Notional interest deduction (NID) was officially introduced into tax law on January 1 2020. The Swiss tax reform enacted then allowed cantons with a higher tax rate to apply the NID at cantonal and communal level. It is currently only being applied in the canton of Zurich.
The NID qualifies as a tax-deductible expense for cantonal and communal taxes and is calculated by multiplying the so-called safety equity by the imputed interest rate.
Safety equity
Safety equity equals the difference between the total equity according to the Swiss statutory accounts and a minimum equity which is determined by applying a mechanical asset test (i.e. each asset on the balance sheet must be underpinned by a certain equity quota based on its average value during a business year and the resulting values are subsequently aggregated).
Imputed interest rate
For the sake of simplicity, the imputed interest rate shall equal the interest rate on a 10-year Swiss government bond. A variable interest rate may apply in line with the arm’s length principle on the safety equity attributable to intercompany receivables (i.e. including cash pool, short- and long-term receivables but exclusive of trade receivables).
Current environment
In the current interest rate environment, the NID provides a benefit mainly in cases where a company’s assets predominantly consist of intercompany receivables, such as in the case of finance companies or finance branches.
The NID should neither be qualified as harmful with regard to anti-hybrid mismatches (BEPS Action 2) nor as a tax practice itself (BEPS Action 5). Furthermore, the EU commission has recently closed the public consultation on the introduction of a debt-equity bias reduction allowance (DEBRA) for tax purposes and intends to adopt a respective directive, underpinning the general acceptance of the NID within the EU and probably the majority of the OECD, too.
For financing in the EU it may therefore be worthwhile to analyse the application of the NID in the canton of Zurich, particularly given that the EU commission has agreed to the introduction of an NID across the EU.
René Zulauf
Partner, Deloitte Switzerland
Loris Lipp
Manager, Deloitte Switzerland
