New European Union Implementing Regulation for company vehicles registered in Switzerland

Do you provide company vehicles for the use of your crossborder employees? These new rules could affect you!

New regulation for company vehicules

The entry into force of the new European Union Implementing Regulation (EU) 2015/234 as of 1 May 2015 means that company vehicles registered in Switzerland and placed at the disposal of employees resident in the EU will be subject to customs duties if they are used for private purposes.

In cases of non-compliance with European customs regulations, the user, i.e. the employee, becomes liable for the corresponding import duties and taxes as well as any fines for not clearing the vehicle through customs.

Company vehicles registered in Switzerland and used by employees residing in Switzerland are not affected by this change. However, for cross-border commuters, companies have to distinguish between those who use such vehicles purely for professional purposes and those who use them for professional and personal ends.

(i) In the first case, a cross-border commuter using a vehicle only for the journey to and from home to the place of work and to carry out professional activities specified in the employment contract may continue as before under the current rules (temporary admission procedure, which suspends customs duties and import tax). It is essential for companies to amend employment contracts and other internal regulations, where necessary, to reflect the intended use of vehicles. Moreover, a copy of the employment contract should be kept in the vehicle at all times.

(ii) The second case is more challenging because the employers must decide whether to continue to allow personal use of the vehicle.

If the employer were to prohibit the personal use of the vehicle, the employment contract would have to be modified, This has consequences, especially in terms of compensation, social security contributions and the tax regime of both the employee and the company.

If personal use is allowed to continue, the vehicle must be cleared through customs (10% customs duty, 20% non-refundable VAT) and several issues have to be resolved:

  • What is the value of the vehicles to be declared as there is no sale? The customs recommend Argus value but based on the French regulations in force and our experience it could be reduced.
  • What measures can be taken to reduce the customs duties? Is there an alternative to the temporary admission procedure to reduce the customs duties owed?
  • What formalities have to be respected?

Urgent action is needed, therefore, to ensure the use of company vehicles complies with European Union law. Our teams in France and Switzerland are at your disposal to assist you through the steps of the two approaches:

1. Clearing the vehicle through customs with the aim of maintaining stable employment contracts for cross-border commuters

Our teams can support you to:

(i) Minimise the impact of customs clearance of vehicles currently placed at the disposal of employees (clearance for personal use vs. other regime, determining the customs valuation);

(ii) Accelerate customs clearance (i.e. EORI registration, support in instructing customs agents as well as training HR teams to deal with the customs expenses now inherent when providing a company vehicle and with ‘crisis situations’ (e.g. if an employee’s vehicle is confiscated by French customs officers, negotiations over fines levied by customs, etc.).

2. Adapt current practices: prohibiting any purely personal use of the vehicle.

Our Swiss team supports you in making the required changes to employment contracts, internal regulations and other relevant documents while ensuring they comply with the other fiscal and social obligations of the company (the valuation of fringe benefits, social security contributions as well as personal and corporate tax).
Whatever the situation, we study the specific needs of your organisation and help you implement solutions tailored to your company’s fleet management.

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Modification of the federal ordinance on the granting of federal tax holidays

In March 2015 the Federal Council published a report on the contemplated modifications of the federal ordinance on the granting of federal tax holidays in application of the new regional policy. The consultation draft of the new federal ordinance can now be commented on by interested parties until July 8, 2015; entry into force of the final version is planned for July 1, 2016.

We have set out below a summary of the most relevant aspects of the consultation draft.

A) Granting of tax holidays according to current tax practice

As part of its regional policy, the Federal Council is endeavouring to strengthen the competitiveness of certain geographical areas. Under the terms of article 12 of the Federal Law on Regional Policy, federal tax holidays can be granted to industrial companies or production-related service providers located in structurally weak geographical areas that are willing to create new jobs or to maintain existing ones.

The cantons are responsible for submitting applications for federal tax holidays in accordance with the Federal Law on Regional Policy. A tax holiday applicant may only obtain a federal tax holiday if the canton of residence has already granted a tax holiday at cantonal/municipal level. The cantonal economic development agencies provide advice about the procedure.

Under current practice, a federal tax holiday can only be granted if the cantonal tax holiday decision contains a claw-back clause. The maximum duration of the tax holiday is 10 years, usually split into a first period of 5 years that is extended for a second period of 5 years if all the tax holiday conditions are met.

Source : http://www.seco.admin.ch/themen/05116/05118/05298/index.html?lang=en

B) Proposed modifications – new federal ordinance

The purpose of the current publication is only to highlight the material and procedural amendments the Federal Council wants to implement.

The amended federal ordinance should enter into force on July 1, 2016. Until then, the current practice will remain applicable. It is also worth mentioning that the amendments proposed by the Federal Council should not have a direct formal effect on cantonal tax practices; some cantons may, however, decide to change current practice and follow the new federal rules. This will have to be monitored in due time.

a.      Regional restrictions for federal tax holidays (articles 2 and 3 of the new ordinance)

The areas in which a taxpayer could apply for a federal tax holiday were significantly restricted in 2010. Currently, approximately 633 towns are located in the regions benefitting from the tax holiday.

Based on the amended federal ordinance, tax holidays may be granted to companies located in municipalities considered to be rural centres, small or medium sized urban centres including the surrounding areas (i.e. Alternative 2 – 136 cities), or alternatively smaller and less urban areas with a central function (i.e. Alternative 4 – 157 cities).

b.      Introduction of a cap for the determination of the tax holiday

Federal tax holidays will be subject to a cap determined using a specific formula (article 11 of the new ordinance). According to the current estimates made by the Federal Council, each new job created could lead to a tax credit ranging from CHF 71,594 to CHF 143,188 per year; each job retained should lead to a tax credit ranging from CHF 35,797 to CHF 71,594 per year.

The cantons should still be able to determine the method used to fix the cap in granting tax holidays in their own right (i.e., application of the tax credit similar to the federal approach or of a percentage of exemption).

c.       Transparency of tax holidays

Once a year the State Secretariat for Economic Affairs (SECO) will publish information connected with newly granted federal tax holidays, e.g., the name of the company, its location, information on the magnitude of the cap on the tax holiday and the number of jobs to be created or saved. Nevertheless, the effective amount of the tax credit granted will not be disclosed. In principle, no information will be published in connection with cantonal tax holidays.

Only a new tax holiday granted under the amended terms of the federal ordinance will be subject to public disclosure; tax holidays granted under the current version of the federal ordinance will not be affected by this new provision.

d.      Miscellaneous

In application of the proposed federal ordinance, compliance with the conditions for the tax holiday will have to be certified by the company’s statutory auditors. This rule will only apply to the tax holidays granted by the federal authorities after the new ordinance enters into force.

Similar to current practice, provisions for a claw-back will still be included when a federal tax holiday is granted.

The conditions for granting a federal tax holiday will not be drastically modified. Here are the main conditions to be met to be granted a federal tax holiday:

(i)   The canton has agreed to grant a cantonal tax holiday to the company

(ii)   Tax holidays may be granted to newly created companies or to companies developing a new activity

(iii)   At least 20 new jobs will be created.

C) Conclusions

The tax holiday practice at federal level is clearly defined and should be seriously taken into consideration when non-Swiss entities contemplate expanding in Switzerland.

The prospect of a future decrease in cantonal tax rates within the framework of Corporate Tax Reform III creates great incentives for multinational companies.

Our tax specialists remain at your disposal should you want to discuss in detail the possibility of being granted a tax holiday according to current or future practice.

Daniel Gremaud
PwC
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
daniel.gremaud@ch.pwc.com
+41 58 792 81 23
Gil Walser
PwC
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
gil.walser@ch.pwc.com
+41 58 792 67 81

Fundamental Review of the Trading Book

It is getting serious…

Fundamental changes are coming up for the banking industry. In course of its aim to increase the stability of the financial system, the Basel Committee is going to make substantial changes to the way required capital for market risks is calculated – and after the recently published consultative paper “Fundamental Review of the Trading Book: Open Issues”, it becomes quite clear what form these changes will take.

Not just about the trading book

The Basel Committee aims to specify the boundary between the trading and the banking book more clearly and unambiguously. While still keeping the intention to trade, hedge and profit from short-term price fluctuations as a guiding principle, the Committee gives strict rules and assumptions about which book certain positions must be allocated. In particular, positions which nowadays can safely be held in the banking book might be switched to the trading book in the new setup. Even in cases where no trading book is needed currently, under the new guidelines the need for a trading book might arise.

The new standard approach – taking sensitivities into account

While the Basel Committee originally suggested calculating required capital based on future cash-flows, it now favors a sensitivity-based approach (SBA) due to feasibility concerns from the financial industry. This new approach directly uses risk measures, the sensitivities, to compute the required capital, therefore, the required capital is directly connected to the risk of the portfolio. However, this also poses challenges regarding data availability and quality as all the sensitivities and fundamental information of the instrument for correct bucketing must be available. In particular, missing fundamental data could lead to instruments being mapped to the residual bucket, which would result in a significant increase in the required capital.

Though challenging, the new approach has the potential to increase the stability not only of the financial system but to secure each individual bank. Have a look at the attached flyer to get more detailed information or contact us directly to discuss the upcoming challenges for your business.

 

Swiss Tax Authorities Confirm Modified Interpretation of Principal Company Taxation

In brief

Swiss principal companies have long benefited from the rules of Swiss Federal Tax Administration (SFTA) Circular 8 (2001). On 6 March 2015, the SFTA confirmed in an official letter to the cantonal tax authorities (see enclosure) that it has adopted new interpretations of circular 8 that vary from those the SFTA issued in January 2014. Circular 8 remains applicable for existing and new principal companies, with the following modified interpretations effective as from financial year 2016 for existing and immediate effect for new principal companies.

  • Substance: Principal companies applying Circular 8 must prove sufficient substance in Switzerland. Also when a company meets the overall principal company qualification outsourcing of core principal functions now needs to be reviewed as it may result in an adjustment of the principal tax allocation.
  • Exclusivity test for limited-risk distributors (LRDs) or commissionaires: LRDs and commissionaires must perform limited-risk distribution ‘exclusively’ for Swiss or other group principals. Exclusivity means that at least 90% of the net profit of the distribution company is derived from LRD activities. There will be an available grace period through the beginning of Corporate Tax Reform III — which is not expected to enter into force until 2018-2020 — for existing distributor companies that do not meet the 90% exclusivity test and cannot be restructured in a timely manner to meet the exclusivity test due to legal and operational constraints.
  • Margin test: The principal tax allocation calculation must be adjusted if gross margin/compensation of the LRD or commissionaire exceeds 3%. Companies that cannot meet the 3% gross margin test can use a ‘fall-back’ test that considers the ‘higher costs’ of distributor companies, which now include a 5% mark-up on the higher costs. If the effective LRD remuneration exceeds the new margin test, a respective adjustment to the principal allocation under circular 8 has to be considered.

In detail

Modified exclusivity test
Only distribution companies that exclusively or almost exclusively act as LRDs or commissionaires qualify for principal allocation. To meet the test, at least 90% of the net profit of the distribution company must originate from the limited-risk distribution activity for the Swiss or other group principal. This requirement must be met by each distribution company on a stand-alone basis. A ‘short-term’ violation of the 90% rule will not be disqualifying. Based on recent confirmations from the SFTA, the test can be performed on the basis of local GAAP financial statements or management accounts (e.g. IFRS or US GAAP). This test applies to all principal companies that have obtained a new ruling since 2014 or that apply for principal company treatment for the first time.

Existing (pre-2014) principal companies whose distributors do not fully meet the 90% test will be granted a grace period to restructure their distribution companies. The SFTA has confirmed that the exclusivity rule will not be enforced with respect to existing companies when:

  • The distribution companies will not meet the 90% test.
  • Restructuring under local commercial law cannot be achieved within a reasonable period (i.e., before Corporate Tax Reform III comes into force in 2018-2020).
  • The burden of proof lies with the principal companies.

Modified margin test
Distribution margin affects the principal allocation level under Circular 8 as follows:
Maximum compensation for distribution companies will be the higher of 3% of gross revenues or the higher costs of the distribution companies plus a mark-up of 5% on those costs. If a distributor company also performs non-distribution activities, separate divisional accounts must be provided. Based on the SFTA letter, qualifying costs for the mark-up will include the distributor’s ‘own’ operating costs as well as taxes of the qualifying distribution companies. Third-party costs will not qualify for the mark-up.

Observation: In practice, some uncertainty remains regarding which costs are seen as ‘own’ costs versus ‘third-party’ costs. The SFTA indicates that the cantonal tax authorities should give some flexibility to simplify the cost basis identification and act in favor of the tax payer for such assessment of the cost base.

If effective compensation of the distributors exceeds total permissible compensation, the excess compensation must reduce the principal allocation on the principal company’s tax return, although the 50% deduction under the principal allocation rules will apply. As previously announced, the margin test will be applied in average taking into account all qualifying distributors.
The modified rule will take effect for tax year 2016. Rulings concluded since 2014 under the 2014 rules can be amended to include the cost plus test but apply immediately.

Example of the modified margin test:

Consolidated LRD Basis

Total Sales 1’000
COGS -700
Gross profit 300
Operating expenses -270
Profit before tax 30
Taxes -10
Profit after tax 20

Margin Test Calculation

Effective gross margin: 300 (30% of 1’000)
Permitted gross margin: 30 (3% of 1’000)
Higher costs: 280 (270 operating expenses + 10 taxes)
Higher costs + 5%: 294 (280 * 1.05; assuming all costs qualify as “own” costs)
Difference: 6 (300 effective gross margin ./. 294 higher costs+5%)

Impact on Principal Allocation

Reduction of principal allocation on principal tax return level:  3 (50% of difference)

Other aspects
The head of the SFTA confirmed in a recent meeting that the outsourcing of support or auxiliary functions to shared service centers and similar facilities will not lead to a reduction of the principal profit allocation. (This point was not included in the new letter.) If core principal functions are outsourced, this will still lead to an adjustment of the profit allocation provided overall principal substance in Switzerland is otherwise sufficient. In the case of potential outsourcing of core principal functions, the taxpayer must present its case to the SFTA for resolution.

The takeaway
Existing Swiss principal companies may need to review their positions with respect to the modified interpretation that will take effect in 2016. The SFTA has indicated there will be some leeway during the transition to the new interpretation. Newly established principal companies must take the new interpretations into account immediately.
Switzerland remains an attractive principal location considering its operational business environment. The upcoming Swiss Corporate Tax Reform III is expected to add new measures to maintain the country’s attractiveness.

Let’s Talk

For a deeper understanding of how these issues might affect your business, please reach out to one of the PwC professionals listed below, or your local Swiss contact:

Urs Landolf
PwC
Birchstrasse 160
Postfach, 8050 Zürich
urs.landolf@ch.pwc.com
+41 58 792 43 60
Armin Marti
PwC
Birchstrasse 160
Postfach, 8050 Zurich
armin.marti@ch.pwc.com
+41 58 792 43 43
Christoph Pauli
PwC
Birchstrasse 160
Postfach, 8050 Zurich
christoph.pauli@ch.pwc.com
+41 58 792 44 24
Swiss Tax Desk New York
Martina Walt
PwC
martina.m.walt@us.pwc.com
+1 646 471 6138