Swiss Corporate Tax Reform
November 21, 2019
On May 19, 2019, the Swiss Corporate Tax Reform was approved in a popular vote. Most of the new measures are expected to become already effective as of January 1, 2020.
The reform brings an unprecedented change to the Swiss corporate tax landscape. Nearly all companies are affected by the most significant overhaul of the Swiss tax system in decades. The implementation period is short, which is why the implications of the reform need to be analysed urgently now.
- Many cantons will further reduce their corporate tax rates – cantonal tax rate incl. the Federal tax is between 12% and 14%, some of the canton do have higher taxes
- Tax neutral step-up in basis for new activities in Switzerland and for a transition period for the companies they had a tax privilege
- The existing privileged tax status (holding, domiciliary and mixed companies) will be replaced by new preferential tax rules, which are fully in line with OECD standards. The new rules inter alia include:
- R&D super-deduction
- Notional Interest Deduction
Reduction of corporate tax rates:
Lower income tax burden for a wide array of businesses without the need to meet special requirements (in addition to participation relief, which continues to exist and exempts dividends and capital gains derived from qualifying participations). The reduction of cantonal income tax rates is not directly covered by the Tax reform, but is necessary to remain attractive for companies that did benefit from a preferential tax regime.
Companies benefiting from a preferential tax regime are generally subject to a lower capital tax rate. To compensate for the loss of this tax advantage, the cantons may reduce the capital tax rate on equity relating to patents and comparable rights, qualifying participations, and intra-group loans.
Based on the official announcements of the cantonal governments, it is anticipated that most Swiss cantons will provide for attractive tax rates of 12% to 14% applicable to the pre-tax income (including federal income tax).
In connection with the new tax relief tax rate of about 10% can be reachable.
Tax neutral step-up of tax basis upon relocation to Switzerland
Enterprises moving assets, functions, business operations, permanent establishments, or their registered office or place of effective management to Switzerland may reevaluate all assets (other than participations of at least 10%) newly becoming subject to taxation in Switzerland at fair value. This step results in an income tax neutral step-up of the tax basis. In the years following this income tax neutral asset step-up, the assets can be amortised tax effectively and thereby reduce the taxable income.
Upon transition from the preferential tax regimes to ordinary taxation, the two rate model is applied. Profits attributable to the realisation of built-in gains generated under the preferential regimes, are subject to a reduced tax rate. The cantons can determine the reduced tax rate at their own discretion. The two rate model ensures a competitive income tax burden over the five-year transition period.
Based on currently applicable practices, a lot of the cantons offer already today the option of a tax-neutral disclosure of hidden reserves in case of a transition from preferential regimes to ordinary taxation under the current law (“old law step-up”).
The subsequent amortisation of the stepped-up goodwill and built-in gains results in a low tax burden (max. 10 years). The old law step-up is relevant for companies that voluntarily waive the preferential regimes before entry into force of the new tax legislation.
The impact and the alternatives should be analysed in detail.
Abolishment of the existing privileged tax status for holding companies, administrative companies, mixed companies, principal companies, and finance branches. Companies with existing privileged tax status have the following options:
- Tax status change and tax neutral step-up in basis before the new rules become effective followed by amortising the disclosed hidden reserves tax effectively in the following years;
- Request a binding decision on the hidden reserves upon the introduction of the new rules and claim a reduced tax rate on hidden reserves realised within 5 years (in all cantons).
Participation relief continues to exist; especially dividends and capital gains derived from qualifying participations remain exempt from corporate income tax.
A main element of the reform is the introduction of a patent box regime in accordance with OECD standards. The Patent Box income derived from domestic and foreign patents and comparable rights is taxed separately with a maximum reduction of 90%.
The cantons may provide that up to 150% of the expenses for research and development activities in Switzerland can be deducted for cantonal and municipal income tax purposes.
- R&D expenses are taken into account if they were incurred directly by the taxpayer or indirectly by third parties in Switzerland. In the case of own expenditure, the personnel expenditure plus a surcharge of 35% is decisive. In the case of indirect R&D expenditure, 80% of the invoiced costs.
The regime of the Patent box and the R&D super-deduction can be combined.
Notional Interest Deduction
High tax cantons (higher than 18%) have the option to introduce a notional interest deduction on surplus equity. Based on the announced intentions of the cantonal governments to reduce the cantonal tax rates, only the canton of Zurich meets the requirements for the introduction of a notional interest deduction. This is a tax deduction of an arm’s length interest rate on equity exceeding the equity required for the long term business activity.
Cap for tax reliefs of 70%
A company’s maximum cantonal income tax reduction resulting from the patent box, R&D super-deduction, and the notional interest deduction may not exceed 70% in total (i.e., minimum tax burden at cantonal level of 30% of the ordinary tax burden). The cantons may introduce a more restrictive threshold. At the moment it is unclear whether and how the amortisations on disclosed hidden reserves upon a status change under current law will be recognised for the tax relief.
Increase in dividend taxation
For direct federal tax purposes, 70% of the income from qualifying participations (at least 10% investment) is taxed at shareholder´s level and for cantonal and communal tax purposes at least 50% of such income shall be taxable.
The current law stipulates a 60% taxation if the income is derived from private wealth, and a 50% taxation in case of shares held as business asset, in some cantons the taxation is currently lower than 50% (eg. Canton Glarus).
Adjustment of capital tax (optional)
the cantons may reduce the capital tax rate on equity relating to patents and comparable rights, qualifying participations, and intra-group loans.
Reduction of cantonal income tax rates (optional)
The reduction of cantonal income tax rates is not directly covered by the Tax reform, but is necessary to remain attractive.
Based on the official announcements of the cantonal governments, it is anticipated that most Swiss cantons will provide for attractive tax rates of 12% to 14% applicable to the pre-tax income (including federal income tax). Some of the cantons/Communes will be even blow 12%.
Need for action
Every company should now take action and evaluate the impact of the changes to the tax position.
A timely preparation for the tax reform will prevent unwelcome surprises and competitive disadvantages.
The following four questions have to be answered:
- Does the company currently benefit from a preferential taxation at cantonal or federal level?
- Is it an innovation-driven company with patents or patent-like rights?
- Is there an extensive holding structure in place? Does the company have shareholders with qualifying participations and has distributable reserves?
- Is the existing structure still appropriate Is the company predominantly equity-financed and tax resident in a high tax canton (ZH)? Does the company have patents, intra-group loans or qualifying participations?
The tax reform will influence the Swiss tax landscape for the years to come. It is therefore important for companies to prepare for the future now and implement the necessary measures. We will be happy to provide you with further information on the tax reform and to assist you in shaping your future tax position together with you.
Dr. Manuel Vogel, Dipl. tax expert