Tax Article
Swiss Withholding Tax · Tax Treaty · Partial Income MethodSwiss AG Dividends for Shareholders Resident in Germany
When an individual who is tax resident in Germany receives a dividend from a Swiss stock corporation (AG), Swiss withholding tax, the Germany–Switzerland tax treaty and German taxation of investment income interact. For larger shareholdings or shareholders actively involved in the company, it is also necessary to examine whether an election can be made to apply the partial income method (Teileinkünfteverfahren) under section 32d(2) no. 3 EStG instead of the flat-rate investment income tax.
Scope
This article focuses on substantial or actively held interests in Swiss companies
A Swiss share held as an ordinary portfolio investment must be distinguished from a shareholding involving a significant business interest in a Swiss AG.
For a portfolio investment, the main issues are the general taxation of investment income, Swiss withholding tax and the refund procedure.
For a shareholder who holds a larger interest or actively works for the Swiss AG, additional German rules on income from shareholdings may apply.
Ordinary Swiss portfolio dividends are covered separately
For an ordinary securities account holding without significant business involvement, see Swiss Dividends for German Residents .
Basic Framework
One dividend, three layers of taxation
The tax withheld in Switzerland does not automatically determine the final combined tax burden.
Withholding tax, treaty relief and German income tax must be examined in sequence.
- 35% Swiss withholding tax
- The treaty limits the final Swiss tax burden
- The excess is generally refundable
- Germany generally taxes the gross dividend
- The remaining Swiss tax may qualify for a tax credit
- Review the tax election for a qualifying individual shareholding
Swiss Taxation
The Swiss AG generally deducts 35% withholding tax
Dividends paid by a Swiss AG are generally subject to Swiss withholding tax (Verrechnungssteuer). The statutory withholding tax rate on investment income is 35%.
Gross dividend of CHF 100,000
The Swiss AG resolves to pay a dividend of CHF 100,000.
With withholding tax of 35%, CHF 35,000 is initially withheld and CHF 65,000 is paid to the shareholder.
This does not yet determine the final Swiss tax burden for a shareholder resident in Germany. The next step is to examine the tax treaty.
Germany–Switzerland Tax Treaty
For an individual, the remaining Swiss tax is generally 15%
If the dividend recipient is an individual resident in Germany, Article 10 of the Germany–Switzerland tax treaty generally limits Swiss taxation to 15% of the gross dividend.
This generally also applies where the individual holds a substantial interest in the Swiss AG. The special relief available to qualifying parent companies cannot simply be applied to an individual shareholder.
Initial withholding
Swiss withholding tax deducted when the dividend is paid.
Remaining treaty tax
The typical maximum Swiss tax where the recipient is an individual.
Refund claim
The difference between the 35% initially withheld and the 15% remaining under the treaty.
A large shareholding held by an individual does not automatically qualify for 0% Swiss withholding tax
An ownership percentage that is relevant in Germany for section 32d(2) no. 3 EStG or section 17 EStG does not automatically change the treaty rate on dividends. Corporate and individual shareholdings must be considered separately.
German Taxation
The starting point is taxation of the gross dividend
For a privately held shareholding, the dividend generally constitutes investment income under section 20 of the German Income Tax Act (EStG).
Without a special tax election, it is generally subject to the separate 25% tax rate under section 32d(1) EStG, plus solidarity surcharge and church tax where applicable.
Swiss withholding tax is not simply deducted from the income taxable in Germany. The Swiss refund and the German foreign tax credit must instead be determined separately.
Gross dividend
Record the investment income for German tax purposes before Swiss tax is withheld.
Refund
Reduce the Swiss tax to the level permitted by the treaty.
Tax credit
Account for the remaining foreign tax under German rules.
Tax regime
Review the flat-rate tax and a possible election for the partial income method.
Section 32d(2) No. 3 EStG
A qualifying shareholding may allow an election for the partial income method
The separate 25% tax rate does not have to apply to dividends from a shareholding in every case.
Section 32d(2) no. 3 EStG permits an election for taxation outside the flat-rate investment income tax regime if one of the statutory shareholding conditions is met.
| Situation | Requirement | Effect of a valid election |
|---|---|---|
| Larger shareholding | A direct or indirect shareholding of at least 25% | The flat-rate tax no longer applies; taxation at personal income tax rates under the partial income method |
| Active shareholding | A shareholding of at least 1% and professional activity that enables significant entrepreneurial influence over the company’s business activities | The partial income method may also be available |
| Neither condition is met | The ownership thresholds or influence requirements are not satisfied | Taxation generally remains subject to section 32d(1) EStG |
The 1% route requires more than simply working for the company
The professional activity must enable the shareholder to exercise significant entrepreneurial influence over the corporation’s business activities.
Tax Effect
The partial income method means 60% taxable and 40% tax-exempt
Under the partial income method, section 3 no. 40 EStG generally exempts 40% of the qualifying dividend from tax. The remaining 60% is taxed at personal income tax rates.
At the same time, 60% of expenses relating to the shareholding can generally be taken into account under section 3c(2) EStG.
Taxable dividend
This portion is included in income taxed at personal income tax rates.
Tax-exempt portion
This portion generally remains exempt under the partial income method.
Expenses
Expenses relating to the shareholding can generally be taken into account proportionately.
The partial income method is not automatically more favourable
Its effect depends in particular on your personal marginal tax rate, financing costs, other shareholding-related expenses and the amount of the distribution. The election should therefore be modelled before it is made.
Comparing the Tax Regimes
Flat-rate investment income tax and the partial income method work differently
| Aspect | Flat-rate investment income tax | Partial income method |
|---|---|---|
| Taxable dividend | Generally 100% | Generally 60% |
| Tax rate | 25% plus applicable surcharges | Personal income tax rates |
| Income-related expenses | Generally no deduction for actual expenses; the savings allowance (Sparer-Pauschbetrag) applies | Generally 60% of shareholding-related expenses can be taken into account |
| Requirements | Default treatment | An election and the shareholding requirements under section 32d(2) no. 3 EStG |
| Swiss treaty treatment | Requires a separate review | Also requires a separate review |
Example
A shareholder resident in Germany holds 30% of a Swiss AG
A shareholder resident in Germany privately holds 30% of a Swiss AG. The AG pays the shareholder a gross dividend of CHF 100,000.
Switzerland initially deducts CHF 35,000 in withholding tax. For an individual, the tax remaining under the treaty is generally CHF 15,000. The excess CHF 20,000 can generally be reclaimed in Switzerland.
The dividend is also included for German tax purposes. As the shareholding is at least 25%, the shareholder can generally consider an election under section 32d(2) no. 3 EStG.
Whether the partial income method is financially more favourable than the flat-rate tax depends on the personal tax rate and, in particular, any expenses relating to the shareholding.
Election
The election for the partial income method must be made on time
The election under section 32d(2) no. 3 EStG must be submitted no later than the income tax return for the relevant assessment period.
Once validly made, the election generally also applies to the relevant shareholding for the following four assessment periods, without the conditions having to be substantiated again each year.
Revocation takes effect prospectively under the statutory rules. Once the election has been revoked, a new election for the same shareholding is no longer permitted.
The choice of tax regime should be considered over more than one dividend year
Where dividends recur, financing costs are incurred or changes to the ownership structure are planned, a multi-year comparison should be prepared before making the election.
Practical Steps
From the Swiss dividend payment to the German tax return
Document the distribution
Preserve the resolution, gross dividend amount and withholding tax records.
Review the treaty
Determine residence, recipient status and the remaining Swiss tax.
Reclaim withholding tax
Claim a refund of the excess Swiss withholding tax.
Choose the German tax regime
Compare the flat-rate tax with a possible election for the partial income method.
Documents
What is needed for the tax review
Shareholding
Shares held, ownership percentage, acquisition date and ownership history.
Distribution
Dividend resolution, dividend statement and proof of payment.
Withholding tax
Evidence of Swiss tax withheld and any refund documentation.
Professional activity
Employment contract, corporate office held and actual entrepreneurial influence.
Expenses
Financing costs and other expenses relating to the shareholding.
Residence
German tax residence and the evidence required for treaty relief.
Common Mistakes
Common errors in the taxation of dividends from substantial or active shareholdings
Crediting the full 35%
Refundable Swiss tax is incorrectly treated as final foreign withholding tax.
Confusing portfolio and business interests
The special German rules for qualifying shareholdings are not examined.
Applying the partial income method automatically
The method is assumed to apply without the required election.
Considering only the 1% threshold
The significant entrepreneurial influence required under section 32d(2) no. 3 EStG is overlooked.
Assuming a 0% treaty rate
Rules for qualifying corporate shareholdings are applied to individual shareholders.
Failing to record expenses
Financing costs are omitted from the comparison of tax regimes.
Reviewing the election too late
The choice of tax regime is not analysed until after the tax assessment has been completed.
Overlooking company-level issues
The shareholder’s activities in Germany may also raise tax questions for the company.
Frequently Asked Questions
Swiss AG dividends for shareholders resident in Germany
What is the Swiss withholding tax rate on dividends?
Does Switzerland actually retain 35% for a shareholder resident in Germany?
Does a large private shareholding automatically qualify for 0% Swiss withholding tax?
Is the dividend taxable in Germany?
When can the partial income method be elected?
How much of the dividend is taxable under the partial income method?
Is the partial income method always more favourable?
Can I make a fresh decision on the election each year?
What happens after revocation?
Does this page also cover ordinary Swiss shares held in a securities account?
Further Tax Knowledge
Shareholdings, disposals and Swiss withholding tax
Germany–Switzerland Tax Advice
Living in Germany and receiving dividends from a Swiss AG?
We review Swiss withholding tax, treaty-based refunds, German taxation, your ownership percentage and the possible election for the partial income method.
Request a Review of Your Dividend Taxation