Taxation of US LLCs in Switzerland

The taxation of foreign company forms regularly raises complex qualification issues under Swiss tax law - particularly in the case of hybrid legal entities that cannot be clearly categorized as either a corporation or a partnership. A prominent example of this are US limited liability companies (US LLCs for short). Their legal and tax classification is decisive for the question of how income from such an investment is taxable in Switzerland.

Characteristics and special tax features of the US LLC

The US LLC is a form of company recognized in all US states that combines the advantages of a corporation - in particular liability limited to the company's assets - with the tax advantages of a partnership. By default, a US LLC is treated as fiscally transparent in the USA, comparable to a Swiss general or limited partnership: income is attributed directly to the partners and not taxed at company level.

There is also a special feature of US tax law: according to the so-called "check-the-box regulations", the shareholders of a US LLC can choose whether it should be treated as a corporation for tax purposes. If no such option is exercised, the company remains transparent for tax purposes. This freedom of choice, combined with the usually very flexible legal regulations for US LLCs in the individual states, leads to a great deal of flexibility in the specific structure of US LLCs. The US LLC is therefore structurally a hybrid form. It has elements of both a corporation (liability structure, legal capacity) and a partnership (tax transparency, profit distribution).

Tax qualification of the US LLC under Swiss law

According to Art. 49 para. 3 DBG and Art. 20 para. 2 StHG, foreign legal entities are to be treated in the same way as domestic legal entities to which they are legally or factually most similar.

Practice of the Swiss Tax Conference (SSK)

According to the practical advice issued by the Swiss Tax Conference (SSK) in 2011, the tax treatment of a US LLC in Switzerland should not depend solely on its tax classification in its country of domicile. Even if a US LLC is often treated as a "pass-through entity" in the USA - i.e. as transparent as a partnership for tax purposes - the SSK believes that it has numerous characteristics that make it comparable to a Swiss limited liability company. These include, in particular, the limitation of liability to the company's assets, the existence of a separate legal personality and the fact that management is carried out by the partners themselves. Based on these structural similarities, the SSK concludes that a US LLC should generally be treated as a GmbH and therefore as a corporation from the perspective of Swiss tax law. This applies even if it is taxed as a partnership in its country of domicile. Theoretically, it is conceivable that in individual cases a US LLC is structured in such a way that for Swiss tax purposes it is treated more like a partnership than a limited liability company (i.e. transparent taxation). However, the taxpayer would have to provide proof of this, as it is usually of a tax-reducing nature.

Jurisprudence the Federal Supreme Court on the US LLC

The Federal Supreme Court first made a fundamental statement on the tax qualification of US LLCs in its ruling 2C_894/2013 and 2C_895/2013 of September 18, 2015. It clarifies that the civil law qualification in the foreign state does not necessarily result in an analogous tax qualification in Switzerland. Clarifying its earlier ruling 2C_664/2013 of April 28, 2014, the Federal Supreme Court states that a tax qualification as a corporation in Switzerland is excluded in any case if the civil law of the state under whose law the US LLC was founded expressly denies such a qualification. In all other cases, a pragmatic mix of methods should be applied, which on the one hand is based on a comparison of the foreign company or entity with domestic entities, but on the other hand also takes into account the tax treatment abroad as a decisive element. This approach is intended to avoid double taxation or double non-taxation as a result of attribution conflicts.

Decision of the Zurich Tax Appeal Court 2022

In its decision of March 29, 2022, 2 DB.2020.14/2 ST.2020.20, the Tax Appeals Court of the Canton of Zurich comprehensively examined the above-mentioned arguments of the SSK and the Federal Supreme Court decision from 2015. In the specific case, it came to the conclusion that, from a civil law perspective, a US LLC comes closest to a corporation and thus a legal entity or a limited liability company in the vast majority of cases, in line with the findings of the SSK. While the Federal Supreme Court classifies the tax treatment abroad as an essential criterion in the context of a mix of methods, the Zurich Tax Appeal Court attached less importance to this component in the specific case and instead focused on the civil law structure.

New federal court rulings on hybrid companies abroad

Recent judgments of the Federal Supreme Court regarding French hybrid legal entities (specifically: Société Civile Immobilière, so-called "SCI", judgment 9C_409/2023 of 4 June 2024 and 2C_729/2019 of 7 July 2020) have recognized the foreign legal entity solely on the basis of its civil law qualification in the country of incorporation. This Jurisprudence raises the question of whether the Federal Supreme Court intends to limit or even abandon its previous Jurisprudence on US LLCs with a pragmatic mix of methods in the future. However, a final clarification by the Federal Supreme Court is still pending.

In practice, the cantons generally continue to follow the SSK's practical advice from 2011, but take into account the Federal Supreme Court ruling from 2015. In individual cases, qualification as a corporation or as a partnership can therefore be considered.

The tax consequences in Switzerland differ depending on the qualification of the US LLC. The effects of the respective qualification are described in more detail below.

Tax consequences of qualification as a corporation

Wealth tax

If the US LLC qualifies as a legal entity for tax purposes in Switzerland, the shares of an individual resident in Switzerland in a US LLC are subject to wealth tax at their market value.

Income tax

Distributions from the US LLC constitute income from movable capital assets for an individual resident in Switzerland. If the shareholding in the US LLC is at least 10 percent, the partial taxation procedure applies and only 50 to 70 percent of the distributions are taxable.

The losses of the US LLC cannot be claimed as they are considered non-deductible capital losses on a private investment under domestic law. Capital gains from the sale of shares in a US LLC to a third party, on the other hand, are generally tax-free, although the legal concept of indirect partial liquidation must also be taken into account here.

Profit tax

If a corporation domiciled in Switzerland holds shares in a US LLC, distributions are generally subject to income tax as investment income. If the shareholding in the US LLC is at least 10 percent or has a market value of at least CHF 1 million, distributions benefit from the participation deduction, which means that the income is effectively tax-exempt.

The US LLC itself is taxed in Switzerland like a limited liability company if it has its effective management, a permanent establishment or a property in Switzerland.

Double taxation agreement Switzerland-USA: Effects on US LLCs

The double taxation agreement between Switzerland and the USA (DTA-USA) does not contain any provisions on the taxation of assets, which is why there is no restriction in this respect (see Art. 2 DTA-USA).

With regard to the taxation of distributions (income and profit tax), the decisive factor is whether the US LLC is taxed in the USA as an independent taxable entity. In this case, Art. 10 DTA-USA is applicable and the distributions can be taxed in Switzerland (with crediting of the withholding tax levied in the USA on the distributions).

If, on the other hand, the US LLC is treated transparently for tax purposes in the USA - which is often the case in practice - there is no dividend income from the perspective of the US DTT and Art. 10 US DTT is not applicable. According to the practical advice of the SSK, in such cases the profits of the US LLC are attributable to the shareholders on a pro rata basis. As a consequence, the profits of the US LLC are generally taxable in Switzerland (however, due to the domestic qualification, not as income from self-employment, but - if and as soon as the profits are distributed to the shareholders at all - as investment income).

However, to the extent that the distribution of the US LLC is derived from a profit of the US LLC that is attributable to a permanent establishment in the USA, this distribution must be excluded in the USA. In Switzerland, the profit shares are only taken into account to determine the tax rate. The extent to which the profit of the US LLC is attributable to a permanent establishment in the USA must be proven by the shareholder as a tax-reducing fact.

If the US LLC does not operate a company at all, but is purely active in asset management, for example, the result is the same based on Art. 21 para. 1 DTA-USA. However, if the income is income from immovable assets (especially in the case of real estate companies), it is exceptionally subject to taxation at the US location in accordance with Art. 6 DTA-USA. In Switzerland, the profit shares would in turn only be taken into account to determine the tax rate.

Tax consequences of qualification as a partnership

If the US LLC qualifies as a partnership for tax purposes in Switzerland due to the circumstances of the individual case, this means that the income from the US LLC does not constitute investment income, but income from self-employment. Losses can be offset against other assets (limited by Art. 6 para. 3 DBG).

If the taxable person carries out his activity in Switzerland and not in the USA through a permanent establishment located there, Switzerland's right of taxation is not restricted by the DTA-USA.

Conclusion and tax assessment

The tax treatment of a US LLC in Switzerland remains complex and dependent on the individual case. Due to its hybrid nature, a standardized classification is not possible - rather, the qualification is based on an overall assessment. While the SSK and the Tax Appeals Court of the Canton of Zurich generally advocate the same treatment as a limited liability company, the Federal Supreme Court requires a case-by-case examination, taking into account the tax treatment abroad.

This area of tension is also evident at cantonal level: although the cantons continue to follow the SSK's practical guidelines, the Federal Supreme Court ruling of 2015 is also taken into account in the tax classification. This results in a more open, but also less predictable approach.

Against this background, a careful analysis of the specific structure of the US LLC, its legal form and its tax treatment in the USA and, if necessary, obtaining binding information from the tax authorities in Switzerland is recommended in order to avoid tax risks.