In the public vote on May 19, 2019, the Swiss voters approved the Federal Act on Tax Reform and AHV Financing (TRAF). The reform will already enter into force on January 1, 2020. With the tax reform, Switzerland introduces an internationally accepted tax system and will continue to be an attractive and competitive business location. The reform also safeguards appropriate tax revenues.
The tax reform abolishes the preferential tax regimes at the cantonal level and replaces them with new, internationally accepted tax regulations. The legislative changes correspond with the intention of lowering the cantonal corporate tax rates. Canton Schwyz announced a combined federal and cantonal tax rate of approximately 11.85%. The reform brings an unprecedented change to the Swiss corporate tax landscape. Nearly all companies are affected by the most significant overhaul of the Swiss tax system in decades. The implementation period is short, which is why the implications of the reform need to be analyzed now.
Most relevant tax measures
- Abolishment of existing tax regimes.
At cantonal level, the preferential regimes for holding, domiciliary and mixed companies are abolished. With the entry into force of the TRAF, the practices applied at federal level relating to principal companies and Swiss Finance Branches will also no longer be available.
- Patent box, mandatory at the cantonal level.
A core element of the reform is the introduction of a patent box regime in accordance with OECD standards. Box income derived from domestic and foreign patents and comparable rights is taxed separately with a maximum reduction of 90%.
- Additional deduction for research and development costs, optional at cantonal level.
The introduction of an additional deduction for domestic research and development (R&D) is Switzerland‘s commitment to be recognized as an attractive R&D location (max. 50%).
- Notional interest deduction on equity, optional at cantonal level.
High tax cantons have the option to introduce a notional interest deduction on surplus equity. Based on the announced intentions of the cantonal governments to reduce the cantonal tax rates.
- Disclosure of hidden reserves, transitional regulations.
Upon transition from the preferential tax regimes to ordinary taxation, the two-rate model is applied. Profits attributable to the realization of built-in gains generated under the preferential regimes, are subject to a reduced tax rate. The cantons can determine the reduced tax rate at their own discretion. The two-rate model ensures a competitive income tax burden over the five-year transition period. Based on currently applicable practices, most cantons offer the option of a tax-neutral disclosure of hidden reserves in case of a transition from preferential regimes to ordinary taxation under the current law (“old law step-up”). V The subsequent amortization of the stepped-up goodwill and built-in gains results in a low tax burden (max. 10 years). The old law step-up is relevant for companies that voluntarily waive the preferential regimes before entry into force of the new tax legislation. The impact on the Group Tax Accounting should be analyzed in detail. In case of a migration to Switzerland, the so-called step-up system applies. The tax-free disclosed hidden reserves can be amortized at the rate applicable to the corresponding assets.
- Relief limitation to max. 70%, mandatory at the cantonal level.
Patent box, R&D super deduction, notional interest deduction, and possible amortization resulting from an old law step-up are subject to a relief limitation of max. 70%.
- Increase in dividend taxation.
For direct federal tax purposes, 70% of the income from qualifying participations (at least 10% investment) is taxed at shareholder´s level and for cantonal and communal tax purposes at least 50% of such income shall be taxable. The current law stipulates a 60% taxation if the income is derived from private wealth, and a 50% taxation in case of shares held as business asset, in some cantons the taxation is currently lower than 50%.
- Adjustment of capital tax, optional at cantonal level.
Companies benefiting from a preferential tax regime are generally subject to a lower capital tax rate. To compensate for the loss of this tax advantage, the cantons may reduce the capital tax rate on equity relating to patents and comparable rights, qualifying participations, and intra-group loans.
- Reduction of cantonal income tax rates.
The reduction of cantonal income tax rates is not directly covered by the TRAF, but is necessary to remain attractive for companies that benefit from a preferential tax regime. The increased cantonal share in the federal income tax of 21.2% instead of 17% allows the cantons to reduce their tax rates. Based on the official announcements of the cantonal governments, it is anticipated that most Canton Schwyz will provide for attractive tax rates of 11.85% applicable to the pre-tax income (including federal income tax).
- Adjustment of the capital contribution principle.
Companies listed on a Swiss stock exchange may only distribute capital contribution reserves free of Swiss dividend withholding tax if a corresponding amount of reserves subject to Swiss dividend withholding tax is distributed (50/50 rule).
- Extension of the lump-sum tax credit system to permanent establishments of foreign companies.
Swiss permanent establishments of foreign companies should be entitled to claim foreign tax credits on income from third countries by means of a lump-sum tax credit.
- Social compensation through AHV
It is assumed that the tax losses caused by the tax reform will amount to CHF 2 billion (static analysis). This shortfall will be offset by various AHV contributions.