In the public vote held on February 12, 2017, Swiss voters rejected the Corporate Tax Reform III Law Proposal (CTR III). Nevertheless, this issue is not yet resolved and remains on the table! A «CTR III 2.0» is expected in a timely manner. Information about the newest developments, but also the failed law proposal can be found here.
However, the result of votes raises a number of pressing questions:
Can this result be interpreted as Switzerland’s rejection to an attractive and competitive location?
- No, both the supporters and the opposition agree that a reform of the current regime is necessary and that Switzerland needs to be attractive in terms of taxes.
Will Switzerland now cancel its plans of a corporate tax reform?
- No, due to Switzerland’s commitment to the OECD and the EU to abolish the current tax privileges, Switzerland and the cantons must act quickly. We expect the "CTR III 2.0" to be ready within one year.
- However, Switzerland has a federalistic system. Under the current regime, each canton has positioned itself as a location in competition not only to the foreign countries but also to the other Swiss cantons. Therefore, certain cantons are already prepared to keep pace with the international tax competition without special tax regimes. However, the CTR III would have resulted in advantages primary for high-tax cantons such as Geneva, Basle-City and Zurich. This fact could now lead to stressful situations with regard to Switzerland’s federalistic system. Consequently, a rapid clarification of the legal situation is required.
Are the current tax regimes and tax rulings still applicable and if yes, until when?
- Yes, the current tax regimes have not been abolished and therefore still apply. However, Switzerland has explicitly stated towards the OECD and the European Union to abolish the current tax regimes with their privileges until 2019. Even though it is not a binding agreement, there is the danger that the EU respectively certain countries would adopt unilateral measures against countries whose tax systems are not in conformity with OECD/BEPS regulations.
- The coming weeks and months will show how the OECD and the EU will comment on the potential timeframe. Most likely only companies with tax privileges would be subject to unilateral measurements (if any) whereas companies with regular taxation would not be affected. Cantons offering low corporate tax rates, such as Lucerne or Zug, are already among the top rankings in the international tax competition.
- The EU is also in the process of discussing the creation of a black list for non-cooperative countries (tax havens). Therefore, we expect the abolition of the current tax privileges will be in place as from the year 2019. Until this date we do not expect any measurements from the EU.
Is the patent box controversial?
- No. Both the opposition and the supporters agree that an international accepted patent box must be part of the future Swiss tax regime. However, the inclusion of software as qualifying intellectual property might be point of discussion.
Which modifications are expected with regard to a revised version of the recently failed CTR III proposal?
- The notional interest deduction will most probably not achieve support of the majority and therefore is not likely to be part of the new legislative proposal. Accordingly, the new "CTR III 2.0" proposal would not include a special handling for interest earnings.
- The reduction of dividend earnings of individual shareholders is likely to be lower than intended within the failed CTR III proposal.
- The introduction of a capital gains tax is rather unlikely from our point of view.
Is there already a need for action?
Yes, we advise to analyse the following topics in a timely manner:
- Examine existing tax rulings.All information on Swiss tax rulings regarding the tax regimes of holding, domiciliary and mixed companies will be exchanged as of 2018. Since those regimes are explicitly governed by the law, the majority of the tax rulings can be withdrawn without any negative consequences and the benefits nevertheless apply.
- Verify the possibility of a tax-neutral step-up. In most cantons in Switzerland, holding, domiciliary and mixed companies are able to get a tax-neutral step-up of its hidden reserves provided they waive their status. Thereby, a similarly low taxation can be ensured over a period for five to ten years.
- Check your location.The changing of the fiscal domicile to a canton with low taxes may be worth taking into consideration. With regard to a long-term planning high tax cantons such as Geneva, Basle-City and Zurich are in need for clarification because it is expected that those cantons are unable to finance substantial tax reductions on their own. Other cantons such as Lucerne or Zug are in a better position concerning this matter. And the canton of Nidwalden has adjusted its patent box regime according to the provisions of OECD/BEPS. This patent box regime is already – without CTR III – available and offers a tax rate of approximately 8.8%.
- Plan new projects in the long term. New projects shall not be based on old tax regimes. For instance, the migration from abroad can be combined with internationally accepted ideas of tax optimization. Therefore, an attractive tax regime for a period of ten years can be guaranteed.
The Swiss economy is oriented on export and Swiss companies must assert themselves in a competitive international environment. An attractive tax regime is vital. We are encouraged by these facts that a new "CTR III 2.0" proposal will be presented by the responsible parties within the period of one year.