On 21 March 2018, the Swiss government finally published the draft bill for the Swiss corporate tax reform package, the Tax Proposal 17 (TP 17; Steuervorlage 17).
Despite significant inputs requested by stakeholders during the public consultation, the Swiss government essentially sticks with the main parameters of its previous discussion draft by including notably a tax neutral step-up and omitting a notional interest deduction (see our previous coverage) As indicated earlier, the government confirms that it intends to implement a first part of the reform as soon as possible – by providing a revised step-up mechanism if a Swiss operation no longer applies a Swiss tax regime.
TP 17 draft bill
TP 17 aims to replace current preferential tax regimes such as holding, principal, mixed company and finance branch regimes with new tax measures in line with international standards. Separately, many cantons announced significant tax rate reductions. The draft bill essentially mirrors the prior discussion draft and does not contain any significant surprises:
The draft bill is mostly in line with the public discussion draft released in September 2017. Whether additional measures will be added – most notably the notional interest deduction regime for financing activities – will be decided in parliamentary discussion.
The step-up mechanism and the expected reductions of effective overall corporate income tax rates in many Swiss cantons to about 12% to 14% will ensure Switzerland's place ahead of other European locations.
Next steps of TP 17
The draft legislation will be discussed in parliament and may still be amended. Essentially, if the project is not delayed, it is likely that TP 17 will enter into force in 2020 whereas cantons will have the possibility to apply the step-up rules already at an earlier stage.
The draft bill provides sufficient comfort to re-assess current structures and move forward with restructuring plans. As many EU member states are at the same time implementing ATAD I a holistic cross-border view is required:
- Step-up: TP 17 contains a step-up mechanism upon abolishing of Swiss tax regimes. As the rules and impact of the step-up under existing rules will be altered, MNE are well advised to review the available options – based on our experience the implementation of step-ups can take several months to complete.
- Relocation of activities/functions: Focus on substance and value drivers are a key component in the post BEPS era – prompting heavy focus on aspects such as sourcing and procurement, group financing and R&D. Switzerland is one of the prime locations due to its strong position for innovation and expertise knowledge. The revised rules on step-up upon immigration combined with the future low tax rates in Switzerland provide a competitive edge over other European locations and have already prompted cross-border relocations further strengthening Swiss operations.
- Covering ATAD I: Mandatory CFC rules in all EU member states are expected to impact Swiss operations - especially if previously benefitting from a Swiss tax regime. Draft legislation has been issued in key member states already setting the stage for reorganizations of Swiss MNE. As CFC rules will apply as of 1 January 2019 any action related to TP 17 also requires to cover aspects of ATAD I in order to be compliant.
We recommend clients to consider all elements of TP 17 and push forward with the implementation process by focusing on the above topics for their Swiss operations.