Domicile company – in Switzerland

The domicile company and banking due diligence obligations in Switzerland

1. The domicile company under the Swiss banks’ due diligence convention

In Switzerland, a domicile company is an entity that does not engage in substantial commercial activities and is primarily used for holding assets, such as holding companies, real estate companies, companies holding listed or unlisted assets, or companies with tax planning or asset protection objectives. According to the Swiss Banks’ Due Diligence Convention (CDB), banks must rigorously identify these domicile companies and their beneficial owners to prevent tax fraud and money laundering risks.

a) Identification and classification

Swiss banks must conduct a thorough analysis when opening and managing an account for a domicile company. This includes:

• Identifying the beneficial owner (BO), i.e., the individual(s) who directly or indirectly own more than 25% of the domicile company.
• Collecting documents justifying the entity’s structure (articles of association, shareholder register, organizational chart).
• Evaluating the level of economic substance (existence of an office, employees, commercial contracts).
• Completing Form A to declare the BO and the CRS/FATCA forms according to the company’s tax profile.

With regulatory updates in 2024, banks are now applying enhanced monitoring of financial flows and imposing regular audits on domicile companies.

b) Increased bank scrutiny

Domicile companies are considered high-risk by banks due to their potential use for tax evasion or money laundering. Consequently, banks may require additional proof of economic substance and, in the absence of such evidence, refuse account opening or report unusual financial transactions to regulatory authorities.

Swiss banks are tightening their verification criteria and imposing in-depth audits, particularly for Swiss domicile companies held by offshore structures or owned by foreign individuals. Some banks also require domicile companies to have a local tax advisor to ensure compliance with Swiss and international tax standards.

2. Companies with economic activity but no substance in Switzerland

There are cases where a company carries out economic activities but lacks economic substance in Switzerland, meaning:

• No employees in Switzerland
• No physical office
• Management located abroad
• Directors without real involvement in the company’s management.

a) Risk of double taxation and increased tax audits

For many years, the Swiss Federal Tax Administration (FTA) has intensified its audits and can impose tax penalties for failing to meet economic substance requirements.

This applies particularly to:

• Domicile companies headquartered abroad but managed from Switzerland. In this case, Switzerland may requalify the company as a Swiss tax resident and tax its income.
• Swiss companies managed from abroad without economic substance in Switzerland. These businesses risk being classified as permanent establishments abroad and taxed in that country.

b) Consequences of tax reclassification

If a company is a tax resident in multiple countries, it may be subject to double taxation on its income. To avoid this, it must:

• Negotiate the application of double taxation treaties (DTT) signed by Switzerland with other countries.
• Demonstrate real economic substance in its registered country by having an office, employees, and local effective management.

Without these elements, the FTA and foreign tax authorities may impose tax adjustments and penalties.

A domicile company whose effective management is located abroad may face a double taxation risk, as it could be considered a tax resident both in Switzerland (due to its legal registration) and in the country where decisions are effectively made.

3. Challenges in opening and maintaining a bank account in Switzerland

Opening and maintaining a bank account in Switzerland has become a major challenge for domicile companies and newly created companies in Switzerland with economic activity but insufficient substance.

a) Difficulties for domicile companies

Banks consider domicile companies high-risk entities due to their potential use for aggressive tax planning, tax evasion, or money laundering.

The main difficulties encountered include:

• Account opening refusals: Many banks require tangible economic presence to justify a bank account.
• Increased monitoring: Transactions conducted by a domicile company are subject to extensive surveillance, with stricter compliance requirements.
• Account closure in the absence of economic substance: If a bank determines that a company does not meet economic substance criteria, it may unilaterally close the account.

b) Difficulties for companies with activity but no substance in Switzerland

For Swiss companies managed from abroad, banks impose strict conditions, including:

• Requirement for a physical office and local employees: A company without infrastructure in Switzerland is often perceived as a tax shell.
• Suspicion of permanent establishment abroad: If management is effectively conducted outside Switzerland, the company may be taxed abroad, complicating its banking relationship.
• Limited access to financial services: Without proof of real activity, some banks restrict access to financial services such as credit or treasury management.

c) Solutions and precautions

To optimize the chances of opening and maintaining a bank account, affected companies should:

• Strengthen their economic substance: Establish physical presence, hire local staff, sign commercial contracts.
• Work with a tax and regulatory advisor: Justify business compliance with Swiss banking and international tax regulations.
• Choose banks accepting domicile companies: Some Swiss banks are more open to these structures under conditions of transparency and substance.

With increasingly strict banking regulations, companies must anticipate these difficulties and adopt proactive compliance strategies to maintain access to financial services in Switzerland.

4. Support by My Swiss Company SA

My Swiss Company SA – a leader Corporate Services provider firm – manages domicile companies and supports clients throughout the process of banking and tax compliance. Anticipating the due diligence requirements of banks and tax authorities is crucial to avoid any operational blockages.

This includes:

• Assessing the economic substance of the Swiss domicile company and implementing appropriate solutions.
• Preparing a strong banking file to facilitate account opening and management.
• Managing CRS and FATCA reporting obligations to ensure compliance with international standards.
• Assisting in structuring and domiciling companies according to regulatory requirements in Switzerland and internationally.
• Establishing governance in compliance with Swiss requirements, particularly if only one director is resident in Switzerland.

a) Obligation of a resident director in Switzerland

A resident director in Switzerland managing a domicile company must comply with the Anti-Money Laundering Act (AMLA). This means they must be registered with a Self-Regulatory Organization (SRO) recognized by FINMA.

This requirement ensures:

• Transparency of financial flows within domicile companies.
• Thorough verification of fund origins.
• Compliance with Swiss and international anti-money laundering regulations.

With increasingly strict regulations, My Swiss Company SA helps its clients prevent tax reclassification risks and ensures compliance with Swiss banking and regulatory obligations.