Introduction of the International Supplementary Tax and postponement of the Undertaxed Payments Rule in Switzerland

Impact of the introduction of the IIR international supplementary tax on in-scope companies

With the introduction of the IIR, Switzerland will be entitled to levy top-up tax on undertaxed profits of foreign subsidiaries of in-scope Swiss multinational groups (MNE groups) and on undertaxed profits of foreign subsidiaries of Swiss intermediate parent companies. Consequently, for in-scope Swiss constituent entities, this new rule will add further complexity in their day-to-day Swiss tax compliance as from 2025.

The OECD/G20 minimum tax rate of 15% applies to MNE groups whose consolidated income exceeds the threshold of €750 million (over at least 2 of the 4 years preceding the relevant tax year).

From a Swiss legal perspective, the IIR is part of the same Federal Ordinance on Minimum Taxation of Large Corporate Groups (OLMin) that governs the Swiss QDMTT. The date of entry into force of each rule varies according to the Swiss Federal Council’s decision. Therefore, the entry into force of the IIR from 2025 will require the amendment of the Federal Ordinance OLMin by the Federal Council.

Current status of measures in Switzerland

In order to comply with OECD/G20 Pillar 2, the Federal Ordinance OLMin refers directly to the GloBE Model Rules for the calculation of the IIR. These steps include in particular the determination of the Effective Tax Rate, the calculation of the Top-up Tax and the application of the Substance-Based Income Exclusion.

Regarding the Swiss QDMTT, the rules ensure minimum taxation at 15% for in-scope MNE groups or constituent entities located in Switzerland. Thus, the rule prevents another country from levying foreign tax on undertaxed Swiss profits of in-scope Swiss constituent entities.

The IIR, on the other hand, ensures the minimum taxation of 15% of the profits of foreign constituent entities of Swiss corporate groups or intermediate Swiss parent companies, if the foreign constituent entities in question are not subject to minimum taxation abroad. As a result, in addition to the application of the Swiss QDMTT (already in place), Swiss headquartered MNE groups and in some cases Swiss intermediate holding companies will have to identify any in-scope foreign subsidiaries taxed below 15% and pay the top-up tax under the IIR rule as of 1 January 2025.

From a Swiss tax compliance perspective, identifying the Swiss taxpayer(s) subject to the IIR and the Swiss QDMTT may be challenging for concerned MNE groups. For instance, in the case of several Swiss intermediate parent companies of foreign MNE groups, more than one constituent entity may be subject to the IIR in Switzerland, whereas only one of them is subject to the Swiss QDMTT. Therefore, identifying the right Swiss taxpayer should be a top priority for affected MNE groups in Switzerland.

What about the UTPR in Switzerland?

The UTPR remains a subsidiary measure ensuring minimum taxation of 15% for all constituent entities of affected MNE groups, where neither a QDMTT nor an IIR exists in a jurisdiction. As mentioned, Switzerland does not intend to introduce such a rule for the time being.

How can Switzerland remain attractive in a Pillar 2 world?

According to the Swiss Federal Council, the introduction of the IIR will allow Switzerland to secure additional funds, which can then be used to strengthen the country's attractiveness as a business location. Other countries (e.g. EU member states, the UK, Canada or Australia) intend to implement the UTPR rules from 1 January 2025. Therefore, without IIR rules in Switzerland, other jurisdictions could have taxed Swiss profits according to their local UTPR rules. The implementation of the IIR rules therefore provides legal certainty for Swiss taxpayers in the future.

In addition to the implementation of OECD/G20 Pillar 2, other measures are also being discussed at the cantonal level to ensure Switzerland's attractiveness. For example, in May 2024, the canton of Zug announced its intention to introduce specific measures to benefit companies located in the canton. These measures focus on three areas: (i) social measures, (ii) sustainability and innovation projects and (iii) subsidies for companies. They are expected to come into force on 1 January 2026.

Another strong argument in favour of Switzerland's competitiveness is the absence of controlled foreign company (CFC) rules. Therefore, even with a minimum tax rate of 15% for in-scope MNE groups, Switzerland remains competitive compared to other countries that apply CFC rules with an effective tax rate above 15%.