International taxation – where must tax be paid?
International taxation affects companies that operate with several subsidiary branches in different countries. Tax will be liable in each of these countries. In order to avoid double taxation, Switzerland has concluded double taxation agreements with other countries.
International double taxation of the subsidiary branch
In tax law, subsidiary branches are operating premises. These are partially tax-liable and constitute a secondary tax domicile (Art. 51 para. 1(b) of Switzerland’s Direct Federal Taxation Act [DBG]; see blog posting). For legal entities, the main tax domicile is the company’s head office or the place from where it is actually managed. The state in which the main tax domicile is located taxes the entire profit at the head office, unless any exemptions apply.
In Switzerland, the subsidiary branch of a foreign company has limited tax liability – i.e. its profits will be taxed. On the other hand, Switzerland does not tax subsidiary branches located abroad.
Extent of tax allocation
For international companies, tax allocation quotas are calculated. These are calculated for the main and secondary tax domiciles. There are two 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.
