Double taxation – where must tax be paid?
In order to avoid double taxation, both total income and total assets will be divided between the main and secondary tax domiciles. When a business operates several branches at various locations in Switzerland, it will be liable for the tax in these cantons or regions.
Inter-cantonal double taxation of a subsidiary branch
In tax law, subsidiary branches are operating premises with limited tax liability (Art. 51 para. 1(b) of Switzerland’s Direct Federal Taxation Act [DBG]). Such branches are sometimes referred to as secondary tax domiciles (see blog post). A company’s head office, or main tax domicile, is always subject to full taxation. As the profit generated by the subsidiary branch often goes to the main branch, it is possible that it might be taxed there a second time. In order to avoid this kind of inter-cantonal double taxation of subsidiary branches, a tax allocation is made. This means that the total income and total assets are divided proportionately between the main and secondary tax domiciles.
Scope of the tax allocation
For inter-cantonal companies, tax allocation quotas are calculated for the main and secondary tax domiciles. There are two different ways of doing so.
In the direct method, tax is calculated using the individual accounts and income statements of the individual sites. The direct method therefore presupposes separate accounting procedures and is usually applied when the individual sites are run as independent businesses. Nonetheless, subsidiary branches are not required by law to keep separate accounts.
If there are no separate accounts and income statements produced, then the tax allocation is calculated using the indirect method. Here, the total capital is divided proportionately in accordance with certain criteria, such as the location of assets. In the case of service companies, total income is allocated in accordance with sales, and in the case of manufacturing companies in accordance with the deployed income factors of work and capital. The proportions are always taxed at the same rate as the whole. It is therefore not possible to use tax allocation to avoid the effects of tax progression.
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