Participation exemption
Swiss participation exemption: holding tax relief explained
Switzerland does not strike dividends and qualifying capital gains out of the tax base. Instead it reduces a company’s tax bill in proportion to its participation income, which in practice brings the tax on those receipts close to zero. This is the mechanism that makes Switzerland a natural home for holding companies.
When a Swiss company holds shares in other companies, the dividends and capital gains it earns from those shareholdings are taxed very lightly. The relief that does this has four names for the same thing: the participation exemption, the participation relief, the participation deduction, and, in German, the Beteiligungsabzug. It is set out in articles 69 and 70 of the Federal Direct Tax Act (DBG/LIFD).
The label is slightly misleading. The relief is not a formal exemption that removes the income from the tax base. It is an indirect, proportional reduction of the tax otherwise due, calculated as the ratio of net participation income to total net profit, which in most cases brings the effective tax on qualifying dividends and gains close to nil. Before 2020 Switzerland delivered a similar result through special cantonal holding regimes; those were abolished by the STAF/TRAF reform and replaced by this ordinary-law relief, now available to every Swiss company in every canton. This guide explains how it works, the qualifying gates, the calculation, and why it underpins the Swiss holding-company structure.
By the numbers
The figures that anchor this topic.
≥ 10%
Capital share to qualify · DBG art. 69
CHF 1m
Or fair market value of holding
1 year
Minimum holding for capital gains
2020
STAF replaced holding privilege
The short answer
What the participation exemption is, in one paragraph.
The participation exemption is a profit-tax relief that reduces the corporate income tax of a Swiss company in proportion to its net income from qualifying participations. It is set out in DBG articles 69 and 70 and goes by four interchangeable names: participation exemption, participation relief, participation deduction, and the German Beteiligungsabzug. Its purpose is to leave qualifying dividends and capital gains effectively untaxed at the level of the company that receives them.
The single most important point, and the one most pages get wrong, is that this is an indirect, proportional mechanism rather than a line-item exemption. The dividend or gain stays inside taxable profit. The law then cuts the tax otherwise payable by the share that net participation income represents of total net profit. If almost all of a company’s profit comes from qualifying participations, almost all of its tax disappears. But because the relief works on a ratio, high financing or administration costs that reduce net participation income will also dilute the relief, so the outcome is usually, but not always, close to a full exemption.
Why it exists
The problem it solves: economic double taxation.
A subsidiary earns a profit and pays corporate income tax on it. When it distributes that after-tax profit as a dividend to its parent, the parent would, without relief, pay tax again. If the parent then distributes to its own parent, a third layer would apply, and so on up the chain. This is economic multiple taxation: the same underlying profit taxed over and over simply because it moves between companies in a group.
The participation exemption breaks that cascade. Operating profit is taxed once, at the tier where it is generated, and can then flow up a group structure without compounding tax at each level. This is the economic logic behind every participation-exemption system in the developed world; Switzerland’s version is generous in scope and simple to apply, which is one reason multinational groups place intermediate and top holding companies here. Our holding company page sets out how that structure is built in practice.
The two gates
Qualifying participation: dividends versus capital gains.
A participation has to clear one of two gates depending on the income. The dividends gate is wider; the capital-gains gate is stricter. For dividends and other profit distributions, the receiving company must meet at least one of these tests at the time of distribution (DBG art. 69):
- It holds at least 10% of the share capital of the distributing company; or
- It holds at least 10% of the profit and reserve rights; or
- Its participation has a fair market value of at least CHF 1,000,000.
For capital gains on selling a shareholding, the test is tighter: the disposed participation must have represented at least 10% of the capital and must have been held for at least one year. Read side by side: dividends qualify on a 10% capital stake, a 10% profit-rights stake, or a CHF 1m market value, with no holding period; capital gains qualify only on a 10% capital stake held for a full year, and the CHF 1m value test does not substitute for the 10% requirement on a disposal. The "no holding period for dividends" point is the detail readers most often miss.
The calculation
How the deduction is calculated.
The relief is a ratio. You take net participation income and divide it by total taxable net profit; the result is the percentage by which the corporate income tax is reduced. Net participation income is not simply the gross dividend. From the gross figure you deduct the financing costs attributable to the holding, a flat administrative allowance, and any write-downs or depreciation linked to the participation.
The administrative allowance is conventionally taken at 5% of the gross participation income unless the company can show its actual administration costs were lower. Financing costs are allocated to the participation in proportion to its share of the company’s assets. The more of these costs that attach to the holding, the smaller net participation income becomes, and the smaller the percentage reduction. That is why the relief is described as proportional: a holding financed largely by debt will see more of its relief eroded than one financed by equity. This calculation is what the German term Beteiligungsabzug, the participation reduction, literally describes.
Worked example
A worked example.
The following is a generic, illustrative example with round numbers, not client data, shown only to demonstrate the formula. Take a holding company whose sole income is a gross dividend of CHF 500,000 from a qualifying subsidiary, with CHF 1,000,000 of total taxable net profit for the year.
- Gross participation income: CHF 500,000
- Less financing costs attributable to the holding: CHF 75,000
- Less the 5% administrative allowance: CHF 25,000
- Net participation income: CHF 400,000
Net participation income of CHF 400,000 divided by total taxable profit of CHF 1,000,000 gives a 40% reduction of the corporate income tax. Now read the dilution effect: if the same holding carried CHF 200,000 of financing cost instead of CHF 75,000, net participation income would fall to CHF 275,000 and the reduction would drop to roughly 27.5%, on identical dividend income. The arithmetic is what makes the "indirect, proportional" character concrete. Where a pure holding has almost no other income and modest financing, the same formula instead lands close to 100%, which is the everyday result and the reason the relief is loosely called an exemption.
Capital gains
Capital gains on selling shares.
Capital gains realised when a Swiss company sells a shareholding also benefit from the relief, but only under the stricter gate. The participation sold must have represented at least 10% of the company’s capital and must have been held for at least one year. The one-year clock is the key difference from dividends, which have no holding period at all: the law rewards genuine long-term participations rather than short-term trading positions. Only the gain above original cost qualifies, and any depreciation previously claimed and now recovered (a recapture) is taxed normally.
Two finer points matter on a disposal. First, Swiss case law (a Federal Supreme Court ruling in December 2021) confirmed that the disposed stake must itself be at least 10%: selling a 5% slice out of a larger holding does not qualify for relief on that slice. Second, after a partial sale that drops the remaining holding below 10%, further capital-gains relief on the residual depends on that residual still having a market value of at least CHF 1,000,000 at the start of the tax year. These are the situations where confirming the treatment in advance, before the deal closes, is worth the effort.
Foreign subsidiaries
Dividends from foreign subsidiaries qualify too.
For a foreign founder this is the decisive question, and the answer is a clean yes. The participation exemption applies to qualifying dividends and gains from both Swiss and foreign subsidiaries, provided the 10%, CHF 1m or one-year tests are met. Crucially, there is no requirement that the foreign subsidiary be taxed at any minimum rate in its own country. A dividend from a low-taxed or even untaxed foreign subsidiary can still attract the relief at the Swiss parent.
In practical terms, an EU or US group routed through a Swiss parent can let income from operating companies around the world flow up to the holding with little additional Swiss tax on the receipt. The participation exemption handles the Swiss corporate-tax side; treaties and the Switzerland-EU agreement handle the withholding side at source. Readers building layered, multi-entity wealth structures often combine this with our family office work.
The 2020 reform
What the 2020 STAF/TRAF reform changed.
Until the end of 2019, Switzerland offered special cantonal regimes for holding, domicile and mixed companies. A pure holding could pay almost no cantonal income tax under the cantonal holding privilege. The OECD and the EU treated these ring-fenced regimes as harmful preferential tax practices, and Switzerland agreed to abolish them. The Federal Act on Tax Reform and AHV Financing (STAF, also called TRAF or RFFA) came into force on 1 January 2020 and repealed the holding, domicile, mixed-company, principal-company and finance-branch regimes.
The participation exemption itself was not new, but it became the principal tool for relieving holding income once the special regimes disappeared. Because it is an ordinary-law relief available to every company, it removed the ring-fenced character the OECD objected to while preserving Switzerland’s attractiveness for group structures. Cantons also layer on capital-tax relief for the portion of equity attributable to participations, so the holding is lightly taxed on both its income and its capital. The residual ordinary corporate tax that the relief reduces is covered in our guide to Swiss corporate tax rates.
A different tax
Participation exemption versus the 35% withholding tax.
This is the distinction that trips people up, so it is worth stating plainly: the participation exemption and Swiss withholding tax are two different taxes. The participation exemption is a relief from corporate income (profit) tax at the company that receives the dividend or gain. Swiss withholding tax (Verrechnungssteuer) is a separate 35% levy collected at source when a Swiss company pays a dividend (VStG art. 13). The participation exemption does nothing, by itself, about that 35%.
Withholding is dealt with through a different route. Inside a Swiss group, the parent reclaims the 35% through its tax return or uses a notification procedure so the tax is never withheld in the first place. For a foreign parent, double-tax treaties cut the rate to 15, 10, 5 or 0%, and the Switzerland-EU agreement reduces it to 0% on qualifying intercompany dividends. Both halves have to line up for a structure to be efficient end to end; our withholding tax guide and dividend taxation guide cover the withholding side.
Canton choice
Choosing a canton for a Swiss holding.
Because the participation exemption is part of federal direct tax law and the harmonised cantonal framework, the relief itself is the same in all 26 cantons. What differs between cantons is the headline ordinary effective rate that applies to whatever profit the relief does not shelter. That combined federal, cantonal and municipal rate ranges from around 11.85% in Zug to the high teens in higher-tax cantons.
For a pure holding company, the canton matters less than for a trading company, precisely because the holding’s core income is sheltered by the deduction regardless of location. The headline rate only bites on non-participation income, such as interest or service fees the holding may earn. Even so, low-rate cantons such as Zug remain the common anchor for Swiss holdings, both for the residual-income rate and for the wider administrative and treaty-access ecosystem.
Working with us
How we help foreign founders structure a Swiss holding.
Setting up a Swiss holding is ordinary company formation: there is no special "holding" legal form. It is an AG or a GmbH, with the usual minimum capital of CHF 100,000 for an AG (at least CHF 50,000 paid in) or CHF 20,000 for a GmbH. The participation exemption attaches to the qualifying income, not to a licence or status, so any company meeting the thresholds can claim it. What increasingly matters is substance: a real seat, decision-making in Switzerland and, where appropriate, local directors, since treaty access and anti-abuse rules expect genuine economic presence rather than a letterbox.
Where a structure carries real value, certainty is worth securing in advance. Swiss practice allows a company to obtain an advance tax ruling from the cantonal authority, confirming how financing costs are allocated, how a partial disposal is treated, or whether a particular minority stake meets the value test, before the transaction closes. We help foreign founders set up the holding, build adequate substance and lock down the position with the relevant cantonal tax office. We work on a custom-quote basis, so contact us with the group structure and we will scope it.
FAQ
Frequently asked questions
What is the participation exemption in Switzerland?
It is a profit-tax relief, also called the participation deduction or Beteiligungsabzug (DBG art. 69 to 70), that reduces a Swiss company’s corporate income tax in proportion to its net income from qualifying participations. Qualifying dividends and capital gains stay in the tax base, but the tax on them is reduced to close to zero, which effectively exempts them at the level of the receiving company.
What counts as a qualifying participation?
For dividends: a holding of at least 10% of the share capital, or at least 10% of the profit and reserve rights, or a participation worth at least CHF 1,000,000. For capital gains: a holding of at least 10% of the capital that has been held for at least one year. Meeting one test in the relevant gate is enough.
Is there a minimum holding period for dividends?
No. Dividends qualify with no minimum holding period. Only capital gains require the participation to have been held for at least one year before disposal.
Do dividends from a foreign subsidiary qualify?
Yes. The relief applies to qualifying dividends from both Swiss and foreign subsidiaries, and there is no requirement that the foreign subsidiary be subject to any minimum tax in its own country. A dividend from a low-taxed or untaxed foreign subsidiary can still qualify at the Swiss parent.
Is the participation exemption a full tax exemption?
Functionally yes in most cases, but technically no. It is an indirect, proportional reduction of the tax due, not a line-item exemption of the income, so high financing or administration costs that reduce net participation income will also dilute the relief. For a pure holding with modest costs the effect is usually close to a full exemption.
How is the participation deduction calculated?
You divide net participation income by total taxable net profit; the result is the percentage by which the corporate income tax is reduced. Net participation income is the gross dividend or gain less attributable financing costs, a 5% administrative flat allowance, and any linked write-downs. The higher those costs, the smaller the percentage reduction.
Did the 2020 STAF/TRAF reform abolish Switzerland’s holding company regime?
Yes. The special cantonal holding, domicile and mixed-company privileges were abolished on 1 January 2020 under the STAF/TRAF reform. Holdings are now taxed under ordinary law, but the participation exemption still frees qualifying dividends and capital gains, and cantonal capital-tax relief on participations applies on top.
Does the exemption apply to capital gains on selling shares?
Yes, if the participation sold represented at least 10% of the company’s capital and had been held for at least one year. The disposed stake must itself be at least 10% (confirmed by a Federal Supreme Court ruling in December 2021), and any recovered depreciation is taxed normally.
How does this differ from the 35% withholding tax on dividends?
They are two different taxes. The participation exemption is a relief from corporate income tax at the company that receives the dividend. The 35% Verrechnungssteuer is a separate withholding tax collected at source, which a Swiss group reclaims or notifies away, and which double-tax treaties or the Switzerland-EU 0% intercompany rate reduce for a foreign parent.
What happens to relief if my stake falls below 10% after a partial sale?
After a partial sale that drops the residual holding below 10%, further capital-gains relief on that residual requires its market value to be at least CHF 1,000,000 at the start of the tax year. Below that, the residual no longer qualifies for the relief on a later disposal.
Which canton is best for a holding using the participation exemption?
The relief is federal and harmonised nationally, so it is identical in all 26 cantons. What differs is the headline ordinary effective rate on any non-participation income, which ranges from around 11.85% in Zug to the high teens elsewhere. Zug is the common low-tax anchor for Swiss holdings.
What is the Beteiligungsabzug?
It is the German term for the participation deduction, the same relief described in this guide. It is set out in articles 69 and 70 of the Federal Direct Tax Act (DBG) and reduces the corporate income tax of a company that earns qualifying participation income.
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