Earlier this month the Swiss parliament approved proposed changes to the country's tax system. Known as Corporate Tax Reform III (CTR III), it will see an end to preferential cantonal tax regimes and certain federal tax regimes.
In recent years Switzerland has faced increasing pressure from the EU and OECD regarding its preferential tax regimes. The cantonal privileged taxation for holding, domiciliary and mixed companies and the federal tax arrangements for principal companies and finance branches draws particular attention and scrutiny. The goal of CTR III is to abolish preferential tax regimes and at the same time, maintain Switzerland's attractiveness and strength in the market.
CTR III will lead to the abolishment of holding, domiciliary and mixed company arrangements. The federal tax arrangements for principal companies and finance branches will be abolished as well.
Reduced cantonal corporate income tax rates
To counter the effects of no more preferential tax regimes for companies, cantons may introduce reduced corporate income tax rates. A number of cantons have already announced this intention, with rates between 12% and 14%. The canton of Zug announced a rate of 12% and the canton of Vaud announced 13.8%.
Introduction of Patent Box at cantonal level
Income from qualifying IPR may be subject to relief of up to 90%. The amount of relief is decided by the cantons. Further Patent Box details are expected and will be subject to developments at EU and OECD level.
Voluntary super deduction for R&D expenses at cantonal level
Cantons are permitted to introduce a deduction for R&D expenses higher than the actual R&D expenses, up to 150%.
Introduction of notional interest deduction
A company's equity is subject to a deemed interest deduction. Limits are set as to what's included in the company's equity. For cantons, the notional interest deduction is optional, but it will be mandatory at federal level. This may lead to effective taxation as low as 2%.
Step-up tax basis allowed
For up to five years following the abolishment of preferential tax regimes, affected companies are permitted to recognise hidden gains. Applicable tax rates are set by the cantons. This also applies to companies moving to Switzerland.
Voluntary reduction cantonal net equity tax introduced
Cantons may decide to reduce the net equity tax due on participations and IPR.
The introduction of a tonnage tax and the abolition of stamp duty on equity payments were CTR III discussion topics, however both have been taken out of the CTR III package and will be debated separately.
Timeline to implementation
While now passed by the Swiss parliament, CTR III may still be subject to a popular referendum. The socialist and green parties have indicated that they will call for this. The cantons must otherwise implement the changes and the expectation is that the preferential tax regimes will be abolished by 1 January 2019 at the earliest.
Companies subject to the holding, domiciliary or mixed company regime should review their status and take appropriate action at the earliest possible stage. Other companies should review their current tax status to determine whether any updates are required.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
