On 28 September 2018, the Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (TRAF), formerly Tax Proposal 17, after the two parliamentary chambers, National Council and Council of States, had negotiated their remaining differences and reached the final agreement.
The purpose of the TRAF is to assure the Swiss tax attractiveness as a business area, the international recognition of Swiss corporate taxation and sufficient tax revenues.
At the cantonal level, tax privileges for holding companies, domicile companies and mixed companies are to be revoked. At the federal level, the profit allocation rules of principal companies and Swiss finance branches are to be repealed. Patent box with a maximum relief of 90%, mandatory at the cantonal level.
A basic element is the establishment of a patent box regime in accordance with the Organization for Economic Cooperation and Development (OECD) standard. In the box, net profits from domestic and foreign patents and similar rights are to be taxed apart with a maximum reduction of 90% (rate at cantonal discretion). Before the patent box can be used for the first time, the corresponding tax deducted research and development (R&D) expenditures must be recaptured and taxed.
The introduction of this super deduction for domestic R&D is Switzerland’s need to be known as an attractive area for R&D. For administrative reasons, the maximum deduction of 50% (rate at cantonal discretion) is limited to personnel expenses for R&D plus a flat-rate surcharge of 35% for other costs and 80% of expenses for domestic R&D carried out by third parties or group companies.
High-tax cantons have the opportunity of introducing a NID on excess capital.
The tax authorities establish hidden reserves together with any self-created favour during the transition from privileged to ordinary taxation or migration to Switzerland.
In the case of a migration to Switzerland, the “step-up” system is applied. The tax-free disclosed hidden reserves are to be diminished annually at the rate used for tax purposes to the respective assets.
In the case of a transition, the “two-rate” system is applied. Profits regarding the realization of hidden reserves that were generated under the privileged tax regime are subject to a separate tax rate. The cantons are free to determine the amount of this special tax rate. The two-rate system assures a competitive income tax burden during a five-year transition period.
It should be noted that taxpayers may abolish voluntarily their tax-privileged status before the reform enters into force (early transition).
The patent box, R&D super deduction, NID as well as possible depreciations from the early transition from privileged to ordinary taxation are subject to the overall tax relief of 70%.
Dividend income of individuals from qualifying participations is at the moment partially exempt from taxation so as to soften double taxation at the shareholder level. At the federal level, the taxation rate increases from 50% (business investments) and 60% (private investments) respectively to a standard rate of 70%. At the cantonal level, there is a harmonization of the relief method and an introduction of a minimum taxation rate of 50% (rate at the discretion of cantons).
Privileged taxed companies usually benefit from a low capital tax rate. In order to reimburse for the loss of this tax advantage, the cantons are given the opportunity to diminish the taxable capital on patents and similar rights, qualifying participations and intra-group loans so as to be competitive.
Swiss companies may only pay tax-free capital contribution reserves in case they pay taxable dividends in the same amount. Intra-group dividends and capital contribution reserves from assets transferred from abroad after 24 February 2008 and in the case of a liquidation are not affected. These rules also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.
In order to prevent double taxation on the international level, Swiss permanent establishments of foreign companies should be able to require withholding taxes on income from third countries with a flat-rate tax credit.
It is presumed that the loss of tax receipts due to the tax reform will amount to CHF2b (in a static view). This shortage will be indemnified via the AHV:
– 0.3% increase in salary contributions (employers and employees one half each);
– allocation of the federal share of the demographic percentage of value added tax to the AHV;
– increase in the federal contribution to the AHV from the current 19.55% to 20.2%.
The reduction of cantonal profit tax rates is not directly covered by TRAF but necessary to remain attractive from a tax perspective for former tax privileged companies. The increase of the canton’s share of the federal direct tax from 17% to 21.2% makes it possible for the cantons to reduce their tax rates.
Before the Federal Council can confirm the final date of TRAF’s entry into force, scheduled for 1 January 2020, it is likely that the approval of the Swiss electorate will also become necessary in a referendum. If no referendum is held, the first measures of the tax reform could enter into force in 2019 and the main part of the measures from 2020. If 50,000 voters sign a petition requesting a public referendum within 100 days of the final bill’s publication in the Official Gazette, the proposed TRAF measures will be subject to a popular vote. TRAF would likely be put to the people’s vote on 19 May 2019.
Overall, the proposed tax reform achieves its main goal of retaining Switzerland’s international attractiveness while having an internationally accepted tax system and the new corporate tax landscape will secure Switzerland’s place ahead in the European landscape.
Legal disclaimer. This article does not constitute legal advice and does not establish an attorney-client relationship. The article should be used for informational purposes only.