Preferential regimes for holding, domicile and mixed companies will be abolished and taxes reduced. Now is the time to review your Swiss operations.
After much debate, Switzerland's Tax Proposal 17 (or as it's now called, the Federal Act on Tax Reform and AHV Financing - 'TRAF') was approved by parliament on 28 September 2018. It's expected that TRAF will strike the right balance between bringing the country's tax system into line with international expectations, while maintaining Switzerland's attractiveness for business and ensuring sufficient tax revenue.
The approval of the corporate tax reform has been a long time in the making, as evidenced by our previous articles on the subject: Swiss Parliament agrees on CTR III, Swiss voters reject Corporate Tax Reform III and Swiss government debates Tax Proposal 17.
Here's a summary of what has now been given the green light. If you'd like to discuss what TRAF means for your Swiss operations, please get in touch with our local team.
Key elements of TRAF
- Abolishment of preferential tax regimes
The cantonal tax privileges for holding, domicile and mixed companies will be abolished. At the federal level, the profit allocation rules for finance branches and principal companies will be terminated.
- Patent box
Mandatory introduction at cantonal level of the patent box. Relief is maximised to 90% of qualifying income, excluding software in principle. The rate of relief is at the discretion of the cantons.
- R&D super deduction
There will be an additional R&D reduction of 50% with the following basis whereby the rate of reduction is at the discretion of the cantons: personnel cost related to R&D performed in Switzerland plus 35% surcharge, limited to actual total R&D cost or 80% of the cost for R&D performed in, and invoiced by third parties in, Switzerland.
- Disclosure hidden reserves
When migrating a company to Switzerland, a step-up of hidden reserves including goodwill is allowed. After, depreciation is allowed annually at the permitted rates.
For companies transitioning from the 'old' preferential regimes, during a five-year transition period, profits emanating from realising hidden reserves are taxed at a separate rate. The rate is at the discretion of the cantons. The hidden reserves will be declared by decision of the tax authorities.
It may be an option in some cases to terminate an existing tax privileged status voluntarily, prior to TRAF entering into force.
- Notional interest deduction
One of the reasons for the earlier popular referendum rejecting the proposed tax reform (see Swiss voters reject Corporate Tax Reform III) was the inclusion of the notional interest deduction. Despite the resistance, the Swiss Parliament has decided to adopt the notional interest deduction as an optional measure for high-tax cantons. At this point in time, it's expected that only the canton of Zurich may introduce the notional interest deduction.
- Overall tax relief
Mandatory maximum tax relief for the above-mentioned measures of 70%; the cantons are free to choose a lower rate of maximum relief.
- Reduction cantonal corporate income tax rates
Related to the introduction of TRAF, to remain attractive, most cantons will reduce their combined tax rates. Current expectations are that the rates will be between 12% and 18%, varying from canton to canton.
- Capital tax relief
It will be at the discretion of the cantons to provide capital tax relief related to qualifying participations, patents and like rights, and intra-group loans.
- Swiss permanent establishments of foreign companies
Aiming to prevent double taxation, Swiss permanent establishments of foreign companies will be able to claim a lump-sum tax credit.
Once the approved law is published, Switzerland enters a waiting period for a possible popular referendum. This period ends in January 2019. If no popular referendum is prompted, TRAF will likely come into force from 1 January 2020, although it's possible that parts of the law will come into effect earlier.
If political party pressure does result in a popular referendum (which would be held in May 2019), the law may still apply from 2020 as scheduled, or be delayed.
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.