Learning Curve
Same Coupon – But Less Return in Your Pocket?
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Ülkü Cibik
Counsel
MLL Legal AG -
Stéphanie Fuchs
CEO and Founder
Stéphanie Fuchs Consulting
Fixed income is back. After years of negative interest rates, during which Bonds yielded virtually no return, the turnaround in interest rates has brought fixed-income investments back into the spotlight. Investors can now choose from a wide range of options – from traditional Bonds and ETFs to Structured Products.
The catch: what looks similar at first glance may be treated completely differently from a legal and tax perspective. A Capital Protection Product and a Barrier Reverse Convertible, for example, may both offer the same 8% coupon – yet, depending on their structure, the amount left after tax can be quite different.
It is therefore worth taking a closer look at the legal classification and tax treatment of the various Fixed-Income Products.
Bonds: the mother of all Fixed-Income Products
From a legal perspective, the Bond is a classic: it represents a claim under the law of obligations against the issuer for the repayment of the capital and the payment of interest.1 A characteristic feature is that they are issued in series and on identical terms – the issuer raises debt capital, whilst the investor receives a claim. The Bond shares this financing purpose with hardly any other Fixed-Income Product.
In addition, two further product categories have become established which are also classified within the fixed-income universe, but differ significantly from the traditional Bond in legal terms:
- Exchange-Traded Funds (ETFs) based on fixed-income underlying
At first glance, ETFs tracking Bond indices appear similar: regular distributions, manageable risk, and traded on the stock exchange. Legally, however, they are collective investment schemes2 – the investor does not acquire a claim against an issuer, but rather a share in the fund’s assets.3
- Structured Products
Finally, Structured Products form a category of their own. Legally, these are defined as financial instruments whose redemption value depends on one or more underlyings, and include, for example, Capital Protected Products, products with a maximum return and Certificates4. Unlike Bonds, the primary focus here is not on the issuer’s raising of capital, but on the investor’s investment or speculative purpose.5
The “Big 3”
Bonds, together with tax-exempt capital gains and options or other derivative financial instruments, form the basic categories – referred to here as the “Big 3” – for the tax classification of financial instruments in Switzerland.
Tax-exempt capital gains are one of the cornerstones of the Swiss tax system. Private capital gains on movable private assets are generally tax-free, provided that the taxpayer is not classified as a professional securities dealer.
With Bonds, we move away from the realm of tax-exempt capital gains. Income from Bonds generally consists of taxable interest. Interest payable at regular intervals is taxed on an accrual basis. In the case of discount Bonds or Bonds with one-time interest payments, however, the decisive factor is whether there is a predominant one-time interest payment (IUP). Whilst for IUP Bonds the difference between the purchase price and the sale or redemption price is subject to income tax, for Bonds without a predominant one-time interest payment, the investor holding the investment at the time of redemption is taxed on the one-time interest payment – the so-called “the devil takes the hindmost” principle.6
The third component consists of options and other derivative financial instruments. Viewed
in isolation, gains from options held as part of a private portfolio generally result in tax-free capital gains. However, if options are combined with Bonds or other underlyings, the question arises as to which part of the return is attributable to the interest component and which to the option component.
Structured Products – economically similar, legally different
Structured Products typically consist of two components: a traditional investment – such as a Bond – and a derivative component, for example an option. Two financial instruments are combined in such a way as to create a new product with its own risk profile. The SSPA (Swiss Structured Products Association) distinguishes between Investment Products and Leverage Products, with Investment Productsin turn being subdivided into Capital Protection, Yield Optimisation and Participation Products.7
Capital Protection Products combine a high-credit-quality Bond with a Call Option. The investor receives back the capital at maturity and also participates in the performance of the underlying. Legally, the bond-like nature of these products predominates.
Yield Optimisation Products – foremost among which are Barrier Reverse Convertibles (BRCs), popular with Swiss investors – function differently: the investor receives a guaranteed coupon above the market rate, but in return implicitly sells a Put Option on the underlying. If the price of the underlying falls below the barrier, the share is delivered instead of the nominal. Despite the fixed coupon, the derivative component predominates here.
Participation Products such as Tracker Certificates track the performance of an underlying on a one-to-one basis, without capital protection and without a fixed coupon. Legally, they are pure derivatives.
The key point is this: two products can offer the same coupon – for example, 8% p.a. – and yet be fundamentally different in legal terms. In the case of a Capital Protection Product, the coupon derives from a dominant bond component, whereas in the case of a Barrier Reverse Convertible, it derives primarily from an option premium.
The economic purpose is the key factor in distinguishing these from Bonds. While a Bond is issued to raise capital for the issuer, Structured Products are primarily used for investment or speculative purposes. If there is also a value- or credit-related dependency on a third-party financial instrument, this also supports classification as a Structured Product.8
Coupon ≠ Coupon
For Structured Products, however, the tax assessment is not based on the name of the product but on its economic structure. A fundamental distinction is made between transparent and non-transparent products.9
This distinction is of considerable importance in practice. In the case of transparent products, the investment income from the bond component can be separated from a tax-exempt capital gain on the option component. In the absence of such transparency, taxation takes place at the level of the product as a whole, with all income being classified as taxable investment income. Depending on the type of Structured Product, further taxation rules may also apply. However, the principles outlined above remain decisive.
This is precisely why two products with an identical coupon or a comparable economic return can lead to completely different tax outcomes.
To simplify matters, the Federal Tax Administration (FTA) publishes a continuously updated list of Structured Products and their tax classification on the ICTax platform. However, if a product is not listed there, this does not automatically mean that it is considered non-transparent for tax purposes. Rather, the taxpayer has the option of providing the information required for the tax classification.
Return leverage – withholding tax
Withholding tax is often underestimated in the case of Fixed-Income Products, but it can have a significant impact on the effective after-tax return. Interest on Bonds issued by Swiss issuers is subject to withholding tax at a rate of 35%. This is one of the reasons why many issuers decide against issuing Bonds in Switzerland. Swiss investors, meanwhile, can reclaim the full amount of withholding tax provided they declare it correctly in their tax return.
For foreign issuers and Structured Products, different rules apply depending on the product and its structure. Particularly in the case of Structured Products with foreign underlyings – such as Barrier Reverse Convertibles linked to US shares – hidden foreign withholding taxes can substantially reduce the effective after-tax return.10
AI agents – looking ahead
The tax classification of Structured Products is likely to change significantly in the coming years, both for investors and tax authorities. AI agents will also make their way into the investment sector. However, the key factor will be the data on which they operate. Particularly in the case of complex products, an incorrect classification can quickly lead to an incorrect tax assessment and a significant reduction in the after-tax return.11
Tax authorities will also have to face the question of what role the FTA’s product matrix, published on ICTax, will play in future given the increasing use of AI agents for the tax analysis of financial products, and to what extent the latter will be actively involved.
One thing, however, remains unchanged: two products that appear almost identical at first glance may be treated completely differently for tax purposes. What matters, therefore, is not the coupon, but what actually remains after tax.
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1The Federal Act on Financial Services (FIDLEG) defines them as “shares in a pool loan with uniform terms and conditions”.
2This is in accordance with the Federal Act on Collective Investment Schemes (CISA).
3The issuer risk, which is central to bonds and Structured Products, does not apply. Instead, different regulatory and tax rules apply.
4Art. 3(a)(4) FIDLEG.
5The investor merely acquires a contractual claim against the issuer and bears the issuer’s default risk – the so-called issuer risk. See: Bärtschi (ed.), Finanzmarktrecht, Zurich 2025, Chapter 3, note 649.
6See also: Cibik, Ülkü / Fuchs, Stéphanie. “The Last to Be Served Get the Short End of the Stick”. payoff, guest article, June 2025, pp. 10–11. Available at: www.payoff.ch/news/den-letzten-beissen-die-hunde
7Art. 3(a)(4) FIDLEG.
8When marketing Structured Products to retail clients, the requirements of Article 70 of the FIDLEG must also be observed. Structured Products may only be offered if they are issued, guaranteed or similarly secured by a bank, an insurance company, an investment firm or a foreign institution subject to equivalent supervision. See Article 70(1) of the FIDLEG.
9See Federal Tax Administration (FTA), Circular No. 15: Bonds and derivative financial instruments as objects of federal direct tax, withholding tax and stamp duty, 3 October 2017; FTA, Taxation of bonds, derivatives and combined products, March 2023.
10See also: Cibik, Ülkü / Fuchs, Stéphanie. Section 871(m): a tax stumbling block for US securities. Payoff guest article, January 2024, pp. 26–27. Available at: www.payoff.ch/news/871m-steuerlicher-stolperstein-bei-us-wertpapieren
11On the legal and tax classification of autonomous AI agents, see also: Cibik, Ülkü / Fuchs, Stéphanie. Autonomous AI agents as new actors. Legal and tax classification in the digital age. In: Mülchi, Karin / Fuchs, Stéphanie. Recht^KI – The Application of Artificial Intelligence in Legal and Tax Practice. DIKE Verlag, February 2026, pp. 191–230.
