In Switzerland corporate income taxes are levied at two different levels: federal level and cantonal level. Whereas the income of a Swiss company (or a branch) is subject to the same direct federal tax rate throughout Switzerland, the cantonal tax rates vary. In 2005, for ordinary income taxes, the canton Zug was top of the list of the most tax favourable cantons, followed by Appenzell and other cantons in Central Switzerland.

New fiscal strategies

For the tax year 2006 canton Obwalden and canton Thurgau have set out to wring from canton Zug its position as the most tax favourable canton. In other cantons, for example, Nidwalden, Appenzell Ausserrhoden, St Gallen and Lucerne revisions of the tax laws are also under way for the coming years. No reports have yet been heard from West Switzerland and Ticino. However it must be assumed that these tax offensives will cause a certain domino effect in the other cantons and further drive the trend towards lower tax rates.

Canton Obwalden: lowest corporate income tax rate in Switzerland

In the canton of Obwalden, a new tax law was passed by a vote onDecember 11 2005. Therefore, the corporate income tax rate as per 1 January 2006 has been lowered by statute to a uniform 6.6% for all communes. The effective income tax rate, including federal tax, is 13.1%.

Canton Thurgau: fiscal law revision

Canton Thurgau is also speeding up in the tax competition race and has decided on a partial revision of the fiscal law that is designed to provide relief for businesses. The revisions are due to be effective on January 1 2006. Accordingly, the effective income tax rate (in Thurgau's capital: Frauenfeld, including federal tax) in the year 2006 has been lowered to 18% and from January 1 2007 to 16.98%.

Canton Zug: defence of its reputation as the most tax favourable canton

Canton Zug is also coming under pressure, if one considers the corporate income tax rate of 16.44% (effective tax charge including federal tax). Canton Obwalden, considering the new tax law, has ousted canton Zug from the top position.

Comparison of the new tax rates

Obwalden with an effective corporate income tax charge of 13.1% (including direct federal tax) will become the clear leader in corporate income taxes, but Thurgau will also move up a few places.

Further decrease in tax rates expected

One can be excited about the future developments in the cantons. It is likely that further cantons will join the trend towards lower corporate income tax rates and so intensify the location competition even further.

Diagram 1: Effective income tax rate 2005 (including direct federal tax)

Diagram 2: Effective income tax rate 2006 (including direct federal tax)

Nathalie Urban (nathalie.urban@ch.pwc.com) Zürich