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Corporate tax reform: Why Corporate Tax Reform III is essential for Switzerland’s future

Corporate Tax Reform III is the starting point for the continuing development of the tax attractiveness of Switzerland in a politically challenging environment, believe Armin Marti and Remo Küttel of PwC.

In the last few decades Switzerland has positioned itself as an excellent location for multinational companies and today boasts one of the strongest integrated economies in the world. Swiss and foreign multinational groups contribute significantly to the value added in Switzerland, account for a high number of highly qualified workplaces and, not least, generate substantial tax revenues.

An important factor in Switzerland's past success in international competition between locations was its corporate tax policy, which has been attractive for many years, encouraging numerous multinational companies to set up new activities in Switzerland or to migrate existing activities to the country.

However, in recent times the tax advantages offered by Switzerland compared with competitor locations have diminished. Various foreign locations have reformed their tax systems and have become more competitive. Switzerland is also under pressure from the EU, which demands conformity of the different Swiss corporate taxation regimes with its standards, despite the fact that Switzerland is not a member state of the EU. This tax controversy between Switzerland and the EU, which has been smouldering for years, has recently been intensified by the EU's pressing for reform measures for an acceptable solution, that is, in conformity with the EU standards.

Faced with these developments, the Swiss Federal Council accelerated the Corporate Tax Reform III (CTR III) project in 2012, with the intention of both:

  • safeguarding the attractiveness of Switzerland as a tax location; and

  • enhancing the international acceptability of important elements of the Swiss corporate tax regime.

Tax controversy Switzerland – EU

The tax controversy between Switzerland and the EU has been smouldering for several years. It began in 2005, when the EU Commission criticised the tax regimes of individual cantons concerning holding, administrative and mixed companies (regime companies) as unlawful state aid having a competition distorting effect and their incompatibility with the 1972 free trade agreement (FTA) between Switzerland and the EU. The EU's criticism is aimed primarily at the unequal treatment of domestic and foreign income of the regime companies.

The Swiss Federal Council has always rejected the EU's charges, essentially because the FTA does not constitute an adequate basis for an appraisal of corporate taxation from the aspect of distortion of competition. It has, however, expressed its willingness to hold discussions with the EU about the addressed disputed issues of Swiss corporate taxation. However, a compromise solution which was proposed by Switzerland in 2009 for an amendment of the criticised taxation arrangements failed after resistance from individual EU member states.

During 2010 the EU proposed holding a general dialogue with Switzerland about the application of the EU's Code of Conduct to its corporate taxation system. Though Switzerland is not an EU member state, meaning that no contractual arrangement exists between Switzerland and the EU based on which it could be obliged to align its corporate taxation with that of the EU member states, Switzerland stated its willingness to hold exploratory talks about a possible dialogue on the EU Code of Conduct on corporate taxation. At the beginning of 2012, however, these talks ended without having achieved significant results.

Increased pressure on Switzerland since 2012

In 2012 the EU increased the pressure on Switzerland and made it clear that if the tax dialogue on the disputed issues of Swiss corporate taxation did not yield any satisfactory results by the end of the year, the implementation of alternative (unilateral) steps and measures would be considered. And threats of new blacklists of alleged tax havens, such as Switzerland, were brought forward in December 2012 and January 2013. In the EU's opinion, such measures should convince non-EU members to abide by EU standards in the future. In the case of Switzerland, the EU has since demanded practical results in the first half of 2013.

As a consequence of the increasing political pressure from the EU, in summer 2012 the Swiss Federal Council approved the mandate for a formal dialogue with the EU with the aim of settling the tax dispute. Negotiations have been in progress since then. In the light of the EU Code of Conduct on corporate taxation, the EU has added to its discussions agenda on the cantonal tax regimes additional – in its opinion non-EU-compatible – corporate taxation rules, including for example:

  • the taxation arrangements for principal companies;

  • the granting of tax reliefs; and

  • the rules governing the Swiss participation deduction.

No results of the negotiations are available as yet. However, the increased pressure from the EU has caused Switzerland to put great effort into internally addressing the issues relating to the international acceptance of important elements of the Swiss corporate tax regime and to further develop and sustain its tax competitiveness in the context of the CTR III.

Despite the EU's politically questionable behaviour, it is hoped from a Swiss perspective that the EU does not lose sight of, and also respects, the time intensive legislative process which is required in Switzerland for legal changes to take place.

Competition for mobile corporate activities in the international context

In the context of the tax discussions between Switzerland and the EU on the cantonal tax regimes, the EU's original criticism was aimed essentially at the unequal tax treatment of domestic and foreign income. After the exploratory talks in relation to the EU Code of Conduct on corporate taxation, however, the EU announced its objective to be a general adoption of the principles of the code by non-member states such as Switzerland. This position is obviously unacceptable to Switzerland.

For Switzerland the negotiations with the EU, and in particular the question of the international acceptability of its taxation rules, are clearly of great importance. Many Swiss and foreign multinational groups locate international activities in Switzerland to benefit from these taxation arrangements and, coupled with the generally low effective tax rates in many cantons, enjoy comparatively attractive taxation.

Primarily mobile corporate activities are concerned, such as R&D, exploitation of intellectual property, financing activities and sales activities, but also centralised functions of corporate headquarters, that is, principal companies. Due to their mobile nature, these activities are exposed to intense location competition and groups predominantly situate them in tax attractive countries, but also countries from where they could easily be relocated.

In the past, foreign multinational groups have immigrated to Switzerland in great numbers because of Switzerland's excellent location environment. As a result, these so-called regime companies today employ a large number of people, create a significant demand for third-party services and also generate indirect positive effects on the economy. They also contribute substantial federal and cantonal tax revenues. Against this background, the need for Switzerland to take action is great. It should, however, be borne in mind that not only various European competitor locations such as Luxembourg, Belgium, the Netherlands, Ireland, in part the UK and Liechtenstein, but also non-European destinations, such as Singapore, stand ready to welcome companies with their own special tax regimes, which enable attractive taxation of such mobile activities and the resulting revenues from these mobile activities. The effective tax rates in the competitor locations are as a rule, from as low as 2% to 10%, depending on the activity and country.

We do not intend to examine further how the EU itself evaluates special tax rules of its member states. The work of the OECD under way now illustrates the fact that special tax rules generally give rise to discussions and actions. Supported by the EU, it demands a plan of action for a comprehensive procedure against tax practices which provide for the erosion of the tax basis and profit shifting, which will also affect special tax regimes.

This means that from an international perspective, with the continuing competition, Switzerland needs to act to still be perceived as one of the most attractive tax locations. A prompt conclusion of the tax controversy with a positive solution for Switzerland is certainly of great interest. Economic disadvantages for Switzerland must be avoided and the location must remain internationally competitive. The inevitable consequences of decreasing competitiveness would be fewer, or indeed no further, migrations of companies, which in turn will be accompanied by fewer investments and jobs. Additionally, there could be the risk of a gradual loss of substance in the Swiss and foreign groups resident in Switzerland. The upcoming CTR III must be guided by these thoughts and international developments require carefully monitoring.


The Swiss Federal Council announced the CTR III five years ago. However, work only really started in September 2012 after the Federal Department of Finance and the Cantons set up the project organisation for drawing up the reform proposals.

The objective of the CTR III is the revision of the Swiss tax system to achieve an optimal positioning between the challenges of international acceptability, tax competitiveness and financial yield for Switzerland. At the same time the tax controversy with the EU should be resolved. A demanding task. If necessary, the financial balance between confederation and cantons must be revised and measures must be worked out to counter the reduction of tax revenues at the level of the confederation.

In view of the clear expectations and attitude of the EU one assumes Switzerland will outline the key features of the CTR III during 2013. Against the background of the complexity of the issues it is however to be expected that it will take a considerable time before a draft of the legal provisions is published for consultation. In view of the political and legislative process, based on present knowledge, it can hardly be expected that new provisions will become effective prior to four or five years from now, that is, about 2018.

Alternative tax measures and reduction of corporate income tax

Due to the tax controversy between Switzerland and the EU, it is probably realistic to assume today that particular Swiss corporate tax regimes will be abolished in the foreseeable future, or at least will have to change. To safeguard the attractiveness of the location in the longer term, or even to be able to strengthen it, specific substitute measures are required. If not, Switzerland risks diminishing its attractiveness as a business location in general and losing ground to its direct location competitors in the contest for enticing mobile corporate activities.

The route to a solution must be approached at different levels such that the situation of international vulnerability can be defused. The proposed solution must consist of a combination of different measures at the level of the confederation and the cantons. Substitute measures in the area of the tax measurement base, as are found today in various European countries in a variety of forms, must be introduced for the taxation of mobile revenues to continue to be attractive. In general it should be the case that every special tax regime which is applied in the individual EU member states also constitutes an alternative course of action for Switzerland, even if the EU and the OECD regard certain regimes with scepticism (but tolerate them). Depending on the situation in the individual cantons, as a supplement a moderate, gradual reduction of the ordinary cantonal corporate income tax rate should be considered.

The list of demands for substitute measures for the taxation of mobile activities, as required by the economy, includes measures, such as:

  • the introduction of a licence box and interest box regime; and

  • a more flexible approach to the "tax follows accounting" principle, by which variation from the commercial law (statutory) balance sheet and income statement for tax purposes should be allowed not only against but also in favour of the taxpayer.

However, drawing up the substitute regimes which finally find favour and are appropriate will probably still require much work and take a significant amount of time. In light of the need for legal and planning certainty for the groups concerned and, against the background of the comparatively long legislative process, appropriate transitional periods until the existing regimes are actually abolished will also be needed.

Elimination of tax obstacles

Another subject for CTR III is the review and possible elimination of other tax obstacles in the context of Swiss corporate taxation. Specifically to be discussed are:

  • the abolition of issuance stamp tax on equity;

  • improvements in external group financing (withholding tax);

  • improvements in the Swiss system of the participation deduction (system of indirect exemption); and

  • potentially an optimisation of the lump-sum tax credit for foreign non-recoverable withholding tax.

This elimination of existing tax obstacles is also intended to contribute to strengthening Switzerland's position in the competition between international locations for investment. It must also be borne in mind that specific individual measures, such as the abolition of issuance stamp tax on debt and the basic exemption of intercompany financing activities from Swiss withholding tax, have already been addressed and implemented. These are however clearly of secondary importance on the priority list for the Swiss corporate tax reform.

Action required

The EU expects real progress from Switzerland in connection with the tax controversy by summer 2013. The work on CTR III is proceeding at full speed. This approach is positive, as an early settlement of the tax differences with the EU and a long-term attractive positioning in the tax competition between locations is of utmost importance for Switzerland. Not least, it creates planning and legal certainty for the companies concerned.

The challenges to be overcome with the CTR III are significant, but at the same time they create the starting point for active continuing development of the tax attractiveness of Switzerland in a challenging political environment. In the context of the reform work, international developments concerning the acceptability of corporate taxation must be monitored carefully. Switzerland must now act, and no longer merely react, so that ultimately it can seamlessly continue its earlier successes in the competition between attractive tax locations.

Armin Marti



PwC Switzerland

Tel: +41 58 792 43 43

Fax: +41 58 792 44 10


Armin Marti is an international tax services partner and corporate tax leader for PwC Switzerland. He has vast experience in international tax consulting for multinational groups and in-depth technical knowledge in international tax structuring and in transfer pricing.

Remo Küttel



PwC Switzerland

Tel: +41 58 792 68 69

Fax: +41 58 792 68 17


Remo Küttel is a director in the international tax structuring team of the tax and legal practice at PwC Switzerland. He has wide experience in rendering corporate tax services to large Swiss based and multinational clients, in particular in the area of designing cross-border tax efficient structures and group restructurings.

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