The so-called “third” Swiss corporate tax reform is well on its way, but still has to pass the hurdle of a referendum that will take place on 12 February 2017. This Swiss tax reform has clearly been triggered by the international pressure from the OECD and the EU, focussing in particular on alleged harmful tax competition by Switzerland.
Provided that the Swiss vote in favour of the Swiss Corporate Tax Reform Act III, Switzerland will be able to stand proactively at the cutting edge of an internationally compliant tax system, whilst maintaining its position as one of the most competitive tax jurisdictions worldwide.
The most important features of the Swiss Corporate Tax Reform Act III are as follows:
Tax privileges that will disappear
The most popular Swiss tax privilege up to now was the so-called “Mixed Company” tax regime, which has been available for companies with predominantly international activities. The part of the Mixed Company’s tax base which is derived from foreign sources is substantially reduced according to the terms agreed with the responsible cantonal tax authority, generally resulting in an effective tax rate of 10% to 13%. This tax regime has been demonised as unfair “ring fencing” and discrimination of other jurisdictions.
Another Swiss tax privilege that will cease relates to holding companies. Currently, holding companies generally benefit from a complete exemption from tax of income on the cantonal/communal level, resulting in an effective income tax rate (on income other than income from participations) of some 8% (qualifying dividends from participations are virtually tax exempt on the level of both federal and cantonal/communal taxes by the application of a participation deduction mechanism).
Transitional rules for Mixed Companies
The transitional rules provide a “soft landing” for the Mixed Companies, over and above the planned general reduction of corporate income tax rates by the cantons. In reality, the tax benefits will continue for most Mixed Companies until the end of the year 2023, i.e. for another seven years.
The transitional rules function like this: the goodwill created during the time of the Mixed Company status will be determined on the basis of the business years 2016, 2017 and 2018. This goodwill can then be amortised tax effectively over the following 5 years and there will be a separate special rate for Mixed Companies with respect to their former, privileged income. Hence, in most cases, there will be no immediate loss of the privileged tax regime for quite some time.
The most important new rules in brief
Income of holding companies is no longer exempt on the cantonal/communal level and will be subject to ordinary taxation. Dividends from qualifying participations will still benefit from the so-called participation deduction (a mechanism that largely exempts such income) but all other income will be taxed at the ordinary tax rates (for exceptions see below).
Income derived from patents will be taxed separately from other income at a reduced rate for cantonal/communal tax purposes (income qualifying for this “patent box” will be established in accordance with OECD standards). The relief on such income may not exceed 90% of a particular canton’s standard tax rate. No such relief, however, is available for federal tax purposes.
Tax-deductible amounts for research and development costs may be increased so that they are as much as 150% of the actual expenses, depending on the cantonal tax legislation to be introduced. Again, no such special deductions are available for federal income tax purposes.
A notional interest deduction may be available on deemed “excess equity” for both federal and cantonal/communal tax purposes, provided that a particular canton introduces corresponding provisions in its cantonal tax law. The assumed interest rate for the notional interest will be determined according the rate of Swiss government bonds (which, however, currently yield very little).
The total tax relief resulting from the various new measures is limited to 80% of a company’s profit in a particular year (before available tax losses).
Hidden reserves may be determined when a company becomes subject to Swiss tax and then amortised for income tax purposes over a period of 10 years. This may offer an interesting opportunity for shareholders of a non-Swiss entity who are considering a migration to Switzerland.
An outside view of the new Swiss corporate tax system after the reform
The ultimate rationale of the Swiss Corporate Tax Reform Act III is in reality nothing other than to avoid the exodus of multinational companies due to international ostracism of the current Swiss tax regimes. The reform is likely to substantially delay this, or even prevent these companies from moving away. Indeed, in the long run the Swiss Corporate Tax Reform Act III may even pave the way for a stronger position in the international tax competiveness ranking. Why? Whilst the current ordinary tax rates in Switzerland range from some 13% to 25% (depending on the canton), with an average “Swiss” tax rate of some 19%, the average effective tax rate for companies will be reduced to around 14%, with many cantons offering combined (federal and cantonal/communal) ordinary effective tax rates of 12% in the future. Owing to other favourable provisions affecting a company’s tax base, the effective tax rate may even eventually be below 12%.
In addition, Switzerland is also likely to benefit as an internationally attractive location as multinationals as well as smaller enterprises and assets move out of tax haven jurisdictions due to their humiliation by the international community. Many an international group might rediscover Switzerland not only for its attractive tax location, but also for its other qualities such as: the central location in Europe, accessibility from anywhere in the world, efficiency in many areas, reliability of public institutions, personal safety of individuals and many more.
What international groups with Swiss companies should consider
It may be worthwhile for international groups to consider the following:
Swiss companies currently benefitting from Mixed Company status should be pro-actively managed throughout the transitional phase. Determining the step up of the goodwill for tax purposes is key. It may make sense to seek a tax ruling with the responsible tax administration at an early stage, so that the company’s bargaining power can be used (see point below).
In due course, a (tax neutral) move of a company’s domicile to another canton may make sense, if the opportunity costs and the difference in the tax rates justify it.
Switzerland will, in particular due to the low effective tax rate, become a very attractive place in which to engage in Research & Development.
Group financing may become interesting, particularly if the yield for Swiss government bonds rises in the future, since this will have a positive impact on the notional interest deduction available, provided that the company is largely equity financed.
A migration of a foreign legal entity to Switzerland may be an option, due to a possibly advantageous depreciation potential for Swiss tax purposes (both federal and cantonal/communal).
Contact person: Stefan Weber, [email protected]