The Federal Council started the consultation process on 6 September by releasing its draft suggestion for the Tax Proposal 17. This suggestion is based on the parameters published in June and is also strongly influenced by CTR III – but in a slimmed-down version. The suggestions will now be submitted to the cantons, the political parties represented in Parliament, to the umbrella organizations representing the municipalities, cities and economy as well as other interested parties.
Relevant content of the reform proposal
There are no significant changes in the consultation draft by comparison with the parameters published and approved by the Federal Council in June. Certain elements of the CTR III are found in the present draft for the Tax Proposal 17, while other elements are new, in order to provide a well-balanced proposal, so that the hoped-for majorities can be obtained in Parliament and in the electorate. An assessment of the suggestion:
- A core element of the proposed measures is the patent box regime which shall be mandatory for the cantons. By comparison by CTR III there is a narrower definition of the qualifying income: the box will be limited to patents and similar rights; the scope of such similar rights is narrowed (supplementary protection certificates, topographies, protected varieties of plants as well as protected documents according to the Therapeutic Products Act). Copyrighted software is not covered by the definition. Qualifying income can be tax exempted up to 90% considering the modified nexus approach.
- The R&D super deduction is optional for the cantons and is – similar to the patent box – a clear sign of commitment to Switzerland as a location for research and industry. The basis for the additional R&D deduction of a maximum of 50% are personnel costs which directly relate to R&D performed by the taxpayer in Switzerland plus a premium of 35% for other R&D costs or 80% of cost for R&D rendered by third parties in Switzerland.
- A notional interest deduction, which would have led to a deemed deduction granted on excessive shareholders’ equity, is (by contrast with CTR III) not to be included in the proposal, partly in order to facilitate acceptance of the Tax Proposal 17. This could however be a disadvantage, particularly for the Canton of Zurich, which is already stretched by the tax reform, since it would have hardly any effective tax instruments at hand. Consequently, Zurich could then only rely on the tax rate reduction. From a Zurich economy perspective, it is therefore likely that additional suggestions will be made in this respect.
- Another aspect of the Tax Reform 17 is a proposed higher taxation of dividends for qualifying shareholdings of individuals. The suggestion is that 70% (federal tax) or at least 70% (cantonal tax) of the individuals’ dividend income shall be taxable in future. This is in contrast to the current situation of only 60% taxation of the individuals’ dividend income at the federal level if held privately, and varying cantonal thresholds. From an overall perspective, this adjustment will be offset by an expected cantonal tax rate reduction on company level.
- For political reasons, it is proposed to increase the child and education allowance by CHF 30 per month, taking the tax reform in the canton of Vaud as a role model. The additional costs of this measure are to be borne by the employers and compensate a part of the relief effect of the expected corporate income tax rate reductions.
- The overall tax relief of all tax measures shall now be limited to 70% instead of 80%. The impact of the important measures, such as the patent box and the R&D super deduction, is correspondingly reduced by this.
- On the other hand, there is no change in the intention to abolish the status companies on cantonal level as well as certain tax practices on federal level – the original trigger for the CTR III. These tax privileges are still to be abolished. A temporary special tax rate solution shall be introduced to avoid over-taxation.
- The Tax Proposal 17 provides the cantons with the option of a reduction in the calculation of the capital taxes on equity which relates to participations as well as patents and similar rights.
- Foreign companies relocating to Switzerland can disclose their hidden reserves including goodwill without Swiss tax consequences (step-up) and profit from additional tax deductible depreciations in the first few years.
- In order to prevent international double taxation, Swiss permanent establishments of foreign companies will be entitled to benefit from the lump sum tax credit in the future.
- The suggestion for the Tax Proposal 17 provides for an increase in the cantonal share of the direct federal tax income, from the current 17% to 20.5%. CTR III had envisaged an increase to 21.2%. Although this is not directly relevant for companies in Switzerland, it can be argued that this reduced increase is not helpful for the reform, since the cantons will have less scope for reducing their ordinary corporate tax.
Ambitious time schedule on track
With this consultation procedure, the Federal Council is still keeping up with the ambitious timetable for the reform as announced in June. This confirms the importance of the tax reform. The consultation period will already end on 6 December 2017. The dispatch to Parliament is to take place in spring 2018. The Parliament will then discuss and pass the new tax reform law in its 2018 summer and fall sessions. Accordingly, the new law may enter into force earliest at the beginning of 2020.
Our services & further information: