July 22, 2016
Tax News
THE SWISS CORPORATE TAX REFORM III
Part I: Light at the end of the tunnel
The Swiss privileged tax regimes and the principal company and finance branch taxation model
are internationally no longer acceptable. There is common agreement between Swiss politicians
that these tax benefits must be abolished and replaced by new measures ensuring a continuous
attractiveness of Switzerland as a leading business location. So far, so good.
Whilst National Council and Parliament have finally achieved consensus on the details of the
Corporate Tax Reform (CTR) III on June 17, 2016 the referendum campaign is in full swing.
Whatever the politicians will finally enact, the Swiss tax community has done its homework.
The current reform bill is Switzerland's response
to a more than ten-year-old conflict. At that time,
the EU criticized the beneficial cantonal tax
regimes and other special taxation models which
were assessed to distort competition. Based on
the dispute with the EU also the OECD increased
its pressure on the Swiss tax practices. To
maintain international acceptance, Switzerland
declared that these privileged tax regimes as
currently applied by 24’000 companies will be
abandoned and the corporate tax law reformed.
Without considering any of the new rules to be
introduced within the scope of the CTR III and
disregarding the accompanying measures as
partly already officially announced, the mere
abolition of the mentioned tax benefits could be
assumed to result in ETRs between approx. 12 24%. I.e., the applicable ETR could be deemed to
simply depend on the canton and community of
location as currently the case for all ordinarily
taxed companies in Switzerland. But let’s have a
look at what else is planned.
I. Tax benefits to be abolished
II. General cantonal tax rate reductions
Abolished as part of the CTR III but still available
until its enactment date will be the three cantonal
tax regimes: holding, domiciliary and mixed
company. For holding companies this means that
for any profits other than those from qualifying
investment income (e.g., interest, royalties,
management fees) the combined federal and
cantonal/communal effective tax rate (ETR) will
increase from 7.8% to the ordinary ETR of the
canton and community of location. For domiciliary
and mixed companies the different taxation of
Swiss versus foreign sourced profits will be
waived. I.e., instead of the current material
reduction of the taxable basis for foreign sourced
profits resulting in ETRs of usually 8.5 - 11%, the
entire profit shall be taxed at the ordinary rate.
As the growing uncertainty faced by Swiss MNCs
had occasionally already led to exit considerations
and as inbound investment has significantly
slowed, various cantons have already announced
to reduce their ETRs following the enactment of
the CTR III.
At the federal level the principal company model
(ETRs of 5 - 9%) and the finance branch model
(ETRs of below 3%) will be abandoned.
Not affected by the CTR III are qualifying
dividends and capital gains which will remain
subject to participation exemption.
This most straightforward measure to maintain
Switzerland’s attractiveness as a business
location once the three cantonal tax regimes and
the two federal taxation models are can be
implemented by the cantons upon their own
discretion. I.e., it does not require a change of
federal law. However, it is also by far the most
expensive.
The Canton of Vaud has even already prior to the
finalizing of the federal reform bill this June voted
on the reform’s cantonal implementation and the
reduction of the future tax rate from today’s 21.6%
to 13.8%. As a result, the EMEA headquarters of
the international tobacco and automotive industry
located at the north shore of Lake Geneva must
no longer fear a tripling of their current ETR.
Page 1 of 4
A selection of other cantons that have not yet
voted on the cantonal implementation but officially
announced their target ETRs are listed hereafter:
150% and restricted to expenses for R&D
activities in Switzerland no matter if performed by
the company or branch itself or a third party.
Canton
In the target tax rate environment, profits resulting
from activities for which a super-deduction can be
claimed would be taxed at ETRs of 10 - 13.3%.
Current ETR
Target ETR
Zug (ZG)
14.6%
~ 12%
Schaffhausen (SH)
16.0%
12 - 12.5%
Geneva (GE)
24.2%
~ 13%
Fribourg (FR)
19.9%
13.7%
St.Gall (SG)
17.4%
< 15%
15.1 - 17.6%
12 - 15.5%
Basel-Land (BL)
20.7%
15%
Basel-City (BS)
22.2%
16%
Berne (BE)
21.6%
17.7%
Zurich (ZH)
21.1%
18.2%
Thurgau (TG)
Cantons where the ETRs are already today at the
bottom of the above scale comprise: Lucerne
(11.5 - 13.3%), Nidwalden (12.7%), Obwalden
(13%), Appenzell-A.-Rh. (13.0%) and AppenzellI.-Rh. (14.2%) and Schwyz (12.5 - 15.8%).
Compared to the ETRs of the current regime
companies and the federal taxation models for
principal company and finance branch, however,
a range of between 12 - approx. 18% was
assessed not enough.
III. Measures to be introduced with the CTR III
In order to ensure that today’s beneficially taxed
companies can continue to enjoy their low ETRs,
a number of measures have been developed for
introduction with the CTR III. The below is an
overview of these measures as finally concluded
by National Council and Parliament:
Patent box
The new patent box will apply to patents and
similar rights and take into account the OECD’s
modified nexus approach. The cantons may grant
a maximum relief on box profits of 90%. Federal
tax will not be impacted. In the target tax
environment, patent box profits would thus be
taxed at minimum ETRs of approx. 8.3 - 9% which
is even lower than the tax burden faced by the
current mixed and domiciliary companies.
R&D super-deduction
This measure is optional and also limited to taxes
at cantonal/communal level. It widens the scope of
the patent box and covers certain ‘softer’ IP such
as production related know-how or non-patentable
technologies. The maximum super-deduction is
Notional interest deduction
Politically most contested was the introduction of
a notional interest deduction (NID) on excess
equity with the latter to be computed based on
rules similar to the Swiss thin-capitalization rules.
Assuming a pure finance company or branch is
100% equity financed and 85% qualifies as excess
equity at both, federal and cantonal/communal
level, the applicable ETRs may be as low as
2 - 3.2%. The downside for financial institutions
involved in third party lending is the interest rate at
which the NID is to be computed; the still below
zero yield of 10-year Swiss government bonds.
However, for the portion to be allocated to group
financing activities, an arm’s length interest rate
can be applied to calculate the NID.
This measure is mandatory for purposes of federal
tax and optional at cantonal and communal levels
at which it can only be implemented if the canton
concerned taxes qualifying dividends received by
individual taxpayers at a minimum of 60%.
Transition for special regime companies
Interesting for today’s holding, domiciliary and
mixed companies is the introduction of a two-rate
model according to which any profits generated
from the realization of hidden reserves and
goodwill that already existed at the time the
company or branch benefitted from the privileged
taxation will be subject to a reduced cantonal/
communal tax rate. The amount of the hidden
reserves and goodwill will be determined at the
time the CTR III enters into effect and the reduced
rate applied for a transition period of five years.
This measure which will be mandatory for all
cantons but for which no range of rate reduction
was incorporated into the draft law will provide for
remarkable tax planning opportunities. Indeed, as
an alternative to this official measure of the
CTR III there is another less prominently debated
but possibly even more favorable opportunity to
safeguard the low ETR (see Section V).
Step-up of hidden reserves and goodwill
upon migration to/from Switzerland
Another novelty in Swiss tax legislation are the
uniform rules applicable to the migration to/
from Switzerland of companies, businesses or
Page 2 of 4
functions at both, federal as well as cantonal/
communal level. According to these, a taxpayer
may disclose in the tax balance sheet any hidden
reserves including goodwill upon immigration to
Switzerland. In the following years, respective
depreciations can be deducted from the taxable
profit whereby safe-haven depreciation rates will
have to be observed. For goodwill, the maximum
depreciation period will be limited to ten years.
A taxation of hidden reserves including goodwill
will vice versa apply to emigrations and the
taxation of emigrations as fictitious liquidations
including a disclosure of only the hidden reserves
on recognized assets be waived.
as initiated by the Social Democratic Party will be
successful and the 50’000 signatures collected
prior to the deadline of October 6, 2016. The
referendum on the CTR III would then be held in
February 2017. Should the outcome of the vote be
positive, the enactment of the CTR III and its
implementation into the 26 cantonal tax laws can
be expected for January 1, 2019 at the earliest.
Should the outcome be negative, the reform bill
must be adjusted and the CTR III will be delayed.
Although these new rules may not appear exciting
for companies already based in Switzerland, they
are of significant value for today’s principal
companies (see Section V).
Maximum relief
To avoid a zero taxation or tax loss carry forwards
from the various measures of the CTR III a
maximum relief was agreed upon. This maximum
relief is defined as the total reduction of the taxable
basis resulting from combinations of patent box,
R&D super-deduction and NID at cantonal/
communal level and must not exceed 80%. I.e.,
based on the targeted cantonal/communal tax
rates but not taking into account a potential tax
relief at the federal level, the minimum post-reform
ETRs will amount to at least 8.7 – 10.1%.
Additional measures
Additional measures to be introduced as part of
the CTR III comprise:
 an optional reduction of the cantonal capital tax
rate for the equity capital tied up in investments
in associated companies, IP qualifying for the
patent box and I/C loans;
 an increase in the taxable quota from 60% to
70% for qualifying dividends received by
individuals and from 50% to 70% for dividends
and capital gains received by individual
businesses;
 an increase in the cantonal share in the income
from federal tax from 17 - 21.2%.
IV. ‘Swift’ enactment in a federalist state
with direct democracy
Given the many critical voices following the
second corporate tax reform in 2011 as well as the
strong condemnation of the “immoderate and
completely overloaded reform” by the political left,
the author deems it very likely that the referendum
V. Alternative solutions
No matter what the final result of the political
debate on the CTR III will be and whether the
reform bill will have to be adjusted or not, the
Swiss tax community has spent significant time
and effort to develop solutions that will ensure very
attractive conditions for the existing as well as
newly relocating companies.
The below gives an overview of how the today’s
and the newly to be introduced legislative rules
can be interpreted at cantonal and federal level to
maintain the current low taxation for a minimum of
five years following the reform’s enactment date:
Voluntary waiver of the special tax regime
and step-up of hidden reserves and goodwill
The current cantonal tax legislation of most of the
Swiss cantons includes an article according to
which existing hidden reserves are determined but
not taxed at the time a company changes from an
ordinary to a privileged taxation as holding,
domiciliary or mixed company. However, should
these reserves be realized within not consistently
applied blocking periods of usually five (e.g. ZG)
or ten years (e.g. SH, ZH, BS) following the
change of tax status, the respective gain is taxed
at the ordinary rate.
Based on the application of these articles to
changes from a privileged tax status to ordinary
taxation, i.e. to the reverse case, a number of
cantonal tax authorities have decided to grant to
their regime-companies a tax free step-up of their
assets including goodwill in the tax balance sheet
Page 3 of 4
and allow for a tax deductible depreciation of the
stepped-up assets for the same period as
stipulated as a blocking period for the actually
ruled case in their laws.
Compared to the two-rate model as a measure of
the CTR III, the cantons have announced that for
the step-up and subsequent depreciation of the
hidden reserves including goodwill the maximum
relief of 80% will be applied.
Assuming a mixed company in the Canton of Zug
with 10 employees and only foreign sourced
income the current ETR of 8.9% would even drop
to 8.7% for cases where the maximum relief can
fully be utilized. Almost equal is the situation in the
Canton of Schaffhausen where the ETR would
remain unchanged at 8.7% or slightly increase to
8.8% depending on the then implemented target
ETR. Should the CTR III notwithstanding the
referendum be enacted and the mixed companies
cease to exist already in 2019, this is the way their
low ETRs may be safeguarded until at least the
end of 2023.
The solution for principal companies
Not yet disclosed to the greater public was the
solution developed for the Swiss principal
companies. As the tax experienced reader may
recollect, the low ETR of principal companies at
the federal level is based on the assumption of
foreign
dependent
agency
permanent
establishments (PEs) and the exemption from
taxation in Switzerland of the respective profits.
Once the principal company taxation model will be
waived, the deemed foreign PEs will also cease to
exist. I.e., the profits which were to be attributed to
the PEs will then be taxed at the headquarters.
This fact can be interpreted as an immigration of
the foreign PEs’ businesses and/or functions to
Switzerland and must therefore allow for a step-up
of the hidden reserves and goodwill created by the
former PE followed by a subsequent depreciation.
Whether such step-up can be claimed already
based on current legislation following a voluntary
termination of the principal company taxation is
still controversially discussed within the Federal
Tax Administration. Also not yet worked out are
the details to be considered for the valuation of the
hidden reserves and goodwill.
Assuming a reduction of the taxable profit by way
of goodwill depreciation of between 20 - 40% at
federal level and the utilization of the entire 80%
maximum relief at the level of cantonal/communal
tax, an existing principal company could even after
the enactment of the CTR III continue to benefit
from ETRs of 6 - 9% for up to ten more years.
V. Conclusions and outlook
Whether the reform bill will be implemented in its
current draft or a heavily slimmed down version,
the Swiss tax community is prepared to offer to its
existing and newly relocating companies a
predictable and low-taxed environment with only
the finance branches still facing some uncertainty.
Together with the new ordinance on tax breaks as
just enacted on July 1, 2016 and the unique
service mentality of the Swiss tax authorities, the
former attractiveness of the country has finally
been restored.
For any questions please contact the author:
Utoquai 55
P.O. Box
8034 Zurich
Switzerland
Kerstin Heidrich, Partner
Phone +41 44 245 44 44
Mobile +41 79 597 77 90
[email protected]
This publication has been prepared solely to inform the interested reader about current tax developments in
Switzerland. It may contain personal views of the author and must not be considered professional tax advice.
Page 4 of 4