Foreign companies with a Swiss permanent establishment (PE) are liable to tax in Switzerland. The taxation is limited to the profit of the Swiss branch and other income within Switzerland (e.g., related to real estate). A Swiss PE is treated as a separate tax subject.

For Swiss tax law purposes, the term 'permanent establishment' means a fixed place of business through which the business activity of an enterprise is wholly or partly carried on. In particular, PEs are branches, factories, workshops, sales agencies, permanent representations, mines, and other places of extraction of natural resources, as well as building or construction sites that last at least 12 months. This definition is generally in line with the criteria according to Article 5(2) of the OECD Model.

Nevertheless, it should be noted that agencies could be considered as a permanent establishment under certain conditions.

Swiss branches are taxed like any other incorporated company in Switzerland. There is no branch remittance tax in Switzerland. Therefore, profits can be transferred to its foreign head office without the withholding of any taxes. Equity can be assigned from the foreign head office to the Swiss branch without issuance stamp tax.

Profits are allocated to the Swiss PE by using a direct method of profit allocation. This means that the Swiss branch is treated like an independent entity. The profit allocation is based on the PE's accounting books if available. Losses from the headquarters and other foreign branch losses cannot be deducted from the profits made by the Swiss PE. However, losses of the Swiss branch can be carried forward and deducted from later profits of the PE during the subsequent seven years.

Transactions between the Swiss PE, the head office and other PEs must be carried out under the same conditions as would be the case between independent parties (principle of dealing at arm's length).

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