Swiss Participation Deduction (Beteiligungsabzug): How DBG Art. 69–70 Works

The Beteiligungsabzug — the Swiss participation deduction — is the mechanism by which Swiss holding companies receive dividends and realise capital gains on qualifying shareholdings at effectively zero tax. It is codified in DBG Art. 69 (dividends) and DBG Art. 70 (capital gains), and it operates at both the federal and cantonal level. Understanding how it works is essential for anyone structuring a Swiss holding company or international group.

Legal basis and terminology

The participation deduction is sometimes called the "participation exemption" in English-language commentary, but it is technically a deduction (Abzug), not an exemption. The distinction matters for the calculation: rather than excluding participation income from the tax base entirely, the mechanism applies a proportional reduction to the overall tax liability based on the ratio of net participation income to total net income.

The legal basis at federal level is DBG Art. 69 (participation reduction on dividend income) and DBG Art. 70 (participation reduction on capital gains). At cantonal level, the same mechanism is implemented via StHG Art. 28. Since the STAF 2020 reform (Steuer- und AHV-Vorlage, in force 1 January 2020), the thresholds are uniform across federal and cantonal levels.

Qualifying thresholds

The participation deduction applies when the company holds a qualifying participation. The thresholds are alternative — either condition must be met:

Once a participation meets either the 10% ownership threshold or the CHF 1,000,000 market value threshold, all dividends from that participation qualify under DBG Art. 69 — there is no holding-period requirement for dividends. Capital gains require both a qualifying threshold and a minimum one-year holding period under DBG Art. 70.

How the deduction is calculated

The participation deduction works via a net income ratio method. The Swiss tax authority calculates the proportion of the company's net taxable income that consists of net participation income (dividends and/or qualifying capital gains, minus any related expenses). This proportion is then applied as a reduction to the gross tax liability.

The practical result is that qualifying participation income is taxed at effectively zero rate — the deduction reduces the tax on that income to nil, while the remainder of the company's income is taxed at the normal rate (11.85% in Zug).

Dividend flow and withholding tax interaction

When a Swiss subsidiary pays a dividend to a Swiss parent, the subsidiary must withhold 35% federal withholding tax (Verrechnungssteuer, VStG Art. 13) at source and remit it to ESTV. The parent company receives only 65% of the dividend immediately.

However, a Swiss holding company can reclaim the full 35% withholding from ESTV via its annual tax return, because the participation exemption means the dividend income is not taxable — and WHT is refundable to Swiss taxpayers on non-taxable or fully-deducted income. The WHT is therefore a timing cost, not a permanent tax, for inter-company dividends within a Swiss group.

Capital gains on qualifying participations

Capital gains on the disposal of qualifying participations are treated under DBG Art. 70. The same net income ratio mechanism applies — if the capital gain represents a qualifying participation income, it is reduced from the taxable base via the participation deduction.

What does NOT qualify

• �Holdings below 10% of share capital AND below CHF 1,000,000 market value — neither threshold is met
• �Capital gains on holdings sold within the first year of acquisition — holding period requirement (DBG Art. 70)
• �Trading gains — where the company's activity constitutes professional securities trading, gains may be classified as ordinary income
• �Liquidation distributions that are not characterised as dividend income under Swiss tax law

STAF 2020 — what changed

Before the STAF reform (Steuer- und AHV-Vorlage, Federal Act on Tax Reform and AHV Financing), some cantons maintained special cantonal holding privileges — reduced cantonal tax rates for pure holding companies. These privileges were abolished as part of Switzerland's commitment to the OECD Framework on Base Erosion and Profit Shifting (BEPS).

In their place, the STAF reform standardised the participation deduction at the federal and cantonal levels and introduced new relief mechanisms: the patent box (StHG Art. 24a — up to 90% reduction on qualifying IP income) and the R&D super-deduction (StHG Art. 25a — up to 150% deduction on qualifying research expenditure). For holding company structures, the participation deduction under DBG Art. 69–70 combined with Zug's low 11.85% rate replaces the old cantonal holding privilege and remains the primary tax advantage for Swiss holding structures.

Application to foreign subsidiaries

The participation deduction under DBG Art. 69–70 applies to dividends and capital gains from both Swiss and foreign subsidiaries. For foreign subsidiaries, the same 10% ownership or CHF 1,000,000 market value thresholds apply. The deduction reduces Swiss CIT on the receipt of those foreign dividends, but does not affect WHT obligations in the subsidiary's jurisdiction. The effective tax on the dividend flow depends on the DTA between Switzerland and the subsidiary's country.

Further reading

• >Swiss holding company in Zug — participation exemption structures
• >Swiss corporate tax — full rate guide and relief mechanisms
• >Zug tax rate 2026 — 11.85% combined CIT
• >Swiss AG formation — setting up a holding company