Release of dispatch and bill for tax proposal 17

The Federal Council drew up the bill based on responses received during the consultation process on the revised tax proposal (TP17). This bill is supported by the cantons as well as the cities and communes and was forwarded to parliament for discussion on Wednesday, 21 March 2018.

If the reform proposal can be dealt with in Swiss parliament expeditiously and without referendum, it is anticipated that some measures of the bill will already enter into force in 2019 with the remaining provisions in 2020.

The objectives

The overall objectives of TP17 remain unchanged, i.e. abolition of special forms of corporate taxation (Swiss tax regimes) and improve the attractiveness of Switzerland as a business location for domestic and foreign companies, maintain and create jobs, adjust the corporate tax law to the new international standards and enhance international acceptance of it. In addition and to take into account the learnings from the negative vote on corporate tax reform III in February 2017, the bill puts more emphasis on the financial impact of the tax reform on the federal as well as on municipalities’ and cities’ budgets.

In detail, the bill includes the following measures:

Measures to sustain international acceptance and competitiveness

  1. Abolition of criticised Swiss tax regimes
    In line with its international commitments, Switzerland will abolish the holding, domicile and mixed company privileges at cantonal level as well as the practices regarding principal taxation and the Swiss finance branches at federal level.
  2. Introduction of a patent box (cantonal level only)
    The patent box regime shall be mandatory for the cantons. The law outlines that Swiss or foreign patents will qualify for the patent box, but also comparable rights, such as certain protection certificates (thereafter “IP” or “IP rights”). In line with international OECD standards, the modified nexus approach (nexus ratio) will apply by patent, by product or by group of products.
    Where the IP right is embedded in a product, the residual profit method shall apply. The net profit from such products shall be reduced by a (routine) profit component of 6% on attributable costs as well as by a trademark related profit component. The maximum allowable relief amounts to 90%, applied to net residual profits from patented products post nexus ratio. Cantons may further reduce the maximum relief.
    Upon the first application of the patent box to a specific IP, any related R&D expenses that were deducted in Switzerland as tax deductible expenses in the past must be added back to the taxable income. Cantons are free to determine the entry taxation modalities within the first five years after entrance into the patent box.
    An ordinance to be issued by the Federal Council will provide more detailed implementation guidance including details on the calculation of the qualifying patent net income, documentation rules and begin / end of the reduced taxation.
  3. Additional deduction for R&D (cantonal level only)
    The introduction of an additional deduction for R&D expenditures is optional for the cantons. The deduction can amount to a maximum of 50% of the R&D costs incurred by the tax payer or the amounts paid to a domestic third party. R&D is defined by reference to article 2 of the Federal law from December 14, 2012 on promoting research and innovation.
    The cost basis is defined i) by reference to the direct R&D labour costs increased by a 35% up-lift for R&D related indirect costs plus ii) 80% of R&D costs invoiced by domestic third parties.
  4. Maximum relief limitation (cantonal level only)
    The aggregated reductions of the tax basis through the patent box, additional deduction for R&D expenditures and a step-up tax depreciation stemming from an early exit from a current tax regime in accordance with current cantonal practice shall not exceed 70%. Cantons may introduce lower thresholds of the relief limitation.
  5. Increase of cantons’ share of direct federal tax and reduction of cantonal income tax rates
    In order to support cantons in connection with the implementation of the measures of TP17 it is envisaged to increase the cantons’ shares of direct federal tax receipts from currently 17% to 21.2%. Although not earmarked for specific purposes it is expected that the cantons will use the additional funds to implement the measures of TP17 according to their needs but also to finance (significant) reductions of corporate income tax rates. The latter element is not directly included in the newly issued bill, since the determination of the magnitude of the cantonal corporate income tax rate reduction is subject to individual decision and approval process for each of the cantons.
    The lowered overall effective income tax rates (federal and cantonal) is to be expected in the range of approx. 12% to 18%.
  6. Annual capital tax (cantonal level only)
    The cantons may implement a reduction of the portion of taxable equity relating to investments and qualifying patents.
  7. Transitional rules for previous special-regime companies (cantonal level only)
    The transitional rules foresee, that hidden reserves (including goodwill) will be subject to a separate reduced taxation during a 5 year period to the extent they have not been subject to income taxes in Switzerland to date. The relevant applicable tax rate is at the discretion of the cantons. This rule is not subject to the ordinary entry into force provision and may be applied by the cantons already somewhat earlier than the ordinary effective date of the other provisions of the reform.
    Companies will have to report the hidden reserves (including goodwill) with the last tax return prepared and filed under the old (currently applicable) law in order to benefit from the five year transition rule.
  8. Step-up of hidden reserves upon migration to Switzerland
    Companies or business functions migrated to Switzerland from abroad may benefit from a step-up of hidden reserves (including goodwill) up to the fair market values in the tax balance sheet in the first tax return. Such a step-up will not trigger Swiss income tax consequences. The tax deductible amortisation of the stepped-up assets must be in line with applicable Swiss safe harbour rates. Capitalised goodwill will have to be amortised over a period of 10 years.

Further measures

  1. Broadening of the lump-sum tax credit
    According to the bill, it is also the intention to provide a new legal basis to enable ordinarily taxed Swiss branches of foreign companies to claim a lump-sum tax credit for foreign withholding taxes under certain circumstances. Respective details will be part of a new ordinance.
  2. Transposition threshold abolished
    The 5% threshold applicable to shares transferred to a self-owned company will be abolished. Accordingly, the transfer or sale of any shares, regardless of the amount or stake held, could result in taxable income at the level of the individual shareholder.

Measures to balance the reform

  1. Increased taxation on dividends for Swiss individual residents
    Dividends from qualifying investments should be taxed at 70% on the federal level and at least 70% on the cantonal level. Currently, on the federal level, a taxation of 50% for business assets and 60% for private assets applies. At the cantonal level, it cannot be excluded that the minimum taxation threshold will even be higher than 70%.
  2. Family allowance
    The minimum children’s and education allowances shall be increased by CHF 30 per month to a minimum of CHF 230 and CHF 280 per child respectively.
  3. Notional interest deduction
    Despite the recognised importance of this measure for the attractiveness of Switzerland as a business location, the measure of a notional interest deduction – at least as a voluntary measure at cantonal level – is not included in the bill. It is possible that during the parliamentary debate some stakeholders may request a reintroduction of a notional deduction on qualifying equity into the reform package.

The takeaway

The starting point for the tax reform is the alignment of Swiss corporate taxation rules with international standards. TP17 and the cantonal implementation plans shall, however, also ensure that Switzerland remains an attractive business location.

Against the background of the rejected corporate tax reform III, the published bill is a political compromise which is supported by the cantons, as well as by the cities and communes with the objective of avoiding a referendum. Ultimately, according to the Federal Council’s assessment, TP17 means that status companies will have to pay some more taxes although new/transitional measures and reduced ordinary income tax rates may limit the increase – while local SMEs pay less taxes, despite the moderate increase in dividend taxation and the increase in family allowances.

The elimination of the notional interest deduction, the further limitation of the additional deduction for R&D expenditure and a stricter maximum relief limitation rule will put greater emphasis on the reduction of the cantonal corporate income tax rates. Further, it is possible that the final version of the legislation, which needs to pass the Swiss parliament, differs from the currently proposed version and it might be feasible, that it will be (even) more favorable to businesses.

Companies are well advised to prepare in good time for the changes and identify necessary actions.

Download this article as a PDF.

Your contact partners

Dieter Wirth
Tel. +41 58 792 44 88
E-Mail: dieter.wirth@ch.pwc.com

Armin Marti
Tel. +41 58 792 43 43
E-Mail: armin.marti@ch.pwc.com

Remo Küttel
Tel: +41 58 792 68 69
E-Mail: remo.kuettel@ch.pwc.com

Benjamin Koch
Tel: +41 58 792 43 34
E-Mail: benjamin.koch@ch.pwc.com

Daniel Gremaud
Tel: +41 58 792 81 23
E-Mail: daniel.gremaud@ch.pwc.com

Claude-Alain Barke
Tel: +41 58 792 83 17
E-Mail: claude-alain.barke@ch.pwc.com

What will the Tax Proposal 17 add?

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The demands on Switzerland

Conformity with the OECD and EU standards. That means inter alia equal treatment of domestic and foreign income and therefore abolition of five special forms of corporate taxation (“tax regimes”), which are subject to international criticism:

  • Holding company,
  • domicile company,
  • and mixed company at cantonal level,
  • principal taxation,
  • and regime for Swiss Finance Branches at federal level.

The timeframe

On 14 October 2014, Switzerland assured the EU that it would abolish tax regimes considered by the EU to be harmful. In turn, the EU undertook to abolish in parallel existing measures of individual EU states against Switzerland. On 12 February 2017 Corporate Tax Reform III (CTR III) was presented to the sovereign and rejected with a resounding “No”.

Given the existing international pressure, the Federal Council had to act quickly and therefore launched the draft of a new tax proposal (known as Tax Proposal 17; TP 17). The consultation process on the Federal Council’s revised proposal was concluded on 6 December 2017.

The objectives of TP 17 are the same as for CTR III

The following target triangle is to be achieved in the best possible way:

  • Restore international acceptance of the Swiss tax system,
  • maintain its attractiveness as a business location and
  • secure appropriate tax revenues for confederation, cantons and communities.

The new corporate tax system should strengthen Switzerland as a competitive tax location and reliable value-adding partner for domestic and foreign groups and for Swiss SMEs. Attractive jobs should be created and retained and social prosperity consolidated. In addition, international conformity is strived for and a balanced corporate tax substrate ensured. It is the intention that TP 17 is more balanced, more comprehensible and politically more widely accepted, as the call for an acceptable solution and a suitable balance is becoming louder.

For those involved in the political process it is now a question of giving up their extreme positions and to come together to reach an agreement.

The basic concept

In order, to achieve the above-mentioned target triangle in the best possible way, the cantons must be permitted a high degree of flexibility in structuring their regimes. Rigid regulation with enforced conformity regardless of the cantonal characteristics would inhibit successful realisation and contradict Switzerland’s federalist concept. The reform package is therefore still based on modules and allows the cantons certain range of options in the realisation. The Helvetic success model, which in the last 30 years has brought Switzerland numerous corporate relocations and prosperity, should be retained this way.

During the CTR III referendum campaign it was frequently unclear, to what extent one would gain effective advantages and suffer disadvantages. The fact is: In the past, the Confederation has benefited from the regime companies to a much greater extent than the cantons. The substrate for these taxation forms represents about half of the corporate income tax revenues from Direct Federal Tax and, together with the cantonal corporate income taxes, amounts annually to about five billion Swiss francs. An exodus of the regime companies, which up to now have enjoyed privileged cantonal taxation, would therefore seriously damage not only the cantons, but also the Confederation. The measures foreseen by the Federal Council are intended to avoid this as far as possible and to ensure, that Switzerland will remain fiscally attractive for the location of companies in the future.

The prospective tax charge for those companies, which up to now have been taxed under the rules of the regimes being abolished, depends on how much the canton, in which they carry on their activities, will reduce the standard corporate income tax rate and whether they carry on research and development in Switzerland. In any event, previous regime companies will, after the reform becomes effective, at first pay the same or somewhat higher taxes and, after the expiry of a transitional period, depending on the canton pay a little or substantially higher taxes.

The proposed relief measures and cantonal reduction of the ordinary corporate income tax rates will benefit in particular Swiss SMEs. The increased partial taxation of dividend income at owner level will compensate this benefit to some extent. The total effect depends on the characteristics of a SME, and where in Switzerland the company and its owners carry on their activities or have their residence. In cantons, which reduce the corporate income tax rates significantly, SMEs will in spite of higher partial taxation overall be the winners. This in contrast to cantons, which cannot, or only marginally, reduce the corporate income tax rate.

The measures

Overview of the most important reform measures and their effects on the corporate location Switzerland:

  • Introduction of internationally accepted reliefs for all Swiss companies with research and development activities in Switzerland (including those that have previously not benefited from a tax regime);
  • Increase of financial contribution from the Confederation to the cantons, to finance the cantonal different potential for reduction of the corporate income tax rates for all companies;
  • Alleviation of the increase in the cantonal corporate income tax charge for international corporate activities, which previously benefited from a tax regime now being abolished, for a transitional period of five years;
  • Retention of taxation independently of the legal form by means of a moderate counter-correction in the partial taxation of private dividend income;
  • In comparison with CTR III reduced losses of tax revenues, with the aim of nevertheless keeping the business and tax location Switzerland internationally attractive and reliable.

Missing is:

  • the introduction of an incentive to create more equity by a deduction for secure financing (formerly interest adjusted corporate income tax) at least optionally for the cantons for the purpose of motivating greater self-financing and reducing the present tax motivation of higher debt. This would contribute to the stability of Swiss companies and job security, even in times of crisis.

Selected measures in detail:

  • Patent box profits, more precisely from patents and comparable rights are beneficially treated for tax purposes. They are intended to promote research and development activities and their value creation in groups and SMEs. At cantonal level – as previously proposed in CTR III – a patent box meeting the OECD requirements is foreseen as compulsory. It is, however, more narrowly defined in TP 17. For example, income from Copyrighted Software shall be excluded from the tax benefit.
  • Increased deductions for R&D expenditure: because the nexus approach reduces the effect of the patent box, optionally the cantons may supplement the patent box with an input oriented special deduction in the additional amount of at most 50 % of own research and development costs and of 40% of R&D costs purchased in Switzerland.
  • Deduction for secure financing: the so-called interest adjusted corporate income tax, also known as Notional Interest Deduction (NID) on excess equity has been struck out of TP 17 by the Federal Council. Interestingly, in the meantime the EU has published a proposed guideline for measurement common corporate tax base in the EU. Included in this proposal is also a so-called deduction for growth and investment, which is very similar to the Notional Interest Deduction. The aims of this rule were twofold: firstly, one wanted to give companies a fiscal incentive to create higher equity financing and, associated with this, greater resistance to a crisis. On the other hand, one wanted to retain highly mobile financing activities existing in Switzerland. Presumably this objective was not recognised by wide circles during the CTR III referendum campaign, not least because of the badly chosen expression “interest adjusted corporate income tax”. Being a sensible measure, it should nonetheless be permitted optionally at least at cantonal level under the positive labelling, “Deduction for secure financing“.
  • Step-up of hidden reserves: 18 of 26 cantons already permit under current law the change from a privileged tax status to ordinary taxation through the tax-free step-up of the hidden reserves that arose under the special regime. With the transitional rule under TP 17 the increase, mentioned at the beginning in the tax charge on the abolition of the current tax status, is to be cushioned for the first five years after enactment of TP 17. The cantons may tax the hidden reserves, hitherto tax free, at a special (low) rate to be fixed by the canton.
  • Reduction of the ordinary cantonal corporate tax rate for all companies: in order to avoid a fiscal shock after expiry of the transitional rules on the taxation of hidden reserves, the cantons want to reduce their cantonal corporate income tax rates as far as possible. Depending on the cantonal tax level, this reduction, which would be effective for all companies operating profitably, would be in the range between negligible and a substantial number of percentage points. This measure is not formally part of TP 17. Each canton must have such a measure approved in the normal cantonal legislative manner.
  • Revision of the capital tax: for companies under a tax regime, today the capital tax is applied more favourably than for companies without special tax treatment. Therefore, the cantons should be able to reduce the cantonal capital tax, to the extent the taxable capital is attributable to patents and participations. Here, too, consonant with the introduction of a deduction for secure financing optional for the cantons, the capital tax relief is also to be permitted, to the extent the equity is attributable to group loans.
  • The partial taxation of dividend income for income tax purposes of private investment holders was adopted in 2008 together with CTR II. This income is to be taxed at 70% in future. Compared with today this is higher. In various cantons this increase will be compensated respectively over-compensated, by the expected reduction of ordinary corporate income tax rates, which in future will apply to distributed profits. However, depending on the constellation, the situation is not consistent and can result in a higher charge for private company owners. Therefore, in order to avoid false incentives and distortions, it would be preferable, if the cantons could set the partial taxation percentage autonomously.
  • The overall limitation of reliefs was reduced from 80% to 70%. The cantonal minimum charge to income tax will be at least 30% (CTR III: 20%) of profits in the future. This limit is effective in those cases, in which the measures being newly introduced would provide greater relief.
  • The minimum children’s and education allowances shall be increased by CHF 30, following the example of Canton Vaud. As a reminder: children’s allowances are funded by the companies dependent on the number of jobs. This element is irrelevant and has nothing to do with corporate taxation. It should therefore be struck from the bill.

Based on the consultation replies received, the Federal Council will draw up the final bill and forward it to Parliament for discussion in spring 2018. If the reform proposal can be dealt with in Parliament expeditiously and without referendum, it is anticipated that the package can become effective on 1 January 2020.

Companies are well advised to prepare in good time for the changing conditions and to draw up alternative actions with a scenario planning. In a first step, they should review the overall tax effects. These include possible benefits from the Step-up practice, benefits from relief measures, such as the research and development deduction or the patent box and effects on the valuation of deferred taxes in the group financial accounts. And of course, it is worthwhile comparing their different possibilities in the various cantons.

Your contact partners

Dieter Wirth
Tel. +41 58 792 44 88
E-Mail: dieter.wirth@ch.pwc.com

Armin Marti
Tel. +41 58 792 43 43
E-Mail: armin.marti@ch.pwc.com

Benjamin Koch
Tel: +41 58 792 43 34
E-Mail: benjamin.koch@ch.pwc.com

Daniel Gremaud
Tel: +41 58 792 81 23
E-Mail: daniel.gremaud@ch.pwc.com

Remo Küttel
Tel: +41 58 792 68 69
E-Mail: remo.kuettel@ch.pwc.com

Claude-Alain Barke
Tel: +41 58 792 83 17
E-Mail: claude-alain.barke@ch.pwc.com

Laurenz Schneider
Tel: +41 58 792 59 38
E-Mail: laurenz.schneider@ch.pwc.com

Information on Tax Proposal 17

The most up-to-date information on and changes to the Tax Proposal 17 can be found at any time online.

Swiss Tax Proposal 17 – Launch of the PwC Step-up-Calculator

Switzerland is currently preparing the so-called Tax Proposal 17 (TP 17). As a consequence, the existing cantonal tax privileges for holding, domiciliary and mixed companies will be abolished, most likely as per 1 January 2020. In order to smoothen the transition for these so-called status companies, the reform foresees a separate taxation rate for existing hidden reserves. In addition, based on the current legislation, various cantons offer the possibility of a step-up of hidden reserves for tax purposes when giving up the privileged taxation status before the effective date of TP 17.

In order to provide affected companies a quick and easy estimation of the impact of these transitional rules, we have built the PwC Step-up Calculator. This web-based tool offers free estimations of the indicative fair market value of the company, its step-up potential and the magnitude of the potential tax benefit resulting from claiming the step-up potential with the tax authorities. The app also offers the possibility of ordering a paid data sanity check by PwC’s valuation experts. The deliverable will be in the form of a PwC document containing the validated high-level fair market value and the estimated step-up potential. This document may then be used as a basis for discussions with the tax authorities.

You can find the PwC Step-up-Calculator at the following link:

Here

Contact

If you have any questions or would like to have a personal discussion on the impact of Tax Proposal 17, please do not hesitate to contact

Armin Marti
Partner
Leader Corporate Tax Schweiz
Tel. +41 58 792 4343
E-Mail: armin.marti@ch.pwc.com

For questions relating to company valuations, please feel free to contact

Dr. Marc Schmidli
Partner
Leader Energy
Tel. +41 58 792 1564
E-Mail: marc.schmidli@ch.pwc.com

Swiss Federal Council released Tax Proposal 17 for formal consultation

On 6 September the Federal Council initiated the consultation procedure with respect to the Tax Proposal 17 (formerly “Corporate tax reform III”; CTR III). The overall objectives of the reform remain unchanged, i.e. improve the attractiveness of Switzerland as a business location, maintain and create jobs and adjust the corporate tax law to the new international standards. In addition, in order to take into account learning points from the negative vote on CTR III in February 2017, the Tax Proposal 17 puts more emphasis on the financial impact of the tax reform on the Federal as well as on municipalities’ and cities’ budgets.

The consultation period will last until 6 December 2017. It is foreseen, that the draft bill will make its way back to the Federal Council, for further submission to the Parliament, in spring 2018. The earliest anticipated entry into force would be 2020.

Apart from the draft bill, the package also includes an ordinance on the reduced taxation of profits from patents and similar rights (clarification of the patent box). The different proposals are outlined in our current newsletter.

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts named below.

Contacts

Dieter Wirth
Partner
Leader TLS Schweiz
Tel. +41 58 792 44 88
Send E-mail
Armin Marti
Partner
Leader CT Schweiz
Tel. +41 58 792 43 43
Send E-mail
Benjamin Koch
Partner
Leader TP and VCT
+41 58 792 43 34
Send E-mail
Daniel Gremaud
Partner
Tax & Legal
+41 58 792 81 23
Send E-mail
Claude-Alain Barke
Partner
Tax & Legal
+41 58 792 83 17
Send E-mail
Remo Küttel
Partner
Tax & Legal
+41 58 792 68 69
Send E-mail
Laurenz Schneider
Director
Tax & Legal
+41 58 792 59 38
Send E-mail

Tax Package 17: Federal Council presents basic parameters of the planned reform

At its meeting on 9 June 2017 the Federal Council confirmed the basic parameters of the planned reform of Swiss corporate taxes, which the Steering Committee sent as a recommendation to the Federal Council and already introduced in a press release on 1 June 2017. The Tax Package 17 (SV 17) has three main objectives: first the aim is to secure Switzerland’s attractive status as a business location. In addition the reform intends, in view of the changed international environment, also to continue to preserve the acceptance of the Swiss tax system. Finally SV 17 is intended to secure sufficient tax revenues at all levels. These objectives are in principle identical with those of Corporate Tax Reform III (CTR III), which was rejected by the Swiss voters on 12 February 2017 with a share of the vote of almost 60%. SV 17 will therefore be more balanced. Compared with CTR III the special rules will be drawn up more restrictively and the interests of the cities and communes will carry more weight.

Continue to read in detail in our current newsletter.

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts named below.

Contacts

Andreas Staubli
Partner
Leader TLS Schweiz
Tel. +41 58 792 44 72
Send E-mail
Armin Marti
Partner
Leader CT Schweiz
Tel. +41 58 792 43 43
Send E-mail
Benjamin Koch
Partner
Leader TP and VCT
+41 58 792 43 34
Send E-mail
Daniel Gremaud
Partner
Tax & Legal
+41 58 792 81 23
Send E-mail
Claude-Alain Barke
Partner
Tax & Legal
+41 58 792 83 17
Send E-mail
Remo Küttel
Partner
Tax & Legal
+41 58 792 68 69
Send E-mail
Laurenz Schneider
Director
Tax & Legal
+41 58 792 59 38
Send E-mail

Switzerland publishes recommendations for new corporate tax proposal 17

After rejection by popular vote of the Swiss corporate tax reform III (CTR III) package in February 2017, a Swiss governmental working group comprised of federal and cantonal members (the steering body) has been working on a revised package (tax proposal 17).

The steering body on June 1, 2017, published its recommended contents for tax proposal 17. The Federal Council now will consider the draft proposal and is expected to publish a final proposal for consultation by end of June 2017. Thereafter, parlamentary discussions are expected to start in spring 2018 and entry into force is expected to take effect January 1, 2020.

Continue to read in detail in our current newsletter.

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts named below.

Contacts

Andreas Staubli
Partner
Leader TLS Schweiz
Tel. +41 58 792 44 72
Send E-mail
Armin Marti
Partner
Leader CT Schweiz
Tel. +41 58 792 43 43
Send E-mail
Benjamin Koch
Partner
Leader TP and VCT
+41 58 792 43 34
Send E-mail
Daniel Gremaud
Partner
Tax & Legal
+41 58 792 81 23
Send E-mail
Claude-Alain Barke
Partner
Tax & Legal
+41 58 792 83 17
Send E-mail
Remo Küttel
Partner
Tax & Legal
+41 58 792 68 69
Send E-mail
Laurenz Schneider
Director
Tax & Legal
+41 58 792 59 38
Send E-mail

Switzerland Rejects Corporate Tax Reform III in Public Vote

PicturePDFWith a majority of 59.1%, Swiss voters rejected the Corporate Tax Reform III (CTR III) in a public vote held on February 12, 2017. CTR III, which was the result of a long and complex political process, would have abolished current existing tax regimes, such as the rules for holding or mixed companies. At the same time, the reform would have introduced new internationally accepted measures such as the patent box, research and development (R&D) incentives, notional interest deduction, and basis step-up.

The negative vote raises a number of questions on the future tax landscape for companies in Switzerland and abroad, especially concerning the immediate impact on Swiss taxpayers. At a minimum, the ‘no’ vote means that the current tax legislation and tax rules remain in place and that Swiss taxpayers will not face any immediate, unanticipated changes.

Nevertheless, considering the worldwide debate and recent developments on taxation, pressure will remain on Switzerland to abolish its current tax regimes, so the need for reform remains undisputed by all parties and the Federal Council will have to work out a new reform proposal as quickly as possible. However, it is clear that the reform will not be ready to take effect in 2019 as originally planned. Instead, there will likely be a delay of two to three years.

Continue to read in detail in our current newsletter.

I have summarized the most important information for you in a short video.

VideoPictureArmin

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts in CTR III named below.

Contacts

Andreas Staubli
Partner
Leader Tax & Legal Services Schweiz
Tel. +41 58 792 44 72
andreas.staubli@ch.pwc.com
Armin Marti
Partner
Leader Corporate Tax Schweiz
Tel. +41 58 792 43 43
armin.marti@ch.pwc.com
Benjamin Koch
Partner
Leader Transfer Pricing and Value Chain Transformation
+41 58 792 43 34
benjamin.koch@ch.pwc.com
Daniel Gremaud
Partner
Tax & Legal Romandie
+41 58 792 81 23
daniel.gremaud@ch.pwc.com
Claude-Alain Barke
Partner
Tax & Legal Romandie
+41 58 792 83 17
claude-alain.barke@ch.pwc.com
Remo Küttel
Partner
Tax & Legal
+41 58 792 68 69
remo.kuettel@ch.pwc.com
Laurenz Schneider
Director
Corporate Tax
+41 58 792 59 38
laurenz.schneider@ch.pwc.com

Swiss parliament passes final corporate tax reform package to enhance global competitiveness

In brief
The Swiss parliament on June 17, 2016, following several back and forth debates, passed the final corporate tax reform package (CTR III) to strengthen Switzerland’s competitiveness as business location. CTR III includes several notable tax reform measures related to federal and cantonal tax laws, included expected reductions to certain cantonal tax rates.

 

Read the decisions of the National Council in detail in our current newsletter.

 

Next steps
The Federal Council determines when the reform measures will take effect. However, the referendum period of 100 days is first to be passed after the official publication of the legislation. If no referendum is requested, certain federal tax measures in CTR III could go into effect as early as the beginning of 2017. The cantons must then separately pass the measures related to the tax harmonization law as part of their cantonal tax legislation. Cantonal legislation changes, and any decision to reduce the cantonal corporate tax rate, would require additional approval by the cantonal electorate in case cantonal referendum would be requested as well.

A referendum opposing the federal government’s CTR III bill seems likely, as repeatedly announced by the country’s left parties. The cantonal electorate would likely have to vote on the bill in February 2017. In the event of a passing vote, the reform could take effect effective at the federal and cantonal levels starting in 2019.

The takeaway
Passage of CTR III marks an important milestone in Swiss tax legislation. Subject to approval by the Swiss electorate and subsequent implementation in the cantons, Switzerland will have an internationally recognized corporate tax system. The period of uncertainty is herewith ended and Switzerland can offer a stable tax and legal system outlook. The reform will have both, winners and losers. Switzerland will continue to have an internationally competitive federal tax system, independent of the decisions made by the cantons. Using the building blocks available under CTR III, each canton can design its own rules, tailored to its particular circumstances and requirements. However, inter-cantonal tax competitiveness is likely to increase due to diverging cantonal income tax rates.

Overall, CTR III’s reform measures are expected to keep Switzerland competitive globally for MNEs operating and domiciled in the country.

Despite maintaining tax-related location competitiveness in international comparison, the big winners of the reform will, however, be the Swiss SMEs. They will be able to benefit the most from the envisaged relief with the patent box, the R&D special deduction, the NID and the cantonal reductions in corporate income tax. The increase in partial taxation, as far as the cantons envisage this in connection with the introduction of the NID, should be bearable for entrepreneurs, as the overall burden for SME owners should not increase if one sets off the lower burden at company level against the additional burden at ownership level.

The reform is of pivotal importance for the medium- and long-term future of Switzerland. This awareness should be considered within the scope of the referendum and will be the decisive factor during the national referendum which seems to be an extremely likely possibility.

Corporate Tax Reform Act III from June 17, 2016

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts in CTR III named below.

Contacts

Andreas Staubli
Partner
Leader Tax & Legal Services Schweiz
Tel. +41 58 792 44 72
andreas.staubli@ch.pwc.com
Armin Marti
Partner
Leader Corporate Tax Schweiz
Tel. +41 58 792 43 43
armin.marti@ch.pwc.com
Benjamin Koch
Partner
Leader Transfer Pricing and Value Chain Transformation
+41 58 792 43 34
benjamin.koch@ch.pwc.com
Daniel Gremaud
Partner
Leader Tax & Legal Romandie
+41 58 792 81 23
daniel.gremaud@ch.pwc.com
Claude-Alain Barke
Partner
Tax & Legal Romandie
+41 58 792 83 17
claude-alain.barke@ch.pwc.com
Remo Küttel
Director
Tax & Legal
+41 58 792 68 69
remo.kuettel@ch.pwc.com
Laurenz Schneider
Director
Corporate Tax
+41 58 792 59 38
laurenz.schneider@ch.pwc.com

CTR III VD

In September 2015, the modification of the Vaud income tax law (“LI”) has been voted by a large majority of the cantonal Parliament. Following said vote, two extreme left-wing parties launched a referendum against the revised bill. Last week end, the amendments of the bill have been approved by a surpringly vast majority of the voters (87% in favor of the new law).

The elements disclosed in the package that has been accepted can be summarized as follows:

1. Taxation of corporations

  • Abolishment of all privileged tax regimes granted at cantonal / communal level – i.e. mixed company tax regime as well as the holding tax status (provided in art.108, 109 LI). The abolishment of the articles will be effective as from January 1st 2019 onwards;
  • General reduction of the corporate income tax rate applicable at cantonal / communal level. The new rate will lead to a global effective tax rate (including federal, cantonal and communal levels), from January 1st 2019 onwards, of 13.79%;
  • Adaptation of the tax rates applicable to the “minimum tax” (art, 126 LI);
  • Harmonization of the capital tax. Regardless of the type of taxation applied to a company located in the canton of Vaud (art 118 LI), such entity will pay capital tax on the taxable equity at a rate of 0.06% to which communal multiplier will be applied (in general ranging from 2 to 2.5). The possibility to credit on the equity tax the income tax remains possible. This measure will enter into force from January 1st 2016 onwards.

2. Taxation of individuals

  • Rental values determination (deemed income for individuals owning real estate): modification of the lump sum deduction (increase from 20% to 30%) applicable to real estate aged over 20 years. The aim of this measure is to reduce the taxable amount resulting from owning real estate for a long period of time (measure aimed for retired persons to whom rental values represent an important income tax burden);
  • Increase of the lump sum deduction for health, life and accident insurance;

3. Taxation of individual who have the right to benefit from lump-sum taxation

Modification of the lump sum taxation principles as per the modifications voted at federal level. Such taxation principle is applied to non-Swiss resident who do not carry out any lucrative activities in Switzerland. Modifications are as follows:

  • Such regime will not be granted to persons with a Swiss passport. In the past, this was possible for a Swiss citizen to be married to a foreigner who was taking profit of this privileged tax regime and be granted with said regime. It was also possible to request such type of taxation regime for a Swiss citizen returning from abroad to Switzerland in the course of the first fiscal year following the return;
  • Requirements for the lump sum taxation will have to be met by both spouses;
  • Minimal lump sum amount to be determined as follows (maximal amount of the three values mentioned below and will be provided in art 15, al.3 LI):
    – CHF 400’000 of taxable basis;
    – 7 times the rental values of real estate owned;
    – 3 times the costs of lodging – amounts paid for living.
  • From January 1st 2016 onwards, lump sum taxation will also have to cover the wealth tax due by a lump sum taxpayer on its wealth attributable to Switzerland. In the canton of Vaud, it results in an increase of the minimal lump sum amount to CHF 415’000. If the determination as per the rental value or the lodging costs lead to a higher amount, percentage applied on such value or on such costs will be used to reflect wealth tax value in the determination of the lump sum amount.

4. Modification applicable to both corporations and individuals (admin matters only)

  • Payment of the taxes due. The system will be modified for corporations to align it on the one applied to individuals (monthly payment of corporate income tax amount – applicable for FY16 onwards);
  • Formal modifications of the Vaud tax law in order to reflect latest adjustments of the Swiss commercial code – formal requirements regarding the presentation of the financial statements of a company, etc.

5. Further modifications

The above mentioned bill does not include all elements currently under discussion at the federal level (Patent Box, Notional interest deduction, step-up mechanism). However, please note that there will be a transition clause that in case Vaud tax law has not legalized the step up, which will set up tax treatment of hidden reserves after abolishment of special regimes, or other federal tax reform elements into its Cantonal law as per 1 January 2019. Such transition clause will ensure that the introduction of the reduced tax rate and abolishment of special regimes as per 1 January 2019 in Vaud is aligned to the benefits to be introduced by federal tax reform timing wise.

A complete summary of parliamentary debates can be found on PWC newsletter.

Recent Developments – The decisions of the National Council

CTR_III_EN_MarchIntroduction
After in February 2016 the Economic Committee of the National Council (WAK-N) had set the parameters for Corporate Tax Reform III, on 16/17 March 2016 the National Council (NC) discussed the bill.
The matters resolved by the NC are predominantly identical with the positions taken by the National Council Committee (refer to our News Alert with the results of the WAK-N here).

Decisions of the National Council
Read the decisions of the National Council on the Federal Law on fiscal measures to strengthen the competitiveness of the business location Switzerland ( short Corporate Tax Reform III ) in our current newsletter.

The next steps
The reform package now goes back to the Council of States, which will deliberate on the remaining differences in the summer session. If significant differences were to remain between the two councils, the reform would again be passed to the National Council for further reconcilement in the autumn session. Otherwise the final vote could be held already in summer. Provided that a referendum were not called against it, the CTR III could in that case come into force as early as 2017 and the required implementation in the cantons as early as 2019.

If you have questions, please contact your usual PwC contact person or one of PwC Switzerland´s experts in CTR III named below.

Contacts

Andreas Staubli
Partner
Leader Tax & Legal Services Schweiz
Tel. +41 58 792 44 72
andreas.staubli@ch.pwc.com
Armin Marti
Partner
Leader Corporate Tax Schweiz
Tel. +41 58 792 43 43
armin.marti@ch.pwc.com
Benjamin Koch
Partner
Leader Transfer Pricing and Value Chain Transformation
+41 58 792 43 34
benjamin.koch@ch.pwc.com
Daniel Gremaud
Partner
Leader Tax & Legal Romandie
+41 58 792 81 23
daniel.gremaud@ch.pwc.com
Claude-Alain Barke
Partner
Tax & Legal Romandie
+41 58 792 83 17
claude-alain.barke@ch.pwc.com
Remo Küttel
Director
Tax & Legal
+41 58 792 68 69
remo.kuettel@ch.pwc.com
Laurenz Schneider
Director
Corporate Tax
+41 58 792 59 38
laurenz.schneider@ch.pwc.com