Following corporate tax reform (CTR) in Switzerland, it is
expected that most of the tax privileges available for
corporate taxpayers (which sees an effective tax rate of 10% or
less), will be abolished.
While the outcome is yet to be finalised in a public
referendum on May 19 2019, CTR is ultimately necessary to bring
Swiss tax law and practice in line with OECD and EU
To ensure a seamless transition, and in light of the
principle of mutual trust, Switzerland will grant transitional
measures (such as a tax-neutral step-up) to allow taxpayers to
implement and adjust to the new environment over the next few
of years. Furthermore, almost all Swiss cantons have announced,
if not already enacted, a reduction in their headline tax
rates, ranging between 11.3 to 14% (including federal tax).
Corporate tax reform will also see the cantons introduce a
number of other measures, such as a patent box regime, a
research and development (R&D) super-deduction, or a
notional interest deduction.
Swiss tax holidays
One instrument that will continue to be available after CTR
is the Swiss holiday tax. It is a tax incentive granted by the
federal and/or cantonal governments if a new business is
established or relocated to Switzerland, ultimately creating
jobs and encouraging business innovation.
Tax holidays are an economic policy designed to strengthen
the competitiveness of individual Swiss regions. It should be
noted that it is the government and not the tax authorities who
are granting tax holidays.
Like most holiday's, Swiss tax holidays also come to an end,
but usually after a maximum period of 10 years. During this
period, it is possible to obtain a low single-digit tax
With many tax privileges expected to be abolished as a
consequence of CTR, the relative importance of tax holidays as
a tax incentive for doing business in Switzerland increases. It
is subsequently worth exploring this tax incentive.
Tax alignment with OECD and EU standards
According to the OECD's final report on BEPS Action 5, tax
incentives in the form of a tax relief designed to encourage
the economic development of specific areas are regarded as
having a small risk potential of base erosion and profit
Although such incentives will continue to be monitored by
the OECD, no further review is currently planned unless there
is a clear indication of adverse economic effects. As a result,
Swiss tax holidays are a legitimate tax advisory instrument
that aligns with the OECD's BEPS initiative.
In order to be considered by the OECD as a "low risk
regime", the following conditions must all be met:
- The tax holiday is only available in a
pre-defined geographical area and specifically contributes to
that region's economic development;
- The main purpose of the tax holiday is to
create new jobs and attract tangible investments, rather than
just intellectual property (IP) or some other mobile
- The taxpayer benefiting from a tax holiday
fulfills significant substance requirements (e.g. can prove
the generation of new employment, assets and investments);
- The country keeps relevant data (the
number of benefiting taxpayers, sector of their activity, and
aggregated amount of exempt income) to allow monitoring of
the economic impact of the tax holiday.
With regard to IP income, the OECD rules provide some
tolerance so that a tax holiday may also grant incidental
preferential tax treatment for IP income, as long as there is
no specific preferential tax treatment of such income.
Swiss tax holidays have never been qualified as a harmful
tax practice, neither in the original BEPS report in 2015, or
in the Progress Report on Preferential Regimes by the OECD in
2018. The legitimacy of the Swiss tax holiday scheme to
incentivise and promote regional development is also recognised
by the EU.
'Good bait catches mice', but Switzerland is no mouse
Swiss tax holidays can be a powerful instrument in terms of
their impact on the effective tax rate (ETR). An ETR of
significantly less than 10% can be achieved.
After the expiration of tax holidays, there will usually be
a 'soft landing', as the ordinary tax rates range between 11.3%
and 14% (depending on the location and prior to any additional
tax reductions through patent boxes, for example).
Tax holidays generally come with a claw-back provision,
which usually requires the taxpayer to stay another five years
at the tax holiday location, otherwise the tax benefits
received might have to be paid back in full, or more often,
pro rata temporis (i.e. the longer the tax payer stays
before exiting, the less tax benefits have to be paid
An exit after the claw-back period will usually not trigger
any obligations to pay back any tax benefits received. Concrete
terms and conditions applicable in a specific case are
generally subject to a so-called performance agreement between
the cantonal government and the taxpayer.
Given the fact that a tax holiday can last up to 10 years,
and that a claw-back period of typically 5 years has to be
observed in order to enjoy the full tax holiday benefit, the
taxpayer needs to have a long-term view of at least 15 years
when taking a decision to establish or relocate a business to
Therefore, it is important to be confident that the place
where the investment is going to be made will be able to
sustain a tax-friendly climate in the long run. It is worth
noting that public finances in Switzerland are rather solid
compared to other global actors, with gross public debt
slightly below 30% of GDP, as determined by the Swiss Federal
Finance Administration (and in line with the European
Additional room for the Swiss government to manoeuver and
keep the ordinary corporate tax rate at a low level between
11.3% and 14%, and provide the rather low Swiss VAT rate of
currently 7.7% (EU minimum VAT rate is 15%), varies widely on
the canton and municipality where the tax payer is
Cantonal tax holidays
The tax laws of all 26 Swiss cantons provide an explicit
legal basis to grant tax holidays if new jobs and innovative
businesses are created (or maintained).
In Switzerland, granting temporary tax relief instead of a
cash grant or loan (without interest or a preferential
interest) is the typical and preferred instrument to support
regional economic development, even though other such
incentives are generally possible and seen in practice.
Historically, some Swiss cantons, in particular those with
an already low headline tax rate (and/or adhering to a rather
straight economic liberalism) have been somewhat reluctant to
use tax holidays as an instrument for regional economic
However, in light of the expected changes from CTR, it seems
that at least some of these cantons are more open to also
consider tax holidays as an option to improve their regional
While cantonal practices vary widely, typically the
following requirements must be fulfilled in order to qualify
for a cantonal tax holiday:
- The business will be newly founded or
plans to relocate to Switzerland;
- It is an innovative business, and it is in
the canton's economic interest to locate this business to its
- Taxpayers already domiciled in the canton
will not be adversely affected by the canton granting a tax
holiday, in particular to a potential competitor of existing
- The business maintains employment from a
quantitative as well as qualitative perspective;
- The business plans future investments,
- The business expects a certain profit
An application with a detailed business plan needs to be
addressed to the cantonal government, typically to the
department of economy, which examines the request and makes a
suggestion to the cantonal government to approve or reject.
Formally, the cantonal government will issue a decree on
their decision. An objection can be filed in cases where the
applicant does not agree with the cantonal government's
decision, specific terms or conditions.
Furthermore, some cantons require applicants to acquire a
10-year tax break in tiers by initially applying for a period
of 5 years, and then renewing for another 5 years (if all
requirements are met).
Federal tax holidays
A federal tax holiday will only be granted if the canton (in
which the taxpayer is resident) has also granted a cantonal tax
holiday for the same undertaking. This condition is paramount,
has always been required, and proven to be non-negotiable.
The legal basis for a federal tax holiday is the Federal Act
on Regional Policy, which was partly revised in 2016. The
revised legislation (effective since July 1 2016) provides for
relief from federal corporate income tax (CIT) for a maximum
period of 10 years for (a) industrial enterprises and (b)
production-related service providers.
Under the revised legislation, industrial enterprises not
only include entities conducting manufacturing activities, but
also businesses providing information technology services.
Whereas the term "industrial enterprises" is rather clear,
the term "production-related service providers" needs some
precision as it also includes globally active industrial
companies centralising their R&D, accounting or supply
chain management activities, and/or other management activities
The distinction between industrial enterprises and
production-related service providers is important since the
latter is only eligible for a federal tax holiday if they
create at least 10 new jobs (FTEs) within the first five years.
There is no such limitation for industrial enterprises.
The magnitude of a federal tax holiday is linked to the
number of newly created or maintained jobs in a qualifying
area. According to a formula foreseen in the law, an annual tax
credit of up to CHF 95,000 (US$94,200) for each newly created
job, and CHF 47,500 for each maintained job, is possible.
To qualify as a "maintained job", the enterprise needs to
substantially realign its business, and such strategic
realignment must trigger significant investments and see an
improvement of products, processes or techniques. The formula
looks as follows (considering the maximum amounts per job):
The federal tax relief is limited by the amount of the
cantonal tax relief, i.e. if the canton grants a tax holiday
below the maximum permissible tax relief, the relief at federal
level would not exceed the cantonal tax holiday.
Undertaking creates 50 new jobs (FTEs) over the
next 10 years with annual profit of CHF 80 million
Total tax burden without tax holiday
million based on 17.4% statutory rate (combined federal
and cantonal tax)
||50 new FTEs
× CHF 95,000 × 10 years = CHF 47.5
|Total tax burden
with tax holiday
||CHF 137 million
- 47.5 million - 64.6 million = CHF 24.9 million
Resulting cash tax rate
(during 10-year tax holiday period)
The federal tax holiday will be granted in the form of a tax
credit which can be offset against the federal income tax
liability during the tax holiday period. Non-utilised tax
credits can be carried forward within the tax holiday
The revised legislation in 2016 includes an adjustment of
the regional areas where qualifying enterprises can apply for a
federal tax holiday. The new areas are much more attractive for
While the former qualifying areas mainly included
micro-communities spread over Switzerland in rather remote
mountain and rural areas, the new selection of regional
economic development areas takes into account more strategic
regional planning considerations and includes locations with
closer proximity to urban areas.
The revised regulations describe the qualifying regions for
federal tax holiday purposes as rural centres, small or medium
sized urban centres (including the surrounding areas), and
smaller and less urban areas with a central function.
Qualifying areas: 93 regional centres in the following 19
cantons (see also the map in Figure 1):
- Appenzell Ausserrhoden
- Appenzell Innerrhoden
- Saint Gallen
Since it is a pre-condition that the canton has also granted
a cantonal tax holiday for the same undertaking, the request
for a federal tax holiday can be filed with the State
Secretariat for Economic Affairs (SECO) once the cantonal tax
holiday has been approved by the cantonal government.
After the SECO's assessment and recommendation to approve or
reject the federal tax holiday, the final decision is taken by
the Federal Department of Economic Affairs, Education and
Research (i.e. the Federal Minister of Economic Affairs).
Once approved, the SECO will annually publish the
information in relation to granted federal tax holidays, which
includes the name of the enterprise, its location, information
on the maximum permissible amount of tax relief, and the number
of jobs to be created or to be maintained.
For cantonal tax holidays, a federal tax holiday is subject
to claw-back provisions. The claw-back clause is generally
triggered if the canton revokes the cantonal tax holiday, or if
the conditions and requirements laid down in the tax holiday
are not met, or no longer met (e.g. if the envisaged number of
jobs have not been created or have not been maintained within
the given time frame).
A partial or full cancellation of the federal tax holiday
relief can only take place within a term corresponding to
one-and-a-half times of the regular tax holiday period (i.e.
within a maximum period of 15 years).
Source: State Secretariat for Economic Affairs
Switzerland's outlook for business competitiveness
Even though significant changes to Swiss tax law and
practice are expected as a result of the upcoming CTR,
Switzerland continues to offer attractive conditions for doing
business in Switzerland.
With tax incentives such as Swiss tax holidays, tax rates of
significantly less than 10% are still possible. Even once an
individual tax holiday has expired, there will be an attractive
combination of generally low headline tax rates, plus
additional measures in line with international standards (e.g.
patent box, R&D super deduction, notional interest
deduction) which could result in single-digit tax rates even
without a tax holiday.
As tax is only one (but important criterion) for an
investment decision, it is the combination of attractive
taxation, excellent infrastructure in the heart of Europe,
highly-skilled and international labor pool, top-ranking
universities and research institutions, a powerful financial
system, and stable political environment with a centuries-old
tradition of property rights protection that makes Switzerland
a destination of choice.
Tel: +41 58 286 3166
Kersten Honold is a tax partner at EY in
Switzerland. Based in Zurich, he is a managing partner
of EY's Swiss transaction tax (M&A tax) practice in
Zurich, Berne and Geneva.
Kersten has extensive experience in international
corporate tax matters, particularly in domestic and
cross-border M&A transactions and reorganisations.
He advises both multinational groups/corporates, as
well as private equity investors in tax matters. This
includes financing, acquisition structuring, capital
market transactions, and management incentive schemes,
but also due diligence, pre-deal structuring
carve-outs, as well as post-deal services such as
post-acquisition integration, tax effective supply
chain planning, IP, R&D planning, as well as
function and risk allocation within multinational
Kersten is lecturer in national and international
taxation at the University of St. Gallen and a frequent
speaker at tax conferences. He holds a PhD in economics
from the University of St. Gallen and is a Swiss
certified tax expert.
Tel: +41 58 286 3477
Kilian Bürgi is a member of EY's transaction
tax (M&A tax) Team in Zurich.
Kilian advises clients in international as well as
transaction tax matters covering tax structuring, due
diligence as well as cross-border reorganisations. He
is deeply familiar with the upcoming changes resulting
from the contemplated Swiss corporate tax reform (CTR)
and assists multinational groups with tax modelling the
CTR effects and the expected impact of the various
measures available post-reform.
Kilian holds a master degree in law from the
University of St. Gallen.