The 10/20/100 Non-Bank Rules

When a startup is paying interest on loans or convertible notes, a 35% withholding tax on the interest paid might apply if these get re-qualified as bond (Bond) or debenture (Obligation) by the Swiss federal tax authority (Eidgenössische Steuerverwaltung ESTV). If noticed too late, this may result in an expensive surprise for startup founders, and unexpectedly reduced or delayed interest payments for investors. Unfortunately, the rules are not very obvious, as withholding tax only applies under specific circumstances depending on the height of the interest rate, the total loan size, the structuring of the loan and the number and type of lenders involved.

Example:

Assuming the customer has issued convertible loans in the amount of CHF 250,000 with a 16 per cent discount and CHF 750,000 without a discount, each with 4 per cent interest.

The estimate of the additional tax payment would then be as follows:

250,000 CHF * (0.16 discount + 0.04 interest) * 0.35 withholding tax = 17,500 CHF
750,000 CHF * 0.04 interest * 0.35 withholding tax = 10,500 CHF

Total additional tax payment: CHF 17,500 + CHF 10,500 = CHF 28,000

(Additional 10,000 CHF issue tax on conversion if the customer has already borrowed more than MCHF 1).

10/20 non-bank rule for broadly defined bonds and debentures

While people might have a different notion of bonds and debentures from Swiss civil law, or with financial markets in mind, the Swiss withholding tax practice has its own definition of them, which is much broader! It subsumes bonds and debentures as written debt acknowledgements for fixed amounts that are issued with comparable conditions, in multiple tranches, and for the purpose of collective financing. Let’s look into this in more detail.

A loan qualifies as a bond (Bond) if all of these conditions are met:

1. A Swiss company issues written debt acknowledgements over fixed amounts.
2. A single credit agreement with identical conditions is used.
3. More than 10 non-banks are among the lenders (including sub-participants, excluding Swiss and foreign banks).
4. The aggregate amount of debt issued is at least CHF 500 000.

A loan qualifies as a debenture (Obligation) if all of these conditions are met:

1. A Swiss company issues written debt acknowledgements over fixed amounts.
2. The credit agreements have variable conditions.
3. More than 20 non-banks are among the lenders (including sub-participants, excluding Swiss and foreign banks).
4. The aggregate amount of debt issued is at least CHF 500 000.

For both bonds and debentures, as defined above, the 35% withholding tax on interest paid (including interest only accrued internally) is due.

See SICTIC Swiss angel investor handbook: https://www.sictic.ch/swiss-angel-investor-handbook/