On Wednesday 21 March 2018, the Swiss Federal Council published its dispatch on the Tax Proposal 17. The federal Council clearly stated the necessity of the Tax Proposal 17 in order to maintain Switzerland’s position as a competitive business location, to support value creation, jobs and tax revenues in Switzerland. Following rejection of the Corporate Tax Reform III (CTR III), the Federal Council proposes a “balanced compromise”. However, the important goal of achieving effectiveness with this reform for a competitive tax location is to be considered in the upcoming parliamentary debate, in particular regarding a notional interest deduction (currently not in the proposal).
No major changes in the content of the reform proposal
There are no significant changes in the dispatch from the Federal Council by comparison with the draft for consultation and parameters for the dispatch published in September 2017 and January 2018, respectively. Certain elements of the CTR III are found in the present draft for the Tax Proposal 17. Other elements are added later on, in order to provide a well-balanced proposal, so that the hoped-for majorities can be obtained in the two chambers of the Parliament and in the electorate. A brief assessment of the suggestions of the dispatch:
- There is no change in the core element, 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. A temporary special tax rate solution shall be introduced by the cantons to avoid over-taxation upon transition to ordinary taxation.
- A core element of the proposed new (replacement) measures is the (cantonal) patent box regime which shall be mandatory for the cantons. By comparison to CTR III there is a narrower definition of the qualifying income. The box will be limited to (Swiss and foreign) patents and similar rights whereby the scope of such similar rights is narrowed (supplementary protection certificates, topographies, protected varieties of plants, protected documents according to the Therapeutic Products Act as well as reports protected by the Ordinance on Plant Protection Products). Copyrighted software is not covered by the definition. Qualifying income can be tax exempted up to 90% considering the modified nexus approach.
- The (cantonal) 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% is
- personnel costs which directly relate to R&D performed by the taxpayer in Switzerland plus a premium of 35% (for other R&D costs) – although max. the entire R&D costs or
- 80% of cost for R&D rendered and invoiced by third parties in Switzerland.
- The overall tax relief of the two above-mentioned measures (plus amortizations on disclosed hidden reserves upon a status change under current law) shall be limited to 70% (CTR III: 80%) to guarantee a minimum taxable profit of 30%. This limitation of the relief is mandatory for the cantons although they may introduce an even lower limit. The impact of the important measures, i.e. patent box and the R&D super deduction, is correspondingly reduced by this.
- Another aspect of the Tax Proposal 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 individuals’ dividend income shall be taxable in future. This is in contrast to the current situation of only 60% taxation of individuals’ dividend income at the federal level if held privately, and varying cantonal thresholds. From an overall perspective, this adjustment will (partially, depending on the canton) 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 ordinary corporate income tax rate reductions.
- 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 (intercompany loan assets are not included).
- Foreign companies relocating to Switzerland can disclose their hidden reserves including goodwill without Swiss tax consequences (step-up) and profit from additional tax deductible amortizations 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 21.2%. CTR III had envisaged the same increase. This additional funding to the cantons shall enable them to lower its ordinary corporate income tax rates.
- Furthermore, and not linked to the above measures, the Federal Council proposes to strengthen the rules regarding the so-called transposition for Swiss resident individuals (i.e. self-disposition of participation rights) in order to eliminate potential tax savings of holders from portfolio investments of less than 5%.
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. The main reason is that this measure has been heavily criticized in the course of the rejected CTR III and hence the non-inclusion shall 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 – apart from the patent box and the R&D super deduction. From the perspective of the Zurich economy, it is therefore likely that additional suggestions will be made in consideration of the effectiveness of the reform during the parliamentary deliberations. Furthermore, the Federal Council mentioned that a notional interest deduction could be discussed within a future reform of the Swiss withholding tax.
Furthermore, the Federal Council refused to make any changes to the capital contribution principle which helps to provide legal certainty of this established principle.
Ambitious time schedule
After the dispatch of the Federal Council has been published, the legislative proposal will be discussed in the first chamber of the Parliament (Council of States) during the ordinary summer session (28 May – 15 June 2018) and afterwards in the second chamber (National Council) during the autumn session in (10 – 28 September 2018). Therefore, the final decision by the Parliament shall be reached in autumn 2018. If no referendum is called, the first measures could come into force at the start of 2019 (elements of a more technical nature) and the main part of the reform from 2020. The temporary special tax rate solution shall come into force immediately after a potential positive public vote or the day when it is certain that no referendum is called.
This timetable is still ambitious but shows that the reform is seen as highly urgent due to the ongoing and recent international pressure and changes in the international landscape.
Our services & further information:
- Steuervorlage 17 – Kanton Luzern nimmt Stellung (in German)
- Steuervorlage 17 – Kanton Zug nimmt Stellung (in German)
- Corporate Tax Services at KPMG