How to retain Switzerland’s competitiveness

in Tax, 19.12.2013

The final report on the Swiss Corporate Tax Reform does give a clear indication on how the Swiss taxation landscape might look like in the future – but lacks specific propositions and leaves the business environment in uncertainty.

On December 19, the Federal Council has released the much anticipated final report on Switzerland’s Corporate Tax Reform III. This tax reform is a milestone in maintaining the competitiveness of the Swiss tax system, and is a reaction to the pressure on Switzerland’s privileged taxation of holdings, mixed and domiciliary companies that has been under increasing pressure from the European Union since 2007.

In the last years, the so-called “ring-fencing” – or the fact that earnings based on activities outside Switzerland are taxed favorably compared to intra-state activities – has been under the spotlight of international pressure. As a reaction, the Swiss Federal Government proposes to replace the holding, domiciliary and mixed company regime in the next five to seven years with a series of measures.

The intermediary report released in May has already shown the direction in which the proposals of the Federal Council are going. Much has been debated in the meantime, and KPMG advisors have been in direct contact with the decision makers from both the political and the industry perspective.

The propositions outlined in the final report are to be grouped in three areas:

Introduction of new regulations for mobile earnings

The following measures are to be introduced specifically on the aspect of mobile earnings:

  • The concept of license boxes on cantonal level
  • An interest-adjusted earnings tax, with a limitation of the interest deduction on higher-than-average equity.

Lowering of cantonal tax rates

Cantons are free to enhance the measures on mobile earnings with a lowering of cantonal tax rates as they feel appropriate to retain their competitiveness, as not all cantons are affected in the same way as privileged tax regimes.

Abolishment of certain tax burdens to enhance the general business location attractiveness

In this area, the abolishment of the stamp duty on equity as well as amendments to the cantonal capital tax is being discussed.

What will happen now? The Federal Council has, based on the final report released 19 December, mandated the Swiss Federal Department of Finance (FDF) to consult with the Cantons. The FDF will consequently draft a proposal for consultation which is scheduled for summer 2014.

Due to our involvement in the political process, I can say that the propositions outlined in the final report do not come as a surprise. The orientation on internationally accepted standards is the correct way; and to make sure Swiss taxation levels correspond to international levels seems appropriate. Also, I appreciate that the report recognizes the importance of promoting research and development – even though it has stated that it should be treated separately – and the abolishment of the stamp duty on equity was overdue.

But I believe the propositions are not yet at the stage of detail that I would have expected. The Swiss business environment needs certainty on what specific measures are going to be implemented. The longer Switzerland waits to provide clear communication of what will change, the greater the threat to our competitiveness.

Further Information