After intense discussions, the States Council and the National Council were able to settle all differences on the various measures of the Corporate Tax Reform III. The reform package will be adopted with final vote on 17 June 2016. In view of a likely referendum, the reform is expected to enter into effect as per 1 January 2019.
Background and Objective of the Corporate Tax Reform III
In recent years, Switzerland has been under increasing pressure from the EU and OECD with regard to its preferential tax regimes. The target of criticism have been in particular the existing cantonal tax privileges for holding, domiciliary, auxiliary/mixed companies as well as certain federal tax practices pertaining to finance branches and principal companies.
On 5 June 2015, the Federal Council issued the revised draft legislation and the dispatch on the Corporate Tax Reform III (CTR III). During the summer session that ends on 17 June 2016, the Swiss Parliament came to an agreement with regard to the final reform package.
The main objective of the CTR III is to abolish the above mentioned special income tax regimes. At the same time, the CTR III will introduce corresponding measures to maintain and reinforce the fiscal attractiveness of Switzerland.
Summary of the Agreed Reform Package
The final legislation agreed on by the States and the National Council includes the following elements:
- Abolition of preferential cantonal tax regimes and certain federal tax practices;
- Basis for reduction of cantonal corporate income tax rates: in the future, the cantons will receive 21.2% of direct federal income tax revenues (currently 17%) in order to create more flexibility with regard to reductions in cantonal tax rates for corporations. Certain cantons have already communicated reduced rates ranging between 12-14% (combined cantonal, communal and federal corporate income tax rate);
- Introduction of Patent Box on cantonal level: income from qualifying intangibles will only be partly subjected to income tax on cantonal level (max. reduction of 90%). The new provision reflects OECD's nexus approach;
- Introduction of super-deduction for R&D expenses on a cantonal level (voluntary): The cantons may introduce regulation that allows corporations to deduct more R&D expenses than effectively borne by the corporation (max. 150% of R&D expenses);
- Introduction of notional interest deduction (NID) on federal and (voluntarily) cantonal level: A new rule will be introduced according to which a deemed interest may be deducted from a defined excess equity basis, reducing the taxable profit of the corporation. No deduction is permitted on (i) qualifyingparticipations, (ii) assets which are commercially not required, (iii) patents qualifying for the Patent Box, (iv) released untaxed hidden reserves, e.g. upon immigration, and (v) assets in case of an unjustified tax benefit, e.g. in debt push down situations;
- Dividend taxation on the level of an individual shareholder as requirement for cantonal NID: only cantons which apply an income tax of at least 60% on dividends from qualifying participations (i.e. of 10% or more of the capital) on a shareholder's level are allowed to introduce NID. Currently, 16 of 26 cantons are below this threshold (applying an average income tax of 50% instead of 60%). It remains to be seen which cantons will increase the taxation for qualifying dividends held as private assets in order to introduce the NID;
- Taxation of built-in gains arising under cantonal tax privilege: corporations transitioning out of a preferential cantonal tax regime may benefit from a special tax rate on profits up to the amount of built-in gains created during the preferential regime for up to five years; special tax rates will be determined by the respective cantons individually;
- Limitation of total benefit on cantonal level: Patent Box, super-deduction of R&D expenses and NID together may not reduce the taxable profit by more than 80% on a cantonal level (i.e. a residual profit of at least 20% remains taxable under these measures, subject to a reduction by tax loss carry forwards and participation deduction relief). The cantons may determine a lower reduction;
- Introduction of possibility for reduction of cantonal net equity tax: the annual net equity tax may be reduced on participations and patented IP (qualifying for the patent box) on a voluntary basis;
- Improvement on withholding tax refund for Swiss branches: the reform package includes the possibility for a Swiss branch to claim a tax credit for a foreign final withholding tax levied on its income based on the respective applicable double-tax treaty (the Federal Council will set out the details in a separate regulation).
To avoid overloading the CTR III, the legislator decided that the introduction of a tonnage tax and the abolition of the stamp duty on equity should not be included in this reform package, but should be featured in a separate legislative draft.
The reform package will be formally adopted with final vote by the Swiss Parliament on 17 June 2016.
Based on comments from certain political parties and lobby groups, the reform will likely be subject to a referendum in 2017. It is thus unlikely that the reform package will enter into effect before 1 January 2019.
The final package of the CTR III as approved by the two Councils provides further clarity about the future measures and planning opportunities for Swiss companies.
Against this background and in preparation for the CTR III that will likely enter into force in the next years, companies may take the following actions:
- Analysis of status quo (concerned privileged taxed companies/branches, existing tax rulings for privileged taxation);
- Analysis of impact of the change in taxation status;
- Assessment of potential reorganization possibilities and possibility to change taxation status pre-CTR III with step-up solution (instead of a special tax rate according to CTR III provisions);
- Analysis of potential opportunities (e.g. Patent Box, super-deduction for R&D expenses, NID, step up upon immigration) and necessary steps to benefit from these measures;
- Cost-benefit analysis (e.g. tracking and tracing of patent income, potential tax costs to enter into patent box, transparency aspects, reorganization costs vs. tax savings);
- Analysis of impact of reduced tax rates in an international context (e.g. on foreign CFC rules);
- Assessment of the existing group structure on a (global) level, under consideration of international developments like the OECD BEPS action; if need be strengthening certain functions in Switzerland.