Swiss Parliament approves corporate tax reform

Introduction

On 28 September 2018 the Swiss Parliament approved the revised version of Tax Proposal 17, a proposal for corporate tax reform.

The new proposal aims to set the basis for new rules on Swiss corporate tax (the last proposal having been rejected in a nationwide referendum in February 2017) and secure and enhance Switzerland's overall attractiveness as a business location.

The current version includes a notional interest deduction (NID) for high-tax cantons (which applies especially to the Canton of Zurich), as well as substantial non-tax (revenue-raising) measures.

Under Tax Proposal 17, Switzerland will repeal the existing special corporate tax regimes (eg, finance branches, mixed, domiciliary, principal and holding company). The bill further includes several measures that had been previously discussed, but it now takes into account the criticism that contributed to the rejection of the February 2017 referendum. If no referendum is requested, the first measures will enter into force in 2020.

Measures

The following measures are included in Tax Proposal 17:

• The introduction of transitional rules for companies benefiting from cantonal tax regimes – such companies may release existing hidden reserves (including goodwill) in a tax-privileged way. This should allow Swiss companies to keep their current tax charge for another five years after the special tax regimes end.
• The introduction of a cantonal-level mandatory patent box in line with the Organisation for Economic Cooperation and Development standard – a 90% exemption is available on qualifying income (determined on the basis of the modified nexus approach), whereby software is excluded. Qualifying income is likely to include IP development by related parties within Switzerland or by unrelated third parties abroad (ie, outsourcing). Embedded IP income must be determined based on the residual profit method. On entry into the patent box, past tax-deductible expenses will be included in the taxable income (entry ticket).
• A 150% super deduction for R&D costs incurred in Switzerland on a cantonal level will be introduced, based on R&D salary costs plus a mark-up.
• An optional NID for high tax cantons (currently only the Canton of Zurich would meet the proposed requirements) will be introduced.
• The introduction of a maximum relief limitation – the combined tax relief at a cantonal level from the aforementioned measures should not exceed 70% (ie, they may not reduce the taxable income to less than 30%).
• The cantons may introduce relief on the capital tax levied annually on equity capital and may also grant relief on equity relating to intra-group loans.
• Statutory provisions will be introduced relating to the tax consequences of companies entering (full tax-free step-up) or exiting Switzerland.
• Foreign tax credit provisions will be extended to Swiss branches of non-resident companies.
• The cantonal share in the federal tax revenues (currently 17%) will be increased to 21.2%.

Tax Proposal 17 also includes further revenue-raising measures which are meant to cross-finance the reform and garner wider political support:

• The harmonisation and increase of minimal tax on qualifying dividends (ownership of 10% or more) – at least 50% of the dividends will be subject to income tax on the cantonal level and 70% on the federal level.
• The introduction of new distribution rules for publicly listed companies – in terms of retained earnings, listed companies may no longer repay tax-free capital contribution reserves first, but must pay (at least) an equal amount of dividends subject to withholding tax (and income tax in case of Swiss residents) if other reserves from retained earnings are available. However, these rules will not apply to companies that moved to Switzerland after 24 Februrary 2008 (the date on which the tax exemption of capital contribution reserves was approved in a nationwide referendum). The purpose is to protect companies that migrated to Switzerland in reliance on the tax exemption. Further, the new distribution rule will apply only to companies listed on a Swiss stock exchange.
• There will be tighter rules regarding transpositions (which apply in private restructurings involving transfers of securities to personally controlled holding companies).
• A 0.3% increase in social security contributions paid by employees and employers to the old age and survivors' insurance (AHV/AVS) and an increase in the VAT share and federal contributions that are allocated to the AHV/AVS. These measures are expected to generate approximately Sfr2 billion in additional funding for the Swiss social security system. As a result of the proposed increase in social security contributions, the increase in family allowances for employees that was suggested by the government has now been removed from the proposal.

The cantons remain free to reduce their corporate income and capital tax rates. Although not formally part of the Tax Proposal 17 package, most cantons still envisage more or less significant reductions of the cantonal corporate income tax rates as part of their cantonal implementation projects. Some cantons are expected to offer ordinary corporate income tax rates as low as approximately 12% (see table below).

Effective tax rates for corporate taxpayers

Comment

The current proposal has attracted wide political support, especially from the cantons, large cities and municipalities and from almost all political parties. However, the proposed increase in social security contributions has been criticised by some unions and employers' associations. From a constitutional perspective, the revised bill also raises certain questions as it combines unrelated matters (eg, tax and social security) into one package.

Once the new law has been published in the Federal Gazette in early October 2018, the standard 100-day deadline will begin (ie, mid-January 2019), during which time 50,000 citizens may request that a popular referendum be held on the matter. If no referendum takes place, the first measures could enter into force in 2020; a referendum could delay implementation.

Companies should continue to review their structures and the effects of the proposed bill, and take appropriate action in order to ensure a smooth and tax-efficient transition to the post-tax reform environment.

For further information on this topic please contact Maurus Winzap or Robert Desax at Walder Wyss by telephone (+41 58 658 58 58) or email ([email protected] or [email protected]). The Walder Wyss website can be accessed at www.walderwyss.com.

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