Tax experts in Switzerland now predict that certain Swiss tax regimes – the cantonal tax regime, the holding regime and, in particular, the auxiliary company regime, will ultimately need to be repealed.

A repeal of these regimes will trigger the need for reform of Switzerland’s corporate tax system. Such a reform may include a redefinition of the tax base.

In particular, the auxiliary company regime, which offers a substantial exemption for foreign source income, has prompted disputes before the European Commission. Indeed, since 2007, the Commission has taken the view that Swiss cantonal tax regimes, especially the so-called auxiliary company status, constitute prohibited state aid under the 1972 EU-Swiss Free Trade Agreement (FTA). Last year, the Swiss Federal Council adopted a mandate for dialogue with the EU on this very issue, and discussions are ongoing.

Earlier this year, the Swiss Finance Department released a long-awaited interim report regarding proposed new corporate tax measures.

This report strives to ensure that these measures comply with both EU standards and the ongoing work of the OECD in relation to base erosion and profit shiftingand, of course, with the Swiss domestic constitutional framework.

For Switzerland, this corporate tax reform represents a major change in tax policy in that a strong degree of harmonization needs to be maintained (that is, there can be no “isolated” cantonal tax measures). One of the aims of the reform is legal certainty over the long term.

Draft legislation is expected to be announced by the Swiss Federal Council in 2014.