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.
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.
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.
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.
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
+41 58 792 81 23
Avenue C.-F. Ramuz 45
Case postale, 1001 Lausanne
+41 58 792 67 81