On May 19 2019, the Swiss voter approved the Swiss Tax Reform and AHV Financing Bill. Under the reform, all special Swiss corporate tax regimes, i.e. the mixed, holding, domiciliary and principal company regimes (governed by Circular Letter No. 8) and the finance branch/finance company regime will sunset on January 1 2020, when the bill comes into effect.
The sunset of the regimes is subject to transitional rules, so that companies benefitting from such regimes can essentially maintain their tax rate for another five years, i.e. until the end of 2024.
The main replacement measures for corporate taxpayers include:
- Reduction of general headline tax rates at the discretion of cantons, whereby the majority of cantons will be in the 12%-14% tax rate range (effective combined federal/cantonal/communal tax rate, ETR);
- Introduction of a patent box, which is following the so-called modified nexus approach by the OECD on a cantonal level with a tax relief for qualifying income of up to 90%;
- Introduction of a R&D super-deduction at the cantonal level up to a maximum of 150% of the effective qualifying expenses at the discretion of cantons;
- Step-up upon migration of a company or of activities and functions to Switzerland: A step-up is granted for direct federal and cantonal/communal tax purposes (including on self-created goodwill) for companies or activities/functions migrating to Switzerland;
- Reduction of the cantonal/communal annual capital tax in relation to participations, patented intellectual property and inter-company loans at the discretion of cantons;
- Cantons with a 'high' cantonal tax rate may introduce a notional interest deduction (NID) on a cantonal level, which only the canton of Zurich will introduce; and
- Benefit limitation – the combined benefit from the patent box, the R&D super deduction, the NID (canton of Zurich) and the amortisation resulting from the step up on transitioning out of tax privileged regimes must not exceed 70% of the taxable income on a cantonal level.
What do you need to do as a taxpayer?
Taxpayers with tax regimes sunsetting on January 1 2020 should evaluate available options under transitional rules, model the benefits of alternatives, obtain valuations and start negotiations with Swiss tax authorities to have their hidden reserves and goodwill confirmed.
Further, taxpayers should explore how to best profit from other benefits, such as the patent box or the step up for bringing new business into Switzerland.
With headline tax rates of 12%-14% in most cantons, which can be reduced to as low as 9% with instruments such as the patent box, Switzerland will have very attractive corporate income tax rates. There are no controlled foreign corporation rules, anti-hybrid rules, interest limitation rules (beyond thin capitalisation limitations), and nor is the EU Anti-Tax Avoidance Directive in effect in Switzerland, nor planned.
Further, Switzerland benefits from a culture of trust between the taxpayer and tax authorities where important issues can be resolved in advance. This is a very valuable asset in today's rapidly changing tax environment fraught with uncertainty.