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Steuerrecht 2025

Substance over form - avoid tax pitfalls in holding structures

Requirements for holding structures in international tax law are increasing, particularly with regard to the substance of companies. Initiatives such as the EU-ATAD 3 are intended to prevent letterbox companies. This article explains the importance of substance for holding companies and how tax pitfalls can be avoided.

International Substance Requirements and Tax Practice

International tax law has lately developed an increased awareness of substance requirements in international holding structures. The EU also aims in this direction with its 'Unshell' initiative "ATAD 3". ATAD 3 intends to prevent the abusive use of letterbox companies. Swiss tax practice has been applying such principles in international relations for some time. 

Crucial is the fulfillment of substance requirements from a source state point of view. In this context, the source state primarily checks whether the foreign company to which it provides a service has sufficient substance according to the source state's understanding, or whether the company structure is purely tax-driven. If the foreign company lacks the necessary substance, the persons involved may be denied the benefits of double tax treaties in the international relationship. The negative tax implications of inadequate substance requirements are various. Specifically, the foreign tax authority may refuse to refund foreign withholding tax on dividends from a foreign subsidiary to the parent company. As a result, the same object is subject to economic double taxation at the level of both the subsidiary and the parent company. 

The long-standing Swiss tax practice has developed a catalog of requirements for the substance conditions that is also found in non-Swiss jurisdictions in a similar form and can be considered a benchmark for international tax practice. A distinction is made between personnel, functional and financial substance. 

Personnel substance

Personnel substance includes business premises (rental costs), personnel (personnel costs) and other equipment (IT, etc.). The extent of this depends on the individual case. Auxiliary functions i.e., activities that are not covered by the corporate purpose, such as bookkeeping and accounting, can also be outsourced, but should be recharged to the company.

Functional substance

The functional substance refers to the business activity and the therefore appropriately established business operations of the company. In case of typical holding companies, a distinction is made between active and passive investment in participations. Only the active investment qualifies as a sufficient economic activity in the sense of business operations. Active investment is characterized by management decisions that are made with a strategic long-term view and fundamental significance for the group. Short-term decisions regarding the day-to-day business of the subsidiaries should not be allotted to the holding company. In addition, the functional substance of a holding company requires the holding of more than one subsidiary.

Financial substance

Financial substance is indirectly addressed, since the holding company not only makes investment decisions but also finances subsidiaries where necessary. In this context, the holding company should have sufficient (i.e., at least 30%) equity capital.

Conclusive

Whether the substance requirements for a Swiss company are met from the perspective of the foreign source state or for a foreign company from a Swiss source state point of view must always be examined on a case-by-case basis and in consideration of the of the affected local tax law.

Nevertheless, it can be stated that the substance requirements for companies are generally increasing as a result of greater transparency in international taxation. Hence, the time of companies without substance – also known as letterbox companies – is definitely over.

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  • Stefan Wigger

    Stefan
    Wigger

    MLaw, Swiss Certified Tax Expert, LL.M. UZH International Tax Law

  • Katrin Speck

    Katrin
    Speck

    Swiss Certified Tax Expert, Attorney at Law