Switzerland: Refund claim for withholding tax on government bond interest denied due to cross-currency swap

A Federal Administrative Court decision concerning a refund claim for withholding tax on government bond interest

A Federal Administrative Court decision concerning a refund claim for withholding tax

The Swiss Federal Administrative Court held that a Danish financial institution holding CHF 250 million in a bond issued by the Swiss Confederation was not entitled to a refund of the 35% withholding tax on the bond coupons because it simultaneously entered into a cross-currency swap with a counterparty in the market and thus was not considered the beneficial owner of the bond.

The taxpayer has lodged an appeal of the decision with the Swiss Federal Supreme Court.

KPMG observation

The Federal Administrative Court’s decision is based on recent case law of the Federal Supreme Court developed in the context of several perceived "dividend stripping" cases. However, those cases involved shares and swaps that converted the entire performance of the securities, which arguably is distinguishable from a case involving government bonds with a default risk of virtually zero. The decision means that an investor in a Swiss bond cannot convert an exposure in Swiss francs into another currency (or equally a fixed interest rate into a floating interest rate), without losing the entire 35% Swiss withholding tax on the interest generated by the bond, which likely will discourage investment in Swiss bonds.

Read an October 2023 report prepared by the KPMG member firm in Switzerland


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