Swiss Tax Alert - February 2017: Corporate tax reform III

The Swiss people rejected the text of the federal law concerning the Corporate Tax Reform III during the popular vote of the 12 February 2017. This corporate tax reform (CTR III), one of the most important of the last decade, aimed as a priority to abolish the privileged tax statutes granted to certain companies (holdings, domiciliary companies and joint venture companies) – insofar as Swiss corporate tax no longer complied with international standards – and to replace them with new tax measures, among others the patent box, compliant with OECD standards.

The consequences of such a refusal by the people are difficult to measure at present. The Swiss tax landscape therefore finds itself at a turning point in its history and we have attempted to pinpoint the implications and consequences in refusing the CTR III in Switzerland through three major mainlines.

A new alternative reform proposal?

As a reminder, it took five years of negotiation between the various stakeholders to lead to the current text of the CTR III. Now Switzerland has until the end of 2018 to comply with international requirements. On Swiss parliamentary level, the legislative process must therefore be revived urgently so a new “alternative” proposal sees the day. This new corporate tax reform will probably tend towards a clearer consensus between the interests of the political parties of the left and right. In fact, it would be totally conceivable that some of the measures that had been dismissed during discussions between the two federal councils on the current Corporate Tax Reform III proposal are again the subject of debate, like for example:

• The introduction of a capital gain taxation on securities;

• The rise of the rate applicable to the partial taxation procedure of dividends to 70%;

• The removal of the measure regarding interest-adjusted profits tax on shareholders’ equity; or

• A more restricted definition of the “patent box” notion.

The development of this new bill will therefore take time and it is for the moment difficult to anticipate a schedule for its implementation. All will therefore depend on the reactivity of the Swiss Parliament and the political consensuses found. According to the left that is already calling at this stage for a “light” version of the CTRIII proposal, it would be totally possible for the Swiss Parliament to quickly develop a new reform proposal with the text coming into force in 2019. Note that this projection could be conceivable provided that the new bill directly receives the guarantee from the two chambers of Parliament and that no referendum (popular vote) is asked for. According to the federal finance department in Berne, a period of two to three years would in its opinion be necessary to simply develop a new message to present to the Federal Chambers.

In this context, Switzerland must not lose sight of the fact that the international community will probably not wait – in the best case scenario - 2019 (at cantonal level – probable transition period of two years i.e. 2021) for it to abolish its cantonal tax regimes. In order to respect its commitments made towards the EU, the Swiss Parliament will therefore have no other choice than to urgently abolish its privileged tax regimes by introducing an urgent federal order in all likelihood.

What approach should the cantons take?

For the time being and without having the tools intended by the CTR III at their disposal, the sole leeway the Swiss cantons will have, is to reduce their corporate tax rate. This measure will not be inconsequential for companies however. In fact, it will be practically unavoidable that a strong tax competition will take hold, creating notable inequalities between the cantons that already have an attractive corporate taxation, like the canton of Zoug (currently at 14.6%) and those with strong taxation like the cantons of Geneva and Vaud (currently at 24.6 and 22.09% respectively). Without the federal compensation measures in favour of the cantons that were intended with the CTR III, it could be difficult for these two cantons but also for Zurich or Berne to rival as attractive a taxation as that already provided by certain cantons. On a cantonal level, on the 20 March 2016, 87.12% of the people of Vaud already accepted a cantonal bill that fixes an effective tax rate of corporate profits at 13.79%. In Geneva, the citizens are in principle called on to vote on these tax measures during autumn 2017. In the event the CTRIII is rejected, the Genevan Council of State has already warned that it would withdraw its projects based on the federal proposal, without giving a new date for a future cantonal vote.

On an international level, recent developments announced by Great Britain and the United States of America relating to a significant drop in corporate tax as well as other measures to remain competitive vis-à-vis other countries will noticeably carry weight during decision-making regarding keeping their business activities in Switzerland. If Switzerland does not adapt to the international context quickly, it will lose its appeal and will no longer be a privileged considered choice for these companies.

What are the stakes at international level?

To compensate for the loss of cantonal tax regimes, the aim of the Corporate Tax Reform III was to introduce new euro-compatible tax measures while satisfying the standards imposed by the OECD in its fight against harmful tax practices. Switzerland’s economic competitiveness was thus protected.

However, without a reform to put in place straight away, Switzerland remains subject to strong pressure from the EU and the OECD towards which it committed to adapt its tax policy by 2019.

Measures against Switzerland like its registration on the blacklist of tax havens and/or retaliatory measures, as in the past, are therefore possible and must be taken seriously. As an example, only very recently in 2016 Italy removed Switzerland from its blacklist relating to Swiss companies benefiting from tax privileges. Italy had in fact undertaken to remove it provided that its privileged tax regimes were abolished or adapted to comply with international standards. Without a reform of its taxation and an abolition of its tax regimes, Switzerland runs the risk of new countermeasures from certain neighbouring countries among others.

With regards the European Union, a European directive was adopted during 2016 to fight against tax evasion practise. This directive provides six rules that make up the policy package available to the States. One of them refers to CFC (Controlled Foreign Companies) and provides that the profits from European multinationals – set up in Switzerland for example – may be taxed with the parent company. The member States have until 31 December 2018 to put this directive in place. This directive that does not apply directly to Switzerland could therefore make its future stance regarding its tax policy a little more complicated.

Our advice for your company

Without a corporate tax reform, the issues and challenges that Switzerland will have to take up in the next few months are crucial. It must in fact be reactive and propose fair solutions that fall under a political and economic consensus with its different Swiss players. In fact, it must galvanize its tax landscape quickly by developing a new corporate tax reform proposal which is both attractive for companies and consensual for political parties, this by 2018/2019 if it wants to keep its promises towards the EU and be in line with OECD rules.

With regards Swiss companies, the latter must not take too hasty decisions in order to weigh up the interests against the choice of leaving Switzerland to look for a more attractive tax system elsewhere or benefit from Switzerland’s political and economic stability as well as its ability for innovation. In this still uncertain tax context, we can only recommend Swiss and foreign companies keeping well informed and attentive to future developments that should take place in Switzerland very soon.