Quick ReadThis article discusses the tax treatment of partnerships and other person-based legal entities in the context of Swiss and international supplementary taxes. Such legal entities are frequently found in privately held groups, for example as tools for succession planning or asset protection. Overall, the article demonstrates that the tax treatment of these legal entities is complex and depends on many factors, including their specific structure and the tax regulations in individual countries.
Partnerships, trusts, and foundations generally qualify as separate taxable entities for supplementary tax purposes and, depending on the circumstances, may also qualify as the ultimate parent company of a multinational corporate group.
Although partnerships are treated as separate taxable entities for the purposes of supplementary taxes—unlike under Swiss profit and income taxes—the OECD Model Tax Convention contains specific rules for attributing the relevant profit or loss as well as taxes, which lead to results comparable to those under Swiss tax law. For the application of these attribution rules, partnerships must first be classified based on their treatment under the tax laws of both the state of incorporation and the state of the partners (fully transparent, hybrid, or reverse hybrid). In the author’s view, a Swiss shareholders’ agreement also qualifies as a business entity by virtue of its nature (simple partnership), which may affect the authority to levy an international supplementary tax under the Income Inclusion Rule (“IIR”).
Trusts are not treated as transparent entities for supplementary tax purposes as they are under Swiss tax law, but are instead independent taxable entities. The classification set forth in the FTA circular (Revocable, Irrevocable, Fixed Interest, Discretionary) is also a useful tool for supplementary taxes to classify the trust as a business entity or as the ultimate parent company.
Charitable foundations that also hold equity interests cannot be exempted from supplementary taxes, unlike under Swiss income and capital taxes. Special attention must also be paid to foreign foundations that are treated transparently in Switzerland due to tax avoidance. This qualifies them as hybrid entities, which may affect the allocation of the relevant taxes.
The author would like to thank Dr. Daniela Martinis-Arth (LL.M., Manager, National Tax Office, Deloitte AG) and Dorothea Paar (Tax Advisor (DE), Manager, Pillar Two, Deloitte AG) for their critical review of the manuscript, their thought-provoking insights, and their suggestions for improvement.
