The abolishing of preferential tax regimes and the implementation of the expected corporate tax reform III will challenge many Swiss operations of multinational enterprises. Holdings should not be affected on a large scale. However, IP and financing activities require review and amendment to the future Swiss tax landscape. This how your company will be impacted by Swiss corporate tax reform.
After Swiss voters rejected the corporate tax reform III bill in February 2017 the Swiss government announced to issue a revised reform package in Q2 2017 – now called Tax Proposal 17 (TP 17). The TP 17 is widely expected to mirror the former reform proposal. It is expected to introduce a patent box and tax incentives for R&D as well as some relief for annual capital tax. It is yet unclear whether a tax incentive for intra-group financing will be included.
2019: Abolishing of regimes and tax rate reductions expected
Switzerland is still expected to abolish its preferential tax regimes as of 2019 at the earliest (holding, domiciliary, mixed, principal company tax status, Swiss finance branch regime).
Regardless of its scope, many Swiss cantons have announced to significantly lower their overall effective corporate income tax rates.
Swiss entities voluntarily revoking their tax regime may benefit from a tax-neutral step-up in asset basis already before implementation of TP 17. Regardless of its scope, many Swiss cantons have announced to significantly lower their overall effective corporate income tax rates. The planned reductions are likely to enter into effect as of 2019, 2020 or 2021.
This is how your company will be impacted by TP 17
The expected tax rate reduction, the abolishing of the preferential tax regimes and the implementation of TP 17 will influence Swiss operations of any MNE in different ways:
- Holding activities: Swiss headquarters or inter-mediate holding structures will continue to benefit from the participation exemption for income and capital gains on qualifying investments. The abolishing of the holding regime can however affect certain types of income previously untaxed under the regime (e.g. interest income or royalties). The effect on annual capital tax is expected to be mitigated by cantonal measures.
- IP and R&D: IP and R&D structures will likely benefit from TP 17 (e.g., patent box and R&D incentives). To the extent that Swiss IP entities currently benefit from a Swiss tax regime such entities may benefit from a tax neutral step-up in asset basis. Due to generally low effective tax rates, its top tier investment climate and highly qualified workforce Switzerland is a prime location for centralization of IP and R&D activities. This is a must in order to be compliant with international standards in a post-BEPS era.
- Financing: Financing and treasury functions benefiting from a preferential tax treatment will have to review their set-up – regardless of whether there will be a specific tax incentive for intra-group financing in Switzerland under TP 17. Centralization of treasury functions for financing activities is required and any restructuring of financing activities is commonly closely scrutinized by tax authorities (e.g. exit taxation). As targeted financing regimes become increasingly investigated under BEPS, compliant structures in line with international tax standards should therefore not rely on tax regimes. Instead, they should focus on effective corporate income tax rates in order to be sustainable.
- Trading: Trading activities will be heavily impacted by the abolishing of the Swiss preferential tax regimes and the implementation of TP 17. Swiss operations currently benefiting from a principal or mixed company regime will have to analyze the possibility of a step-up in asset basis and also relocations within Switzerland. Implementation will require substantial planning and should be started in Q2 of Q3 2017 at the latest.
- Impact EU: EU member states are required to adopt Controlled Foreign Corporation (CFC) rules, which may discriminate against third countries such as Switzerland – a tough challenge for any MNE group. These developments have triggered a considerable amount of corporate reorganizations in Europe. Swiss (top) holding structures are becoming increasingly popular in order to deal with EU CFC rules. Generally, the impact of CFC rules on Swiss entities can be easily mitigated if structured properly.
Cantonal corporate income tax rates are expected to be lowered significantly in order to maintain Switzerland's leading position as a business location. Together with the spontaneous exchange of information on tax rulings and the expected abolishing of regimes / implementation of TP 17 as of 2019 (earliest) the change in the Swiss tax landscape requires long-term planning and tailor-made cross-border solutions.