Switzerland: Revised Swiss Corporate Tax Reform Will Keep Switzerland A Top Corporate Location

I. The background of the tax reform

In connection with the international pressure on the Swiss corporate tax location, especially in relation to the Cantonal exemption of income for holding companies as well as the status privileged companies ("status privilege") and the need of Switzerland to recover global recognition as a fair and attractive tax location, the Swiss Federal Council and the Swiss parliament developed a new corporate tax reform in 2015 ("CTR III"). CTR III was designed to be compliant with international tax standards such as the Base Erosion and Profit Shifting Project ("BEPS-Project") of the OECD. Amongst others, it included the abolition of the status privilege or holding company taxation and should have enabled Switzerland to remain competitive from an international tax perspective.

Swiss left-wing parties did not agree with the CTR III proposal and therefore launched a referendum. Swiss voters rejected the CTR III proposal on 12 February 2017. This raised the problem that the afore-mentioned criticized tax system has led to legal and planning uncertainties. Prager Dreifuss AG is one of Switzerland's leading law firms for business law. We offer advice in the areas in which we can provide outstanding quality. We thus strive to find integrated, innovative solutions for our clients that are adapted to legal and economic realities. Our attention is equally focused on legal issues as on controlling business risks. Dr. Roland Böhi Partner, Head of Tax roland.boehi@prager-dreifuss.com Danielle Wenger Partner Tax danielle.wenger@prager-dreifuss.com Manuel Vogler Associate Tax manuel.vogler@prager-dreifuss.com 2 After the rejection of the CTR III proposal, the Federal Council released a revised corporate tax reform called Tax Proposal 17 ("TP 17 proposal") on 21 March 2018. The majority of the measures of the TP 17 proposal were almost congruent with the measures of the CTR III proposal, but the new proposal appears to be more balanced in order to hopefully reach a political consent. The Swiss parliament included a new subsidy of CHF 2 billion per year for the Federal Social Security Scheme ("AHV") as a form of socio-political compensation to the TP 17 proposal. The now called 'Federal Act on Tax Reform and AHV Financing' ("TRAF proposal") was adopted with clear majority by the Swiss parliament on 28 September 2018.

The first measures of the TRAF proposal could already enter into force in 2019 if no referendum was held against it. Some parties have already announced that they will call (again) for a referendum against the TRAF proposal. In this case the TRAF proposal will be put to the people's referendum on 19 May 2019. Accordingly, the implementation of the TRAF proposal would enter into force as from 1 January 2020 onwards.

II. The measures of TRAF proposal

In the following we will discuss the key measures to provide an insight of this complex tax reform:

2.1 Replacing measures

2.1.1 Revocation of status privilege

One of the most important actions of the TRAF proposal is the abolition of the above mentioned status privilege, incl. the holding company taxation, on cantonal level so that the Swiss tax jurisdiction will be compliant with international tax standards and expectations.

2.1.2 Disclosure of hidden reserves for status privilege companies

In connection with the revocation of the status privilege, such companies that will stay in Switzerland will require to transition from privileged to ordinary taxation. Generally, the transition into the ordinary taxation should not entail tax costs. However, due to the transition, hidden reserves which were obtained under a status privilege would be subject to a deferred tax burden. In order to avoid an excessive taxation of such companies, the legislator introduced a harmonized regulation for all Cantons. Therefore, all hidden reserves which were obtained under a status privilege will not be disclosed in the tax balance sheet but by means of a ruling of the relevant tax authority. In the following five years the amortization of these disclosed hidden reserves will be subject to a low tax rate. Cantons will be free to determine the special tax rate. This disclosure of hidden reserves ensures a competitive income tax burden and is ought to motivate current status privilege companies to remain in Switzerland.

2.1.3 Step-up of hidden reserves for relocating companies

Companies migrating to Switzerland can disclose hidden reserves which were generated abroad for confirmation to the Swiss tax authorities. Relocated companies will therefore benefit from the step-up system with which they can amortize the tax-free disclosed hidden reserves annually at an applied rate for tax purposes to the respective assets. If such relocated companies would migrate from Switzerland overseas an exit tax on hidden reserves would become due (as is already the case nowadays).

2.1.4 Equity tax relief

Another measure to reduce the future tax burden of the current status privilege companies is the equity tax relief. As such companies now benefit from a low equity tax rate, the Cantons will in the future be allowed to lower the taxable equity on patents (and similar rights), qualifying participations and intra-group loans.

2.2 New measures

2.2.1 Patent box

The patent box is another key measure of the TRAF proposal and internationally still accepted. Net profits from patents and similar rights (e.g. supplementary protection certificates, varieties of plants etc.) are to be taxed in the excluded box with a maximum deduction of 90% on cantonal level. In order to be compliant with the "modified nexus approach" as developed by the OECD, the patent box is only applicable if the corresponding research and development ("R&D") expenditures have already been recaptured and taxed.

The calculation of the net profits from patents and similar rights is assessed according to the so called residual-method. Starting point of this method is the overall profit of the product related with the patent or the overall profit of the company. All profits which are not related to the patent itself are then deducted from the overall profit and subject to ordinary taxation. The remaining net profit will subsequently be taxed in the patent box. The residualmethod is very similar to the calculation method of UK patent box profits.

2.2.2 Super-deduction for R&D activities

The TRAF proposal will further authorize the Cantons to introduce an R&D "superdeduction" of up to an additional 50% of business-related costs for R&D activities undertaken in Switzerland. The term R&D activities was outlined very broad by the legislator and is aligned with article 2 of the Swiss innovation law ("FIFG") as well as with common standards determined by the OECD. Therefore, basic research, scientific application and knowledge based R&D will be deductible.

The R&D super-deduction will be calculated by adding 135% of labor costs plus 80% of invoiced third party R&D costs to the general R&D costs. The total amount will then be multiplied by a maximum factor of 1.5, resulting in the deductible R&D costs. Please note that the invoiced third party R&D costs must be performed in Switzerland in order to be in line with the above mentioned nexus-approach.

2.2.3 Notional interest deduction

High-tax Cantons, such as Zurich (expected rate of 18.2%), may get the opportunity to implement a notional interest deduction ("NID") on excess capital. So far only the canton of Zurich would meet the requirements and thus be allowed to introduce NID (which is planned).

2.2.4 Relief restriction

The Legislator included a relief restriction to avoid excessive deductions which could erode the Cantons' tax base. Hence, the aggregate tax relief based on the patent box, the R&D super-deduction and the depreciation costs associated with a former cantonal status privilege cannot exceed 70% of the taxable profit.

Despite the relief restriction, the overall tax burden for example in Zurich could still be reduced to 11.2% if all measures were applied.

2.3 Shareholder's income tax measures

2.3.1 Increased dividend taxation

The TRAF proposal would allow to increase the partial tax exemption of dividend income of individuals from qualifying participations at the federal level from now 50% (business investments) respectively 60% (private investments) to a standard rate of 70%. At cantonal level, the minimum taxation rate of 50% would be implemented.

2.3.2 Adjustment of the capital contribution principle

The TRAF proposal would introduce a repayment restriction on the capital contribution principle for companies listed on the Swiss Stock Market Exchange ("SIX"). Such corporations were only entitled to distribute tax exempt capital contribution reserves if they simultaneously paid ordinary taxed dividends of at least the same amount. This counter -measure would weaken the capital contribution principle as introduced in 2011 .

III. Corporate tax rate reductions

It is planned that all Cantons will reduce their corporate tax rates. Although this measure is not directly covered by the TRAF proposal, this is of utmost importance for Switzerland to continue to offer an attractive corporate tax environment. The Cantons will receive money from the Federation to finance such cantonal rate reductions. Based on official announcements made by the cantonal governments, it is expected that the majority of the Swiss Cantons will provide effective tax rates between 12% and 18% (including 7.8% federal tax). Amongst others, Zurich will reduce its standard rate to 18.2 %, Geneva to 13.5% and Zug to 12 %.

IV. Conclusion

The TRAF proposal ensures that Switzerland regains legal and planning certainties for international companies and aims to re -establish the reputation of the alpine republic as a fair and attractive tax location. Hopefully the Swiss people will not accept the referendum in May 2019. We are at your disposal to analyze existing structures and to discuss planning opportunities.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Rihm Attorneys
Schellenberg Wittmer Ltd
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Rihm Attorneys
Schellenberg Wittmer Ltd
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions