After the first corporate tax reform of the Swiss tax system in 1998, which was aimed at harmonizing corporate tax, and the less fundamental second corporate tax reform in 2011, the third corporate tax reform emphasizes the federal approach of the Swiss tax system. The cantons will have several options to adapt their tax rules to their preferences and needs.
Switzerland levies corporate income tax on the federal, cantonal and communal level. The reforms include the following changes to the federal tax rules:
- Introduction of a notional interest deduction on excess equity; and
- Disclosure of hidden reserves when a company migrates to Switzerland or leaves Switzerland.
The proposed measures will lead to the following reform to the cantonal and communal tax rules:
- The cantons will need to abolish all tax privileges (for holding, mixed company and domiciliary company).
- The cantons will need to introduce special rules for companies which currently enjoy a privilege. The hidden reserves are determined and are subject to a special tax rate for five years. The introduction of such a rule is compulsory for the cantons but the taxpayer can opt for normal tax treatment.
- Introduction of a patent box: Income from patents and similar rights may be reduced by 90%. The cantons can define the reduction below 90%. The rules regarding qualifying intangibles follow OECD nexus approach.
- Additional R&D deduction: The cantons will be able to introduce an additional R&D expense (max. 150% of effective costs).
- Notional interest deduction on excess equity: The cantons will be able to introduce a notional interest deduction if they levy tax on at least 60% of dividend distributions of qualifying investments to individuals.
- Annual capital tax: The cantons are able to introduce a reduced annual capital tax rate on certain types of assets (investments, intangibles and loans to group companies).
- Limitation of tax reliefs: The reductions from patent box, additional R&D deduction and notional interest deduction may not exceed 80% of the profit (before set-off of losses and participation exemption). The cantons are able to define a lower percentage.
The clear principle that cantons can decide their tax rates remains unchanged. Due to the abolition of the cantonal privileges, many cantons are considering lowering their tax rates in order to remain competitive. Currently the following ordinary income tax rates (including federal, cantonal and communal income tax and considering the fact that tax is a deductible expense in Switzerland) are likely to be applied upon the entry into of the proposed reforms:
The new rules will provide flexibility to the cantons and taxpayers but will not make it easy for tax accountants to calculate taxes.
It is expected that a referendum on the tax reform will be held in February 2017. If the Swiss people vote in favour of the reform it can enter into force in 2019. Details of the corporate tax reform will be published by the Swiss Finance Department or federal tax authorities. Details at the cantonal level will be published by the cantons.