Swiss Corporate Tax Reform
Switzerland offers a competitive corporate tax environment. Companies engaged in international trading, financing, administrating, and shareholding activities benefit from very attractive tax rates. To comply with international tax standards and to maintain and improve upon its attractiveness, Switzerland plans to amend its corporate tax system.
Key takeaways:
- Many cantons will further reduce their corporate tax rates
- Tax neutral step-up in basis for new activities in Switzerland
- The existing priviledged tax status will be replaced by new preferential tax rules, which are fully in line with OECD standards. The new rules inter alia include:
- Patentbox
- R&D super-deduction
- Notional Interest Deduction
1. Overview and Timing
On September 29, 2018, the Swiss parliament approved the final wording of the new corporate tax act. Unless the new tax law is rejected in a public vote (expected in May 2019), the new tax reform will enter into force on January 1, 2020.
2. Measures
Measures |
Impact |
Reduction of corporate tax rates in many cantons |
Lower income tax burden for all kinds of businesses without the need to meet special requirements (in addition to participation relief, which continues to exist and exempts dividends and capital gains derived from qualifying participations). |
Tax neutral step-up of tax basis upon relocation to Switzerland |
Businesses relocating fixed assets, functions, business operations, permanent establishments, registered office or place of effective management to Switzerland may revaluate all assets (other than participations of at least 10%) newly becoming subject to taxation in Switzerland at fair value. This results in an income tax neutral step-up of the tax basis. In the years following such income tax neutral asset step-up, the assets can be amortized tax effectively and thereby reduce the taxable income. |
Abolishment of the existing privileged tax status for holding companies, administrative companies, mixed companies, principal companies, and finance branches. |
Full compliance with international tax standards.
Participation relief continues to exist, i.e., dividends and capital gains derived from qualifying participations are exempt from corporate income tax. |
Patent Box |
At cantonal level, the residual income derived from patents and similarly protected rights developed in Switzerland will generally be taxed at a reduced level (maximum tax discount of 90% at cantonal level). This new tax incentive for R&D activities is fully compliant with OECD standards. |
R&D super-deduction |
The cantons may provide that up to 150% of the expenses for research and development activities in Switzerland can be deducted for cantonal and municipal income tax purposes.
This new tax incentive for R&D activities is fully compliant with OECD standards. |
Notional Interest Deduction |
The Canton of Zurich plans to introduce a notional interest deduction. All cantons with a total pre-tax corporate income tax rate exceeding 18.03% may allow such a notional interest deduction, which is a tax deduction of an arm's length interest rate on equity exceeding the equity required for the long term business activity. |
Cap for tax reliefs |
A company's maximum total income tax reduction resulting from the patent box, R&D super-deduction, amortizations on disclosed hidden reserves upon a status change under current law, and the notional interest deduction may not exceed 70% in total (i.e., minimum tax burden at cantonal level of 30% of the ordinary tax burden). The cantons may introduce a more restrictive threshold. |
Other measures |
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3. Need for Action
The Corporate Tax Reform will impact the corporate tax burden for all Swiss companies and branches in most cantons. This impact should be analyzed, and potential options for relocations should be considered.
For companies engaged in R&D activities in Switzerland and/or in the exploitation of patents and similarly protected rights developed in Switzerland, the R&D super-deduction and/or the patent box may provide an opportunity for significant tax savings.
For a company currently benefitting from a special tax status, one might consider opting for ordinary taxation even before the Corporate Tax Reform becomes effective. This maneuver may prove beneficial, especially in the following situations:
- Consider a company with substantial hidden reserves: In many cantons, a company may disclose its hidden reserves tax neutrally upon the end of a special tax status even as early as of today. Such an early disclosure would result in an income tax neutral step-up of the tax basis, allowing the company to make higher future amortizations, which would bring a lower income tax burden.
- Consider a company that is a subsidiary of a non-Swiss parent facing certain disadvantages: foreign controlled corporation rules, a tax credit system for dividend income, and/or other obstacles, if the tax rate, at the Swiss subsidiary level, is below a certain minimum threshold. A wide range of different ordinary tax rates range between approx. 11.5% and 24%, depending on the canton and municipality. This tax rate spread allows choosing a Swiss location where the corporate tax rate meets the minimum tax rate required by foreign law.
A company that does not opt to change its privileged tax status before the new corporate tax reform becomes effective (e.g., where a tax neutral asset step-up would result in an unwelcome deferred tax asset in the group's consolidated financials) may request a binding assessment on the amount of its hidden reserves when the current privileged tax status is to be abolished. If realized within five years, these hidden reserves will be subject to a reduced favorable income tax rate.
Finally, for a foreign business considering setting up or upgrading a Swiss presence, both the new option for a tax neutral step-up in basis as well as the reduction of the corporate tax rates may result in new international tax planning opportunities.
