The Swiss holding company: Is it still relevant?

The holding company in Switzerland is a so-called umbrella company. According to the classic definition, the holding company must hold substantial interests in corporations or cooperatives, while interests in partnerships are excluded. Short-term or minor holdings do not fulfil the conditions of a holding company. In the long term, about two-thirds of the balance sheet assets must consist of participations or two-thirds of the income must come from the participations.

Secondary activities such as asset management, business or group management functions and foreign operations are permitted. However, the holding company may not engage in commercial or industrial activities as a manufacturer or supplier of products, intellectual property rights or services.

Since, as already mentioned, the tax privilege has ceased to exist, this classic definition for maintaining the holding status is probably only relevant with regard to the also mentioned regulations concerning capital and profit reserves. It will have to be examined in each individual case to what extent these requirements are still relevant at all.

Swiss holding companies continue to offer advantages despite the 2020 reform. Beyond the participation deduction that reduces taxation on dividend income and capital gains, holding companies provide strategic benefits including the ability to defer personal taxation, pool and protect liquid funds across subsidiaries, manage timing of distributions for retirement planning, and maintain operational separation between different business assets.

The elimination of the largest and probably most relevant part of the tax advantages of a holding company in Switzerland does not affect the other, mostly practical advantages. These can vary depending on the purpose pursued with a holding company:

Timing of taxes

By establishing a holding company, shareholders can distribute income to the holding company. The dividends do not go to private individuals at this time and therefore do not trigger higher income and wealth taxes.

To a certain extent, the profits are temporarily stored in the holding company. The holding company can thus be used to supplement income at a later date by distributing dividends, which can then be used to supplement a retirement pension, for example.

It should be noted that these distributions are then subject to ordinary dividend taxation at the time of distribution. It is also important to note that since January 1, 2020, full capital tax has been payable on the assets held in interim storage.

Pooling or distribution of liquid funds

Cash and cash equivalents that are not required for operating companies and do not fall under the legally prescribed reserves can be pooled at the holding company.

Depending on requirements, they can then be used by another operating company. In the event of the bankruptcy of an operating company, these funds are not part of its liquidation assets.

Depending on the situation, owners of an operating company may pursue the goal of keeping the company and its assets lean. This may be with a view to a sale or to minimize business risks. In such cases, a so-called sister company can be founded, which takes over certain assets. The sister companies are in turn combined under the holding umbrella.

Other advantages that are retained

Furthermore, the establishment of a holding company also retains the advantage of being able to use the additional name of the holding company in external dealings, for example. The frequently cited advantage that employees of the subsidiaries may act more efficiently and responsibly, as their work has a more direct influence on the results of the subsidiary, also remains unaffected.

Even since the tax reform has been in force, setting up a holding company can be attractive in terms of the advantages listed. However, there are a number of considerations to be made, particularly with regard to the tax burden. The amount of tax payable on a holding company is likely to have changed since the reform and the answer to the question of whether a holding company is the optimal solution may be different since then. For the inexperienced, it may be beneficial to consult a tax advisor, as tax law in Switzerland is very complex.