On June 14th 2016 the National Council followed the position of the Council of States and a final decision on the Corporate Tax Reform III (CTR III) was taken. The reform underlines the aim to strengthen Switzerland as a business location, focusing on innovation, value creation and jobs. The law provisions passed are compatible with the current international standards and will increase legal and planning certainty for companies.
Based on the previous parliamentary discussions both National Council and Council of States have now made a decision on the reform with the National Council following the Council of States on June 14th 2016 and thereby eliminating the remaining differences. The law provisions concluded on the “Federal Act on Tax-Related Measures to Strengthen the Competitiveness of Switzerland as a Business Location” now basically passed the legislative procedure of the Federal Parliament (final formal vote on 17 June 2016). CTR III provisions will ensure a competitive environment for companies operating in Switzerland, particularly for activities associated with a high degree of innovation and value creation.
The law provisions passed by both the National Council and Council of States consider the international development on the fiscal landscape, e.g. the OECD action plan on avoidance of base erosion and profit shifting (BEPS) and the requests by the EU. Therefore, CTR III will give corporate taxation a legal foundation that is in line with the current international standards.
Tax policy measures
The following tax policy measures are passed by the National Council and the Council of States:
- Abolishment of the cantonal tax statuses for holding, domicile and mixed companies as well as of the principal company taxation and the finance branch regime.
- Introduction of a Patent Box regime on cantonal level covering income from patents and similar rights considering R&D of the tax payer (nexus approach): The Federal Parliament leaves the decision on the amount of the reduction with the cantons. However, the reduction is limited at maximum 90%.
- Introduction of a R&D Super Deduction on cantonal level: The costs for domestic research and development can be deducted from the tax base by more than 100% of the effective costs. The law provision passed will limit the deduction to maximum 150%. In addition, the deduction shall also be applicable for R&D expenses in connection with Swiss third parties (domestic contract R&D).
- The National Council and the Council of the States agreed on introducing a Notional Interest Deduction, whereas a deduction of a deemed interest on excess equity shall be allowed. On cantonal level, however, the cantons may only introduce such a deduction, provided that the respective canton has a Partial Taxation of at least 60% for dividends earned by individual shareholders. For corporate shareholders, the current participation exemption regime remains unchanged.
- As limitation of these new measures the Patent Box regime, the R&D Super Deduction as well as the Notional Interest Deduction and furthermore amortizations on step-up amounts in case of an early change in the tax status should result overall in a maximum reduction of 80% (of the profit before such deductions, loss carry forwards and excluding participation income), whereas the cantons shall have the opportunity to determine a lower limit.
- Introduction of a “Step-Up” for tax purposes as a transitional measure: Over a period of maximum 5 years the net taxable income realized is to be taxed at a “special” reduced tax rate to the extent it is based on the realization of hidden reserves determined as “step-up” amount at the time of the abolishment of the previous tax status. It is mandatory for all cantons but optional for the tax payers. The future profit will be divided in two baskets (ordinary and “special” tax rate) and the tax values will not be adjusted. Hence, such proceeding does not require a deferred tax asset to be accounted for.
- Step-up mechanism to reveal hidden reserves: The proposed step-up mechanism aims to ensure planning certainty both for taxpayers and the authorities. It will establish a consistent tax treatment of companies relocating to or from abroad.
- Introduction of a reduced capital tax basis: Regarding the capital tax (net wealth tax), the cantons shall be entitled to grant a reduction based on patents and participations as well as based on intercompany loans.
National Council and Council of States voted against the following propositions:
- The Tonnage Tax for shipping companies, whereby such shipping companies shall not be taxed based on their effective net income but on a lump-sum basis considering the tonnage of the respective vessel shall be further analysed within a consultation procedure and be dealt with in a separate legislative project.
- The abolishment of the Stamp Duty on Equity was rejected, but shall be readopted in the future within the scope of a separate proposal.
- The introduction of a Capital Gains Tax in respect of (privately held) securities was rejected.
- The current regulation regarding the Partial Taxation of dividends shall be kept (except the requirement for the cantons who want to apply the Notional Interest Deduction). The full taxation of dividends as well as a Switzerland-wide standardization of a 70% taxation of dividends was rejected.
Further, the cantons are generally free to lower their ordinary tax rates, taking into account the anticipated effect of the CTR III on their budget. Some cantons have already announced effective income tax rates as low as 12% to 13%, whereas the canton of Vaud has already finally decided on an effective income tax rate of 13.8%.
Having passed these new tax measures and considering the reduced cantonal tax rates CTR III represents the necessary basis for Switzerland to retain and further develop its position as one of the most attractive business locations worldwide, while increasing international acceptance of its corporate tax legislation.
Considering the past parliamentary discussions and the business needs, a prompt implementation of the law provisions concluded would be desirable to increase the legal and investment certainty. Basically, it is expected to apply the new measures as from January 1st 2019. Also in case of a referendum followed by a public vote such time line should not be delayed. Even if the privileged cantonal tax regimes will presumably not be abolished in the context of CTR III before 2019 companies currently benefiting from respective tax regimes might be directly affected from international transparency measures before. Considering the new international standards (i.e. BEPS) which are expected to be applied before the abolishment of the current tax status with CTR III, implemented structures should continuously be assessed in the light of the international development and consider the measures of CTR III.