Switzerland will replace its privileged tax regimes by new attractive and internationally accepted tax measures. The final bill on the Corporate Tax Reform III has been passed by Swiss Parliament in the summer session of June 2016.1 The purpose of the Corporate Tax Reform III is to enhance the attractiveness of Switzerland as a business location and to improve the international acceptance of the Swiss tax system. A number of legislative changes combined with a reduction of the cantonal corporate tax rates shall ensure the achievement of the desired purpose. The final bill on the Corporate Tax Reform III dated June 17, 2016 is subject to the optional referendum. The earliest expected date for the abolition of the Swiss privileged tax regimes is January 1, 2019.
The Swiss tax regimes under which foreign revenues are subject to a preferential taxation (sometimes referred to as ring fencing) have been heavily criticized by the EU. At the cantonal level the criticized tax regimes include the holding status as well as the domiciliary and the mixed company status. At the federal level the tax regimes subject to international criticism are the privileges for principal structures and finance branches. The tax dispute between Switzerland and the EU was resolved in October 2014 by a joint statement in which Switzerland agreed to abolish the afore-mentioned criticized tax regimes and, consequently, the privileged taxation of foreign revenues. This tax dispute resolution triggered the legislative process of the Corporate Tax Reform III. The action plan of the Organization for Economic Cooperation and Development (OECD) on base erosion and profit shifting (BEPS) has put additional pressure on the Swiss corporate tax system. In order to strengthen the tax competitiveness of Switzerland and to ensure at the same time international acceptance of the Swiss corporate tax system, the final bill on the Corporate Tax Reform III provides for a number of tax-efficient measures at the federal and the cantonal level.
Main Tax Measures
1. Notional Interest Deduction on Surplus Equity
For the purposes of the federal corporate income tax, a notional interest calculated on surplus equity will be allowed as tax-deductible expense. The surplus equity represents the share of the equity that exceeds the equity the corporation requires on a long term for its business activities. In order to determine the surplus equity, the Swiss tax authorities will apply equity ratios that take into account the specific risk connected to the various classes of assets. The notional interest is not permitted on equity representing (i) participations qualifying for the federal participation exemption, (ii) non-operating assets, (iii) tax-exempt hidden reserves (including self-generated goodwill) disclosed upon migration to Switzerland (cf. Section 2 below) and (iv) assets in connection with transactions that achieve unjustified tax savings, namely receivables of any kind against related parties, provided that these receivables originate from alienations of participations qualifying for the federal participation exemption or from dividend distributions. The notional interest rate will correspond to the rate of return of a ten-year federal government bond. Insofar as the surplus equity regards receivables of any kind against related parties (inter-company receivables), an arm's length interest rate may be applied. At the cantonal level the introduction of the notional interest on surplus equity in the cantonal tax laws is optional. However, the introduction of the notional interest deduction on surplus equity at the cantonal level is subject to the condition that the tax base for dividend income derived from qualifying participations held by individuals as private assets for the purpose of cantonal personal income tax amounts to 60% at a minimum. The Federal Finance Department will implement detailed provisions on the notional interest deduction on surplus equity.
2. Step-up in Basis upon Migration
When becoming subject to Swiss tax liability – a foreign corporation has migrated to Switzerland by transferring its registered seat or its place of effective management to Switzerland, assets or functions have been transferred to a Swiss permanent establishment or a tax holiday has ended – a corporation may disclose hidden reserves (including self-generated goodwill) without triggering corporate income taxes. However, a tax-exempt disclosure of hidden reserves is not permitted with respect to qualifying participations. The disclosed hidden reserves have to be depreciated on an annual basis in accordance with the depreciation rates provided for tax purposes. The disclosed self-generated goodwill has to be amortized over a maximum period of ten years. This rule will apply at the federal and the cantonal level.
3. Patent Box
The cantons are obliged to introduce in their cantonal tax laws a patent box. The patent box has been designed to ensure full compliance with the modified nexus approach of the OECD. Income derived from patents and similar rights will benefit from a tax relief of 90%. The cantons, however, are allowed to provide for a lower tax relief percentage in their cantonal tax laws. The patent box will be introduced only at the cantonal level, not at the federal level. The Federal Council will implement detailed provisions governing the patent box.
4. Increased Research and Development Deduction
The cantons are allowed to introduce in their cantonal tax laws an increased tax deduction for research and development expenses. The R&D deduction will be limited to 150%. Only R&D expenses incurred directly by the corporation or indirectly by a third party in Switzerland will qualify. R&D expenses incurred abroad will not qualify. The introduction of the increased R&D deduction by the cantons is optional. An increased R&D deduction will not be possible at the federal level. The Federal Council will implement detailed provisions on the increased R&D deduction.
5. Step-up in Basis upon Change of Tax Status
The final bill on the Corporate Tax Reform III introduces mandatory tax provisions for the cantons governing the transition from a privileged cantonal taxation (holding status, domiciliary and mixed company status) to an ordinary cantonal taxation. Undisclosed hidden reserves including self-generated goodwill of corporations subject to privileged cantonal taxation realized within a period of five years upon enactment of the Corporate Tax Reform III will be taxed at a preferential tax rate. Together with the tax return for the last fiscal year under the currently applicable tax laws the corporations will receive from the cantonal tax authorities a questionnaire in which they may declare their undisclosed reserves including the self-generated goodwill. Based on said questionnaire the cantonal tax authorities will issue a binding decision stating the corporation's undisclosed hidden reserves including the self-generated goodwill at the time of enactment of the Corporate Tax Reform III. Corporations subject to privileged cantonal taxation who forgo or forget to declare their undisclosed reserves including the self-generated goodwill, forfeit their right to claim a preferential tax rate on the built-in gains realized within the five-years' period upon enactment of the Corporate Tax Reform III. These built-in-gains will be subject to the ordinary cantonal tax rate.
Corporations are entitled to waive their cantonal tax privilege prior to the enactment of the Corporate Tax Reform III. Many cantonal tax laws allow a tax-exempt disclosure of hidden reserves created under the cantonal privileged tax regime and a tax-deductible depreciation on the disclosed hidden reserves over a maximum period of 10 years. The final bill on the Corporate Tax Reform III rules that depreciations on disclosed hidden reserves that have been disclosed at the time of the waiver of the cantonal tax privilege have to be taken into account for the calculation of the maximum allowable cantonal tax relief of 80% (cf. Section 6. below)
6. Cantonal Tax Relief Limitation
The final bill on the Corporate Tax Reform IIII imposes on the cantons a tax relief limitation. The overall cantonal tax relief resulting from the patent box, the notional interest deduction on surplus equity and the increased R&D deduction may not exceed 80% of the taxable income of a corporation, determined before deduction of the losses carried forward and under exclusion of the net income derived from qualifying participations. It is not permitted that the above cantonal tax relief measures result in a loss carried forward. The cantons are allowed to introduce a threshold below 80% in their cantonal tax laws. At the federal level no tax relief limitation applies.
7. Cantonal Capital Tax Relief
The final bill on the Corporate Tax Reform III allows the cantons to provide in their cantonal tax laws for a capital tax reduction on equity insofar as the equity relates to qualifying participations, patents and similar rights as well as inter-company loans.
8. Cantonal Tax Rate Deductions
In order to further strengthen the tax competitiveness of Switzerland but also to compensate for the loss of the cantonal privileged tax regimes almost all cantons will lower their ordinary corporate income tax rates. Given that the determination of the cantonal tax rates falls within the powers of the cantons, this tax measure is not addressed in the final bill on the Corporate Tax Reform III. Effective corporate income tax rates (before taxes, including federal corporate income tax) between 11.5% and 14% are expected in a number of cantons, once the Corporate Tax Reform III has been enacted.
9. Share of the Cantons in Direct Federal Tax Revenue
The abolition of the cantonal privileged tax regimes is expected to result in considerable losses of tax revenue for the cantons. In order to compensate for the anticipated cantonal losses the share of the cantons in the direct federal tax revenue will be increased from 17% to 21.2%.
10. Abolition of Federal Issuance Stamp Tax
In the initial draft bill on the Corporate Tax Reform III the abolition of the federal issuance stamp tax was proposed. The National Council and the Council of States have, however, decided to eliminate this controversial tax measure from the draft bill and to include it in a later separate bill in order not to jeopardize the acceptance of the Corporate Tax Reform III by the Swiss voters.
The final bill on the Corporate Tax Reform III is subject to the optional referendum, which means that the final bill on the Corporate Tax Reform III will be subjected to a popular vote, should 50'000 Swiss voters request a public vote within 100 days as of the date of publication of the final bill on the Corporate Tax Reform III in the Federal Gazette. If so, the popular vote is expected to take place in 2017. The earliest date of enactment of the final bill on the Corporate Tax Reform III is expected to be January 1, 2019. The tax measures to be provided for at the federal level will be implemented by amending the Federal Direct Tax Act of December 14, 1990, as amended. The cantonal tax measures will be introduced in the Federal Act on the Harmonization of Direct Taxes of the Cantons and the Municipalities of December 14, 1990, as amended, which is a federal umbrella law based on which the cantons will amend their cantonal tax laws. The cantons are obliged to enact the amendments to their cantonal tax laws on the date of enactment of the final bill on the Corporate Tax Reform III. Consequently, the earliest date of abolition of the Swiss privileged tax regimes is expected to be January 1, 2019.
The internationally accepted tax relief measures provided for in the final bill on the Corporate Tax Reform III combined with the anticipated attractive corporate income tax rates between 11.5% and 14% will strengthen the tax competitiveness of Switzerland and provide new opportunities for international corporations.
- Final bill on the Corporate Tax Reform III published on: https://www.efd.admin.ch/efd/de/home/themen/steuern/steuern-national/reform-der-unternehmensbesteuerung--usr-iii-.html; Commentary on the Corporate Tax Reform III dated June 5, 2015 from the Federal Council published on: https://www.admin.ch/opc/de/federal-gazette/2015/5069.pdf