Quo vadis, Switzerland?

Where are you heading, Switzerland, with your tax reform? The Swiss are being asked this question today, because in recent years Switzerland has come under intense pressure from OECD nations, the G20 and the European Union (EU) to abolish its special tax breaks for multinational firms, such as holding, domiciliary, principal and mixed companies.

To bring the country’s tax practices in line with international standards, the Swiss government proposed a change in its corporate tax regimes that would ensure Switzerland’s continued attractiveness for multinational corporations. The new tax package, Corporate Tax Reform III (CTR III), not only contained provisions for the abolition of special tax breaks, but also included several tax relief measures (namely a patent box, a super-deduction for R&D, and a notional interest deduction). However, on February 12, 2017, Swiss voters decisively rejected CTR III, with 59.1% of the population voting against the government proposal.

Is this the end of business forms with special privileges?
What are known as “low-tax status companies” in Switzerland are not a specific type of company; the name denotes a special tax status applicable to any one of the company forms available under commercial law. The entities which to date have enjoyed fiscal privileges to be phased out under the third version of the proposed corporate tax reform (CTR III) include those termed principal, domiciliary and holding companies as well as mixed companies.

Following the rejection of CTR III, the Federal Council commissioned a steering committee, representing both the cantons and the Swiss Federation and chaired by Ueli Maurer, Federal Councillor, to draft a modified corporate tax proposal (TP 17). After consulting political parties, the business community and representatives of cities and communes, the federal steering committee issued its recommendation for a new corporate tax reform package to the Swiss Federal Council on June 1, 2017. Once again, tax relief in the areas of innovation (namely patents), research and development (R&D) are the cornerstone of this proposal.

With its skilled workforce, proven university-industry partnerships and a stable legal system, many multinational businesses have long recognised the benefit of setting up operations in Switzerland. To further strengthen and expand the country’s attractiveness for R&D companies, TP17 would provide for a patent box solution at the cantonal level. Under this new regime, income derived from licences and patents generated mostly in Switzerland would be eligible for preferential tax treatment. In addition, TP 17 would also provide for an optional deduction for research and development costs, while allowing a deduction of up to 50% for R&D staff costs incurred in Switzerland as a personal expense. However, the steering committee emphasized that the deduction should be limited to personnel expenses.

Depending on the exact circumstances, this could result in potential tax relief at cantonal level of up to 70%. The proposed tax reform package also will influence the actual relief of the double economic burden for qualifying dividends with regard to the direct federal tax and cantonal and communal taxes. Under the proposed tax reform, taxation of private dividends would be increased to at least 70% on a federal, cantonal and communal level. TP 17 would not foresee a notional interest deduction.

Cantons would continue to have a high degree of freedom to adapt their corporate gains tax and capital tax rate to their specific economic and fiscal needs. Ecovis’ experts have noted that cantons with many special low-tax status companies like Zug, for example, have already announced plans to lower their corporate gains tax rate.

The Federal Council approved the basic parameters of TP 17 on 9 June 2017, and requested the Swiss Federal Department of Finance to prepare a first draft law for public consultation by September 2017. The Swiss parliament is expected to debate the new bill in spring 2018. At that point, the Federal Council will also decide on how to gradually implement the proposed tax reforms.