Tokenization of Equity Stakes opens up new avenues for companies to engage investors flexibly and structure financing efficiently. Investment tokens not only offer digital innovation but also provide tax planning opportunities that can complement or, in some cases, replace traditional equity models.
They can be particularly beneficial for international investors by helping to optimize withholding taxes and other burdens. At the same time, tokens facilitate automated processing, more transparent communication, and targeted investor structuring. In this article, we explain how investment tokens work, which tax considerations are critical, and how careful coordination with the authorities can help fully leverage the opportunities offered by digital financing models
Initial situation
In the case of traditional equity participation rights (e.g. shares or LLC membership interests), distributions are generally subject to Swiss withholding tax at a rate of 35%. Although domestic investors can reclaim this tax, the refund process often involves administrative effort and it temporary ties-up liquidity.
For international investors or structured financing arrangements, refunds depend on the applicable double taxation agreements (DTAs). In practice, however, refunds are frequently not granted in full, which may result in a partial or even complete final burden of withholding tax.
For individuals, many DTAs provide for a minimum non-refundable withholding tax rate of 15%. Investors without DTA protection, by contrast, face a definitive tax burden of 35% - a significant disadvantage in international capital structures.
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In practice, the lack of full withholding tax recovery for foreign investors leads to a noticeable reduction in returns - particularly for growth-oriented companies or private equity structures with an international investor base. Such tax leakage can significantly reduce the attractiveness of Swiss equity investments and encourage companies to seek financing in foreign jurisdictions.
For FinTech companies in particular, the tokenization of equity participation rights may represent a more tax-efficient financing alternative and could help to mitigate some of Switzerland’s disadvantages. Switzerland is increasingly competing with jurisdictions such as the United Arab Emirates, Singapore, Liechtenstein, or the United Kingdom, which offer more favourable withholding tax regimes on distributions.
Tokenization instead of equity participation
In principle, both equity instruments (e.g. shares or membership participation rights) and debt instruments (e.g. bonds) can be tokenized. These so-called investment tokens represent pecuniary rights vis-à-vis the issuer. Where equity instruments are tokenized, a distinction is generally made between investment tokens with a contractual basis and investment tokens granting participation rights.
Debt tokens and investment tokens with participation rights
If tokenization mirrors traditional securities on a one-to-one basis, the same tax consequences generally apply as for conventional equity or debt instruments:
From a tax perspective, the issuance of tokens corresponds either to the issuance of equity interests or the funding via debt. The funds received do not constitute taxable income but are recognised as equity or debt on the balance sheet. Accordingly, for corporate income tax purposes, the capital inflow qualifies tax-neutral.
Future payments to investors—such as dividends or interest—are subject to Swiss withholding tax at a rate of 35%. For interest payments to fall within the scope of withholding tax, the debt financing must qualify as a bond for withholding tax purposes.
Consequently, no tax advantages arise from a one-to-one mirroring of existing participation rights. Benefits may instead lie in practical implementation and structuring - such as enhanced tradability, automated settlement via smart contracts, simplified investor communication, and reduced transaction costs upon transfer.
Investment tokens with a contractual basis
Tokenization becomes particularly interesting when the specific structuring of participation rights directly affects their tax treatment. Economic participation rights can be digitally represented via investment tokens without necessarily qualifying as traditional equity or debt instruments for tax purposes (so-called investment tokens with a contractual basis). Depending on their structure, such tokens may exhibit hybrid characteristics, combining elements of participation rights with usage or profit-sharing rights.
a) Withholding tax
The contractual agreement for such investment tokens may be designed in a way that investors participate exclusively in the company’s EBIT or another performance metric -independently of whether dividends are distributed to shareholders. Such “participation” is not subject to corporate law rules on statutory reserves and does not require a shareholders’ meeting resolution. Payments are made purely on a contractual basis and therefore not subject to Swiss withholding tax.
To prevent potential tax avoidance through the tokenization of securities, the Swiss Federal Tax Administration (SFTA) has developed a practice under which withholding tax is nevertheless levied on distributions paid to holders of investment tokens with an contractual basis if certain economic thresholds are exceeded:
- At the time the income becomes due, shareholders may not collectively hold more than 50% of the issued tokens.
- The profit participation ratio must be structured such that payments to token holders are limited to a maximum of 50% of EBIT.
These thresholds are intended to prevent existing shareholders from receiving economically equivalent distributions via a parallel token structure that would formally not qualify as dividends. The rules aim to ensure that tokens are primarily offered to external investors and are not used as a withholding tax optimisation tool for existing shareholders.
Nevertheless, investment tokens with a contractual basis may represent an attractive financing alternative to traditional equity instruments. They allow external investors to participate in a company’s economic success without changing the ownership structure or diluting the shareholder base.
In practice, a combined solution may be particularly appealing: investors with limited withholding tax recovery options may invest in EBIT-based tokens, while others invest in participation tokens. Contract-based investment tokens may also serve as a useful instrument to deliberately restrict the voting rights of new external investors - similar to profit-sharing certificates or participation certificates. Since distributions from such certificates are subject to withholding tax, appropriately structured investment tokens may constitute a flexible and attractive alternative.
In such cases, the planned structure should be discussed with the SFTA in the form of a tax ruling. Careful documentation and clear functional delineation - particularly in the underlying contractual arrangements - are essential to avoid subsequent disputes with the tax authorities and to secure the long-term tax qualification of the tokens.
b) Corporate income tax
Regarding corporate income tax, it should be noted that funds received by a company upon the issuance of investment tokens with a contractual basis do not qualify as either debt or equity, as no repayment obligation exists. Therefore, they constitute taxable income for the issuing company.
Compared to traditional equity instruments or investment tokens that mirror such instruments, this represents a significant disadvantage, as those transactions are generally income-tax neutral and only affect the balance sheet.
However, the taxable income arising from the issuance of investment tokens with a contractual basis may be mitigated through the recognition of provisions. Depending on the circumstances, the income can be tax-effectively deferred by creating provisions - for example, for project development costs - which are subsequently released over the duration of the project. This allows the taxation of the inflow of funds to be spread over several periods and aligned with the corresponding project-related expenses.
As for withholding tax, it is advisable to clarify the income tax treatment of capital inflows and provisions in advance through a binding tax ruling with the cantonal tax authorities. Ongoing transparent documentation of the use of funds is also essential to substantiate the economic justification of the provisions at all times.
c) VAT classification of asset tokens
The VAT classification of asset tokens is independent of their treatment under corporate income or withholding tax. The thresholds developed by the SFTA for contractually structured asset tokens in the context of withholding tax are not relevant for VAT purposes.
From the perspective of Swiss VAT, the technical design of a token is not decisive; rather, the underlying economic content of the service it represents is key. Tokenization itself is VAT-neutral. What matters is whether the issuance of the token constitutes a supply of services under the Swiss VAT Act and – if so – whether that supply is taxable, exempt, or not subject to VAT.
Consequently, a token structure may be accepted for Swiss withholding tax purposes but still qualify as a taxable or exempt supply under VAT—or vice versa.
1. Asset tokens with equity-function:
Asset tokens that provide the investor with an economic participation in the success of a company – such as through profit- or EBIT-dependent payments – generally constitute a supply of services from a VAT perspective. The transfer of the token occurs in exchange for consideration, whereby the investor acquires a valuable right in return.
However, the SFTA explicitly classifies the issuance of such asset tokens as an exempt supply under Article 21, paragraph 2, item 19(e) of the Swiss VAT Act. The funds received therefore do not constitute non-consideration under Article 18, paragraph 2, but are considered consideration for a tax-exempt supply. Accordingly, no VAT is levied on the issuance of such asset tokens.
This classification applies in particular to asset tokens functionally comparable to equity rights, participation rights, or other capital market instruments that do not grant a claim to specific, individually attributable services.
2. Distinction from performance-based or hybrid token structures:
Asset tokens with a pure equity function must be distinguished from token structures in which the token, in addition to economic participation, also grants rights to specific services. In particular, this may be the case where the token provides the holder with usage rights, access rights, price advantages, or other individually identifiable services, or is functionally designed as an advance payment for future services.
In such constellations, it must be assessed whether the issuance of the token qualifies, in whole or in part, as a taxable supply. To the extent that the content of the supply is sufficiently specific or at least determinable at the time of issuance of the token, a taxable exchange of services may exist. Where the token contains both an investment component and a service component, an allocation of the consideration may be required.
3. Timing of VAT liability:
For VAT purposes, tax liability generally arises only once all factors relevant for taxation are known or at least determinable. This requires that the content of the supply, as well as the tax base and the applicable VAT rate, are fixed or can be reliably determined at the time the token is issued.
In practice, this is often not the case for asset tokens and hybrid token structures. In particular, for project-related, performance-based, or functionally open tokens, the underlying supply is regularly not sufficiently defined at the time of issuance. No VAT liability arises at the time of token issuance in such cases; tax liability is only triggered once the supply has been concretized and actually rendered. Accordingly, taxation at the time of issuance is likely to be the exception rather than the rule.
4. Input VAT deduction:
The VAT consequences of a token issuance affect not only the output tax side but also input VAT. The issuance of asset tokens as an exempt supply does not, per se, preclude the deduction of input VAT. Expenses incurred in connection with capital raising measures and equity financing generally entitle the company to input VAT deduction within the framework of its overall input VAT recovery ratio.
Whether and to what extent input VAT may be deducted depends on the specific circumstances of the individual case, in particular on the nature of the financed activities and the proportion between taxable, VAT-exempt, and non-taxable supplies. In the case of hybrid token structures, a partial restriction of input VAT deduction may be required where expenses can be attributed to components subject to different VAT treatments.
5. Importance of rulings and documentation:
Given the sometimes fluid distinction between VAT-exempt asset tokens and taxable performance-based token structures, it is generally advisable in practice to seek prior alignment with the tax authorities through a binding VAT ruling. Clear contractual structuring, a consistent description of the token in whitepapers and investor documentation, and transparent documentation of the use of funds are essential to sustainably secure the intended VAT qualification and to avoid subsequent discussions with the tax authorities.
Conclusion
With the increasing integration of digital assets into existing legal and tax systems, Switzerland is gaining international visibility. A coherent tax practice and openness to innovative financing structures are key factors in securing Switzerland’s long-term position as a leading hub for blockchain and FinTech companies.
Investment tokens may represent one such innovative financing instrument. While they are not a “one-size-fits-all solution,” they may, in certain cases, provide a tax-efficient alternative to traditional equity participation or debt instruments and thereby selectively enhance Switzerland’s attractiveness as a business location. Careful structuring and a case-by-case tax assessment are essential - particularly to avoid the risk of retroactive withholding tax liability.
In practice, a binding tax ruling is therefore typically obtained prior to any such token issuance - not only with regard to withholding tax, but also in respect of corporate income tax (in particular to ensure the tax recognition of provisions) and VAT.
