What Tax Pitfalls Threaten International SME Groups?
Fast-growing international SME groups, particularly in the life sciences and tech sectors, operate in a complex tax environment. With increasing internationalization – be it through subsidiaries for research and development (R&D), clinical trials or sales, or through a US parent company to raise capital on the US market – the number of tax interfaces is increasing rapidly. In addition, there are international employees, hybrid financing and investors based abroad.
This article provides a structured overview of the most common tax risks that I see time and again in my consulting practice for SME groups with foreign companies. The aim is not to anticipate solutions, but to create awareness of where the tax course should be set in good time.
Group structure and substance
A clear and documented substance is the basis of any tax-viable structure. In order for a company to benefit from the Swiss location advantages or the patent box, the value-adding activities – in particular the so-called DEMPE functions (Development, Enhancement, Maintenance, Protection, Exploitation) – must be effectively carried out in Switzerland. In practice, this means that the company must have qualified personnel, its own premises and decision-making powers. Especially in the case of joint ventures or decentralized group structures, detailed documentation of the allocation of functions and risks is crucial. If this substance is missing, there is a risk of tax privileges being withdrawn or double taxation, for example if other countries claim the value added.
Transfer Prices
Transfer prices are the neuralgic point of international structures. Although Switzerland does not have an obligation to create a master and local file in accordance with OECD guidelines, companies must still be able to prove to the Swiss tax authorities that their internal prices stand up to third-party comparison. Comprehensible documentation of the functions, risks and assets within the group is crucial. This also includes structuring intra-group contracts in such a way that they reflect economic reality. Missing or contradictory documentation quickly leads to profit corrections or provisions – or possibly even to international double taxation. While Switzerland has no disclosure obligations for cross-border tax planning, EU companies within the group may be subject to DAC6 reporting requirements. Companies should also note that Swiss tax rulings with a foreign connection automatically fall under the exchange of information with other countries – a point that is often overlooked in practice.
Low profit tax rates and location promotion measures
Switzerland offers low profit tax rates by international standards – in Northwestern Switzerland, i.e. in the cantons of Basel-Stadt (BS), Basel-Landschaft (BL), Aargau (AG) and Solothurn (SO), they are between 13 and 15 percent (as of 2025). In addition, there are additional cantonal R&D deductions (BL, AG and SO) and patent box taxation (all four cantons), which can reduce the effective tax burden on income from patents and comparable rights to below 11% in some cases. But beware: these instruments can lose their effect for groups of companies that fall below the OECD minimum tax rate of 15 percent. For this reason, various cantons in Switzerland have already introduced additional location promotion measures, including the canton of Basel-Stadt. Accordingly, new risks arise in the accounting and tax treatment of related refundable tax credits or direct payments. If these are classified as a subsidy for VAT purposes, for example, this can lead to a reduction in input tax. Close coordination between accounting and tax planning is therefore essential.
Swiss withholding tax
Swiss withholding tax on dividends is a recurring area of risk – especially for foreign shareholders. Whether a distribution is subject to 35% withholding tax or can be reported depends on the right of use and the substance of the direct shareholders. The Swiss Federal Tax Administration now examines such cases very closely in order to prevent treaty or rule shopping – without corresponding substance. Errors in the shareholding chain or insufficient substance abroad can lead to refusals to grant refunds. Company sales are also particularly tricky: if a company domiciled in Switzerland is sold or transferred, the new shareholder may be in a worse position with regard to the refund of withholding tax from the previous owner. For this reason, the withholding tax position of the previous shareholder must be checked whenever a company is purchased to ensure that the object of purchase is not encumbered with any open (e.g. old reserves) or hidden reserves on which the new shareholder cannot reclaim the withholding tax due to the previous owner’s withholding tax position.
Withholding tax abroad
Conversely, foreign countries can also levy withholding tax on payments to Swiss companies – for example on dividends, license or interest payments. The requirements of the respective double taxation agreements are decisive here—particularly the principal-purpose test and treaty-specific requirements. Careful structuring of contractual relationships and proof of substance are key to securing refunds. In practice, incorrect or incomplete forms – such as the US W-8BEN-E – often lead to refusals of refunds or claims being made years later. The question of whether a license agreement is considered foreign operating income or passive income can also determine the amount of withholding tax. With regard to dividend payments from Germany, it should be noted that the double taxation agreement between Switzerland and Germany provides for a full refund or exemption from withholding tax, but this is only granted by Germany if the necessary requirements under the German Income Tax Act are met. The fulfillment of these requirements must be set out in an application.
Withholding tax on employee and board remuneration
International employment relationships often lead to complex withholding tax issues. In the case of cross-border commuters or international weekly workers, it must be ensured that working days and places of work are recorded correctly. If there are no records or clear contracts, there is a risk of double taxation or incorrect tax collection. There is also the coordination with social insurance (see below). Constellations in which board members domiciled abroad receive compensation from Swiss companies are particularly tricky – both withholding tax obligations and a social security obligation may arise on the board member’s worldwide income.
Social security obligation for international employees
Switzerland has concluded numerous bilateral agreements on the coordination of social insurance. The decisive factor is where the work is actually carried out – and whether it is self-employed or employed. Depending on the country in which an employee or board member employed in Switzerland lives, it is therefore necessary to check in which country – i.e. in Switzerland, abroad or in both countries – this person must pay their social security contributions. In the case of board members residing abroad, the Swiss social security obligation may apply to their entire worldwide income, even if they also work in other countries. In practice, unexpected double burdens often arise if there are several employers or directorships in different countries. Careful planning and drafting of contracts before taking up board activities, proper coordination and a documented allocation of activities are therefore essential.
Tax compliance: profit tax, withholding tax, stamp duty and VAT
While the profit tax return is sent by the tax administration, withholding tax, stamp duty and VAT are based on self-assessment. Companies must therefore fulfill their reporting and payment obligations independently. If deadlines are missed, there is a risk of default interest of currently 4.5 % (as of 2025) and – in the case of systematic failures – criminal tax proceedings. Especially with growing groups, these deadlines are quickly lost in the operational hustle and bustle. A clear compliance process, allocation of roles and an internal control system are therefore essential to ensure security and avoid sanctions.
Equity financing
Financing via equity is generally subject to the issue tax of 1 %, whereby the first million francs are exempt if the increase is made by issuing new shares or ordinary shares. It is important to keep this limit and any exceptions (e.g. in the case of reorganizations or restructurings) in mind. Once taxed, capital can be reported as a capital contribution reserve in the annual financial statements. Repayments from the capital contribution reserve are not subject to withholding tax and are tax-free for natural persons resident in Switzerland – a considerable advantage for subsequent distributions.
Particular caution applies to token issues, e.g. Initial Coin Offerings (ICO): Depending on their structure, these can be considered equity, debt or the sale of usage rights for tax purposes. Money laundering regulations are also having an increasing impact, particularly in the case of larger financing volumes.
Debt financing
Debt capital is attractive from a tax perspective because interest is generally deductible. However, interest payments to investors may be subject to withholding tax if the 10/20 non-bank rule is exceeded – especially if there are several private investors. However, financing within a group of companies is only subject to withholding tax in exceptional cases. Careful contract drafting and comparison with the so-called safe haven interest rates of the Swiss Federal Tax Administration (FTA)are mandatory. In the case of loans between group companies, the principle of third-party comparison applies and the safe-haven interest rates are not binding for the foreign tax authorities. In practice, risks often arise with cash pooling structures or intra-group refinancing, especially if foreign companies are involved. Here, a supposedly simple financing structure can suddenly trigger tax consequences.
Value added tax and purchase tax
Voluntary VAT registration is often worthwhile, especially in the start-up phase, in order to recover the input tax paid on investments. It is often overlooked that the purchase of services from abroad is also subject to VAT – even if the foreign supplier does not declare VAT and the Swiss company purchasing the services is not subject to VAT but purchases such services worth more than CHF 10,000 per year. If the purchase tax is not declared, there is a risk of additional claims and interest on arrears. Later on, the correct determination of the place of supply is particularly important, especially for software, cloud or consulting services. Errors in this area are frequent and lead to expensive corrections in practice, as they are usually only discovered during VAT inspections.
Employee shareholdings
Participation programs are a popular instrument for retaining talent in the long term – but a sensitive area from a tax perspective. Genuine shareholdings (shares, options) can lead to tax-free capital gains for employees if they are structured correctly. In contrast, non-genuine shareholdings such as phantom shares or bonus plans are subject to income tax. A tax ruling to confirm the treatment is strongly recommended in practice in order to avoid subsequent discussions. In addition to the tax treatment, the administrative effort involved should not be underestimated, in particular the valuation and documentation of the shareholdings. It should also be noted that when shares are sold, employees receive shareholder rights and the associated voting and information rights – this is not always in the interests of the previous shareholders.
Exit structuring
A company sale involves not only economic issues, but also significant tax issues. During tax due diligence, the company’s tax history is examined in detail. Proper documentation of all tax positions creates trust and avoids price discounts. While buyers usually prefer an asset deal in order to generate depreciation, sellers – especially natural persons in Switzerland – are interested in a share deal, as this allows them to realize a tax-free capital gain. Different interests, earn-out mechanisms and old reserves require early tax advice and possibly additional guarantees from the seller or the buyer.
Financial statement planning and loss offsetting
The determination of profits for tax purposes in Switzerland is based on the financial statements under commercial law. Although this allows the creation of certain hidden reserves, it also entails the risk that tax authorities may uncover excessive provisions, value adjustments or depreciation. However, this does not apply in every case, e.g. the mandatory valuation regulations under commercial law must also be observed by the tax authorities, and cantonal tax practices expressly permit the creation of certain hidden reserves, e.g. the creation of lump-sum value adjustments on trade receivables or inventories. Nevertheless, it is important to carefully reconcile accounting and tax practices, particularly in the annual financial statements. The periodicity principle also applies: losses from one financial year can only be offset against profits from future financial years – currently over a maximum of seven years (as of 2025). Start-ups and young life science and tech companies with high initial investments in particular should plan their loss offsetting strategically – as far as possible – so that losses remain tax deductible and do not expire.
Conclusion: Create tax clarity – before it becomes critical
Tax traps are not a sign of poor management, but an expression of the complexity of growing structures. It is crucial to recognize them in good time and tackle them in a structured manner. With a clear tax review, solid documentation and a coordinated tax strategy, companies gain planning security and avoid unnecessary costs.
How BrinerTax supports you
- Strategy package: Analysis of your group structure, identification of tax risk areas, priority plan, ruling preparation, exit readiness.
- Compliance package: monitoring deadlines and declarations, preparing tax returns, checking withholding tax and VAT compliance.
- Individual advice: Specific support with special issues – from the 10/20 rule, patent box and R&D deductions to employee shareholdings or exit structuring.
Create tax clarity and structure – before things get critical.
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FAQ – Frequently Asked Tax Questions of International SMEs
Lack of substance, unclear transfer prices and inadequate documentation are the top risks. They often lead to double taxation or hidden profit distributions.
Without substance – personnel, decision-making powers, premises, adequate financing – companies risk the withdrawal of tax privileges and reclaims from foreign tax authorities.
With clean functional and risk analyses, standard market contracts and regular reviews of the transfer pricing documentation and pricing in accordance with the OECD transfer pricing guidelines or in the purely domestic context of the practice of the Swiss tax authorities and safe haven regulations.
Whenever new structures, restructurings, the transfer of assets or shareholdings from abroad to Switzerland or vice versa, cash pooling or employee participation plans give rise to tax uncertainties. A ruling creates legal certainty and prevents subsequent discussions.
It can neutralize low cantonal profit taxes or patent box advantages. Companies with a turnover of over EUR 750 million should model possible top-up taxes at an early stage. However, most companies are still not affected by the OECD minimum tax and benefit from the low cantonal profit tax rates and incentive measures.
About the Author
Adrian Briner
Certified Swiss Tax Expert / Certified Public Accountant
Founder and Owner of Briner Tax Advisory AG
With over 15 years of experience in Swiss and international corporate tax law, Adrian Briner advises life science, tech and SME groups on complex tax issues – from transfer pricing, financing and employee participation plans to exit structuring and international rulings.
He has proven experience in the tax structuring and documentation of cross-border corporate groups and regularly publishes on topics such as OECD minimum tax, transfer pricing and tax compliance.
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