On 19 May 2019 Swiss voters approved a new 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 reform includes a patent box, an R&D super deduction and a notional interest deduction (NID) for high-tax cantons. There are also substantial non-tax (revenue-raising) measures and new provisions on social security contributions. At the same time, Switzerland will repeal the existing special corporate tax regimes (eg, finance branch, mixed, domiciliary, principal and holding company regimes). Moreover, the bill takes into account the criticism that contributed to the rejection of the February 2017 referendum. The measures will enter into force in 2020.
The bill has implemented the following measures:
- Transitional rules for companies benefiting from cantonal tax regimes have been introduced, allowing such companies to 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. Corporations need to make first decisions in this respect over the course of 2019.
- A cantonal-level mandatory patent box in line with the Organisation for Economic Cooperation and Development standards has been introduced, under which 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 50% additional (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 may be introduced by high tax cantons (currently only Zurich, Berne, Solothurn and Aargau would meet the proposed requirements; so far, only Zurich has expressed an intention to do so).
- A maximum relief limitation has been introduced, under which the combined tax relief on 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%.
The bill also includes further revenue-raising measures which are meant to cross-finance the reform and garner wider political support:
- The minimal tax on qualifying dividends (ownership of 10% or more) will be harmonised and increased – at least 50% of the dividends will be subject to income tax on a cantonal level and 70% on the federal level.
- New distribution rules for publicly listed companies have been introduced. 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 February 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 stricter rules regarding transpositions (which apply to private restructurings involving transfers of securities to personally controlled holding companies).
- There will be 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.
Although not formally part of the package that was voted on, most cantons envisage more or less significant reductions of the cantonal corporate income tax rates as part of their cantonal implementation projects.
Overview of cantonal implementation
The cantons continue to implement the new rules into their respective tax laws (for an overview, see Table 1), all with the aim of rolling out the changes to the cantonal tax rules on 1 January 2020. Depending on the status of the political and legislative procedures, a cantonal vote may still be required during the second half of 2019 in one or another canton.
Table 1: Implementation of corporate tax reform in cantons
| Canton | Patent box relief |
Super R&D deduc- tion |
Release of existing hidden reserves (special rates) | Full tax-free step-up of existing hidden reserves (under existing law) | Maxi-mum relief limit-ation | Ordinary corporate income tax rates after reform (in cantonal capital) | Ordinary corporate income tax rates before reform (in cantonal capital) | Minimal taxation of qualify-ing divid-ends (private assets) | Minimal taxation of qualify-ing divid-ends (busi-ness assets) |
| Aargau | 90% | 50% | 2.5% | Yes | 70% | 18.6% | 18.6% | 50% | 50% |
| Appenzell Ausserrhoden | 50% | 50% | 1.3%/ 2.6% | Yes | 50% | 13% | 13% | 60% | 60% |
| Appenzell Innerrhoden | 30% | – | 2% | No | 50% | 12.7% | 14.2% | 50% | 50% |
| Basel-Landschaft | 90% | 20% | 2.2%/ 2.6% | Yes | 50% | 13.5% | 20.7% | 60% | 60% |
| Basel-Stadt | 90% | – | 3.0% | Yes | 40% | 13% | 22.2% | 80% | 80% |
| Berne | 90% | 50% | 0.5% | Yes | 70% | 21.6% | 21.6% | 50% | 50% |
| Fribourg | 90% | 50% | – | No | 20% | 13.7% | 19.9% | 70% | 70% |
| Geneva | 90% | 10% | 2.8% | No | 9% | 14% | 24.2% | 70% | 60% |
| Glarus | 10% | – | 1.5% | Yes | 10% | 12.4% | 15.7% | 70% | 70% |
| Graubünden | 70% | – | 0.5% | Yes | 70% | 14% | 16.1% | 70% | 70% |
| Jura | 90% | 50% | 0.5% | Yes | 70% | 15% | 20.7% | 70% | 70% |
| Lucerne | 10% | – | 0.4% | Yes | 70% | 12.3% | 12.3% | 60% | 50% |
| Neuchâtel | 20% | 50% | – | No | 40% | 13.6% | 15.6% | 60% | 60% |
| Nidwalden | 90% | – | 1.2%- 1.8% | Yes | 70% | 12% | 12.7% | 50% | 50% |
| Obwalden | 90% | 50% | Not yet defined | Yes | 70% | 12.7% | 12.7% | 50% | 50% |
| Saint Gall | 50% | 40% | 0.5% | Yes | 40% | 14.5% | 17.4% | 70% | 70% |
| Schaffhausen | 90% | – | 0.8% | Yes | 70% | 12.4% | 15.7% | 60% | 60% |
| Schwyz | 90% | 50% | 0.4% | Yes | 70% | 14.1% | 15% | 50% | 50% |
| Solothurn* | 90% | 50% | 1% | Yes | 50% | 13.1% | 21.4% | 60% | 60% |
| Thurgau | 40% | – | 0.5% | Yes | 50% | 13.4% | 16.4% | 70% | 70% |
| Ticino | 90% | 50% | 3-4% | Yes | 30% | 17% | 21% | 70% | 70% |
| Uri | 30% | – | 1.2% | Yes | 50% | 12.6% | 14.9% | 60% | 60% |
| Valais | 90% | 50% | Not yet defined | No | 50% | 17% | 21.6% | 60% | 50% |
| Vaud | 90% | 50% | Not yet defined | No | 70% | 13.8% | 21% | 70% | 70% |
| Zug | 90% | 50% | 0.8%- 1.6% | Yes | 70% | 11.9% | 14.6% | 50% | 50% |
| Zurich | 90% | 50% | 0.5% | Yes | 70% | 18.2% | 21.2% | 60% | 60% |
* First cantonal proposal rejected, however, in cantonal vote on 19 May 2019.
Overview of effective corporate income tax rates
Some cantons will offer ordinary corporate income tax rates as low as approximately 12% (see Table 2 and accompanying chart).
Table 2: Cantonal corporate tax rates comparison
| Canton | Before reform | After reform |
| BE | 21.6% | 21.6% |
| SO | 21.4% | 21.4% |
| AG | 18.6% | 18.6% |
| ZH | 21.2% | 18.2% |
| TI | 21% | 17% |
| VS | 21.6% | 17% |
| JU | 20.7% | 15% |
| SG | 17.4% | 14.5% |
| SZ | 15% | 14.1% |
| GR | 16.1% | 14% |
| GE | 24.2% | 14% |
| VD | 21% | 13.8% |
| FR | 19.9% | 13.7% |
| NE | 15.6% | 13.6% |
| BL | 20.7% | 13.5% |
| TG | 16.4% | 13.4% |
| AR | 13% | 13% |
| BS | 22.2% | 13% |
| OW | 12.7% | 12.7% |
| NW | 12% | 12.7% |
| AI | 14.2% | 12.7% |
| UR | 14.9% | 12.6% |
| SH | 15.8% | 12.4% |
| GL | 15.7% | 12.4% |
| LU | 12.3% | 12.3% |
| ZG | 14.6% | 11.9% |
The popular vote of 19 May 2019 marks the end of a long enduring political and legislative process. Switzerland will eventually repeal corporate tax rules that attracted a lot of criticism from other countries (some of this criticism dated back to the pre-base erosion and profit shifting era). At the same time, Switzerland will introduce new progressive measures which are compatible with international standards and which should allow the country to defend its traditional premium ranking as a location for international businesses.
In the course of 2019, companies will need to review their structures and the effects of the new rules, especially the transitional rules, and take appropriate action in order to ensure a smooth and tax-efficient transition to the post-tax reform environment.
Public companies listed on a Swiss stock exchange may wish to consider a conversion of existing capital surplus into share capital in order to counter the new distribution rules and repay such funds tax free to their shareholders in the future by way of a share buyback followed by a formal capital reduction.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
