Parliament has passed the Value Added Tax Act Reform Bill. Barring a referendum, this new legislation will completely replace the existing legislation and will introduce significant changes in key areas; businesses will have only a few months to prepare for the transition.
Rates of corporate income tax in Switzerland are low compared to those of some other European countries, making the jurisdiction an attractive location for multinational companies. The European Commission has recently formally challenged the cantonal corporate tax regimes, holding that they are in violation of Article 23 of the 1972 Free Trade Agreement between the European Economic Community and Switzerland.
In June 2006 a new federal law was passed governing the taxation, at both federal and cantonal level, of an indirect partial liquidation involving the sale of participations equal to 20% or more of the nominal share capital of the relevant company, and limiting the restricted period to a maximum of five years. The new law significantly improves the tax position of the seller and the purchaser.
The section on foundations of the Swiss Civil Code has been revised to take into account the importance of charities and not-for-profit institutions in Switzerland, as well as the corporate governance issues associated with their increasing importance and the value of the assets they manage. Some of these amendments also have an impact on the tax situation of the founders and donors.
Revisions to the Federal Stamp Duty Act entered into force on January 1 2006. Among other things, foreign resident corporations with shares listed on a recognized stock exchange and their foreign resident affiliates are exempt from the Swiss transfer stamp duty triggered on sales or purchases of taxable securities from a Swiss securities dealer or intermediated by a Swiss securities dealer.
Rising stock markets have seen a return of employee stock and stock option plans as a common part of compensation and incentive packages for executives and other highly compensated employees. A draft bill including revised rules on the taxation of benefits granted under employee incentive plans is pending in the second chamber of the Federal Parliament.
The Swiss-EU Savings Agreement provides for measures equivalent to those laid down in the EU Directive on the Taxation of Interest Payments and the EU Parent-Subsidiary Directive. The relief from withholding tax on dividends under the agreement will strengthen Switzerland's position as a location for holding companies and promote investment activity in the jurisdiction.
Through the proposed law known as the Corporate Tax Reform II, the Federal Council aims to make Switzerland more attractive to entrepreneurs and investors. However, provisions relating to the recharacterization, under certain circumstances, of tax-free capital gains as taxable distributions are controversial and are likely to be debated by the first chamber of the Federal Parliament in spring 2006.
In 2005 the Federal Tax Administration issued a circular letter on lump-sum deductions with respect to foreign-to-foreign business transactions. Swiss resident corporations and foreign resident corporations with a Swiss permanent establishment are no longer allowed to apply lump-sum deductions on foreign-to-foreign business transactions, but must keep records of their expenses.