Switzerland: New rules on inter-cantonal tax allocation established
Daniel Stutzmann and Manuel Angehrn of Deloitte Switzerland consider how the Swiss tax reform has led Swiss cantons to move towards a ‘function-based’ tax approach.
Following the implementation of the Swiss tax reform into applicable tax law on January 1 2020 and the abolishment of the preferential tax regime, Swiss cantons have established new rules to attribute profits amongst Swiss cantons in connection with the application of benefits provided by the reform.
Based on the long-standing practice established by the Swiss Supreme Court to avoid double taxation within Switzerland based on quotas or direct allocation, the rules allow for the appropriate determination of a profit allocation in the case of multiple locations within Switzerland. This change is in connection with the benefits derived from the Swiss tax reform. Circular letter No. 34 dated January 15 2020 outlines cases and possibilities to make use of the Swiss tax reform within an inter-cantonal context.
Depending on the approach taken by a tax payer (direct allocation by the way of permanent establishment (PE) accounts or indirect allocation by way of quotas), cantons are required to determine the taxable profit subject to cantonal and communal tax. This will be based on their tax laws and influence their ability to grant incentives, even in cases where functions are subject to a benefit which are not performed within the canton.
The rules address the change from a mere ‘legal entity’ approach of taxation towards a ‘function-based’ taxation. Furthermore, the limitation of benefit introduced as part of the Swiss tax reform and the way limitations are shared among the cantons is defined in detail. Thus, taxpayers may need to revisit their existing legal structure and assess the impact of a likely preferential combination of research and development (R&D) entities with manufacturing, sales or distribution entities and their preferred allocation approach to fully utilise potential R&D tax incentives granted by a Swiss canton, even in case the respective activities are located in a different canton.
Considering that tax is a deductible expense in Switzerland, the changed rules require a taxpayer to have clarity on the benefits to be applied for in the tax return prior to the business year-end. Accordingly, action in advance of the year-end is highly recommended and required.
The combination of entities and functions within a single Swiss legal entity not only makes sense from a domestic perspective, but – considering the possibilities of a transition regime or the possible R&D activities in Switzerland – could allow corporations to shelter additional profit with benefits derived from Swiss R&D.
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