Swiss Tax Alert - September 2018 - A major reform on corporate tax in Switzerland approved
Today on September 28th, 2018, the Swiss Parliament proceeded to the final vote on the Tax Proposal 17 (TP17). The proposed measures should reinforce the fiscal and economic position of Switzerland, both for international corporations and local firms.
Due to the pressure exerted by the European Union (EU) and the OECD on Switzerland’s advantageous cantonal fiscal regimes as well as the failure of the Corporate Tax Reform III (CTRIII), the Federal Council designed a new package on the matter, first by editing a message on the Tax Proposal 17, and secondly by putting the Proposal into consultation. International pressure also put Switzerland on the OECD report on Base Erosion and Profit Shifting (BEPS) on the matter of damageable fiscal practices. Thus, as an answer to this criticism, the TP17 aims at abolishing cantonal fiscal regimes and replacing them by new measures that are in conformity with international expectations.
The new legislation approved by the Parliament could be subject to a Referendum, which was already announced by some left wing parties. In this case, a popular vote would take place in May 2019. If no referendum is launched, the first measures of the TP17 can enter into force beginning of 2019, the majority of the measures, though, will enter into force as of 2020.
Main characteristics of the Tax Reform 17
Abolition of preferential tax regimes Confederation: no | This first measure will only affect the tax regimes of cantons and municipalities. The actual preferential regime for status company will be abolished. Indeed, the above-mentioned preferential tax regimes are against the OECD’s international principles of taxation, which Switzerland agreed to adjust. |
« Patent Box » Confederation: no | The concept of Patent Box was already part of the CTR III and it follows the approach convened between the OECD and the G20 countries. The cantons are free to exclude the license fees originating from the exploitation of patents and other comparable rights from the basis of the computation of profit tax on the cantonal and municipal level for up to 90%. |
Super-deduction for R&D Confederation: no | The cantons can introduce on a voluntary basis additional deductions for R&D based on works carried out in Switzerland. The personnel expenses directly linked to the activity of research in Switzerland, marked-up by 35%, or 80% of the expenses for research and development outsourced to third parties in Switzerland can benefit from a supplementary deduction of 50%. |
Deduction for self-financing Confederation: no | Despite the heavy critics when presented with the CTR III, the Council of States reintroduced the deduction for self-financing (or deduction of notional interest). Nevertheless, to take into account the strong objection to this measure, its application will be limited to Cantons in which the cumulated federal, cantonal and municipal tax rate amounts at least to 13.5%. |
Revaluation of hidden reserves for companies transitioning into tax liability Confederation: yes | The reform accepted by the National Council sees a revaluation for hidden reserves in the tax balance sheet at the beginning and at the end of the tax liability period. It will guarantee a coherent fiscal treatment when companies transfer assets or duties to or from Switzerland or when they adopt or leave a patent box regime or other tax exemption regimes. By repealing a preferential tax regime, the hidden reserves formed under those regimes will be declared by means of a decision of the tax authorities. Thus, in the course of the next 5 years, such hidden reserves will be taxed upon realisation with a special tax rate depending on the cantons. |
Limitation of combined tax reliefs Confederation: no | The combined tax relief for the patent box, the R&D super deduction and the amortization from the revaluation of hidden reserves must not reduce the taxable profit more than 70%. The cantons can opt for a lower rate than 70%. |
Introduction of a regulation concerning reimbursements and partial liquidations for listed companies Confederation: yes | Capital companies and cooperatives that are listed on a Swiss stock exchange can only distribute capital contribution reserves if taxable dividends are distributed for an equivalent amount (principle of proportionality). The other reserves that can be distributed according to business law will be distributed at the time of reimbursement for an amount at least equivalent. The reimbursement is taxable up to the same amount, but not exceeding the amount of other reserves that can be distributed. The following have to be excluded from this rule
On the other side, in the case of a share buyback from listed Swiss entities, the financing of such shares must encumber at least half of the reserves originating from capital contribution reserves (regulation in case of a partial direct liquidation). |
Revisions of the Capital tax Confederation: no | The cantons can lower the capital tax in proportion to the capital allocated to the participations, patents and similar rights as well as intragroup loans. |
Taxation of dividends Confederation: no | This measure foresees a higher and more homogeneous taxation on dividends for participations held by individuals. At the level of the Federal direct tax, the plan of the Federal Council was to tax at least 70% of the amount of dividends collected, while the Cantons will have to tax at least 50% of the dividends. Indeed, after being debated by the Council of States, the minimal cantonal tax rate was reduced to 50% with a harmonization of the method of tax relief. |
Adjustments relative to the transposition Confederation: no | This measure aims at closing the gap of the Swiss tax system by limiting the field of application of tax neutral capital gain and thus, indirectly the effects of the principle of capital contribution. |
Extension of the flat-rate tax credit on foreign companies’ permanent establishment Confederation: no | Swiss permanent establishment of foreign companies will also benefit from the flat-rate tax credit. |
Other measures and consequences
Increase of the cantonal share to the Federal Direct Tax
The share of the cantons to the yield of the Federal Direct Tax will increase from 17% to 21.2% in order to minimize the revenue losses for the cantons and thus enable them to have some swing for the reduction of the cantonal tax rate.
Inclusion of cities and municipalities
Within the scope of the increase of the cantonal share to the Federal Direct Tax, emphasize is put on the inclusion of cities and municipalities in the redistribution of the latter.
Social compensation by means of the AHV financing
The reform also sees a social compensation of CHF 2bn through the OASI, especially by means of a joint increase of the social insurance contributions by 0.15% for each the employee and the employer and the Confederation’s participation increase from 19.55% to 20.20% as well as through the VAT’s demographical 1%.
Reduction of cantonal corporate tax rates
As part of the reform, some cantons will have to reduce their tax rate on company profits. Indeed, some of them already announced that they would lower their tax rate. The canton of Vaud for instance expects to reduce the rate to 13.78% (including Direct Federal Tax, Municipal and cantonal taxes) as from January 1st, 2019. The other cantons of the French speaking part, despite showing ambition to remain competitive and thus lower their respective tax rate, have not elaborated a clear proposal yet. (expected tax rate: Fribourg 13.72%, Geneva 13.49%, Jura 17%, Neuchatel 13.4%, Valais 15.61%).
Timeline and recommendations
If no Referendum is initiated, the first measures of the TP17 could enter into force at the start of 2019, while the majority of the measures will enter into force as of 2020. Nevertheless, if a Referendum takes place, the Swiss people will most likely have to vote on the TP17 on May 19th, 2019.
In the meantime, it seems appropriate to analyse existing solutions for companies that benefit from one of the privileged cantonal tax regimes. Insofar as the entry into force of the new law is imminent, it seems adequate to reflect whether or not the abolishing of privileged tax regimes before the entering into force of the TP17 is opportune and to what extent the new tools introduced by the reform can be implemented in everyone’s structure especially the Patent Box or the super deduction on matters of R&D. This evaluation shall enable entities to determine whether they can benefit from one of the above mentioned measures and thus anticipate the challenges that come with the BEPS plan.
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