What are double tax treaties?
Double tax treaties (DTTs) are central to Swiss banks’ international operations. They increase legal certainty, prevent income and profits from being taxed in multiple countries at the same time and contribute substantially to the competitiveness of the financial centre. However, it seems that some countries wish to extend their taxation powers, especially with regard to cross-border services.
Why are DTTs so important?
Switzerland traditionally bases its DTTs on the OECD Model Tax Convention, which provides in principle for companies’ income to be taxed in their country of domicile as long as they do not have any business operations in other countries. This system has proven effective for decades because it defines clear criteria for determining tax liability and creates a reliable basis for cross-border business.
Which developments are a threat to legal certainty in relation to DTTs?
In recent years, some countries have attempted to tax services more heavily on the basis of where the customer is domiciled (the source country). They do this by applying the concept of the permanent establishment (i.e. a physical presence in the source country) and levying withholding taxes on services. In some cases, providing a single service or having a single customer in another country can be enough to trigger tax liability in that source country.
This becomes especially problematic when services are excluded from the scope of protection under a DTT (which is known as “carving out”), meaning that national tax rules apply. These developments weaken the principle of taxation in the country of domicile, lead to a gradual shift in the tax base away from Switzerland and expose Swiss companies to foreign fiscal and procedural regimes. The results are increased legal uncertainty, additional operating expenses and potential risks of double taxation.
Where do we stand?
The Swiss Bankers Association (SBA) has been actively engaging in the debate over how DTTs are structured for years. This was triggered by developments in specific treaties, including that with Ethiopia in 2021 and those with Angola and Zimbabwe in 2022, that gave the source country extended powers to tax services and introduced carve-out rules.
The SBA has repeatedly pointed out that, for banks with cross-border activities in particular, source-country tax powers – regardless of their extent – are associated with additional legal uncertainty and a considerable administrative workload.
It therefore continues to lobby for treaties that set out clear responsibilities for taxation and fulfil their original purpose, namely to ensure legal certainty and avoid double taxation.