The Federal Council launched the consultation process for the Corporate Tax Reform III (CTR III). The reform is related to the OECD, G20 and EU efforts (in particular BEPS project) to counter privileged taxation of so called “mobile revenues”, e.g. royalties and trading profits, common also at international level.
The consultation process is expected to go on until 31 January 2015 and will be followed by the parliamentarian legislative process. If, in addition, there is a popular vote on CTR III it seems likely that the measures will not be enacted before 2018 or 2019.
In his proposal, the Federal Council puts forward the following measures.
1. Abolition of privileged Tax Regimes
The privileged cantonal corporate tax regimes (namely holding, domicile and mixed companies) have been under discussion for a while. It is now proposed to abolish them. In addition, the application of the principal company and finance branch regimes is expected to be terminated too.
2. Licence box
The introduction of a licence box is aimed at taxing revenue relating to so called qualifying IP Rights separately and at a reduced rate.
The availability of the licence box regime is to be restricted to corporations with sufficient economic substance.
3. Disclosure of hidden reserves
The proposal includes the possibility of revaluing hidden reserves (except on participations) in a tax neutral manner prior to entering the ordinary tax regime. Such revalued reserves shall be eligible for linear depreciation over ten years. In many instances that measure would allow to retain a favourable corporate tax rate for at least those ten years.
Corporations could also disclose hidden reserves tax free upon relocation to Switzerland. This would ensure that Switzerland only taxes profits that arose in this country.
4. Notional interest on equity
In addition to interest on debt, a notional interest on part of the equity shall become deducible too. The proposal distinguishes between core equity (no interest deduction) and security capital (notional interest deduction available) and includes several methods for calculating the two.
5. Modification at Capital Tax Level
Cantons shall have the option of reduced taxation of equity relating to participations, IP rights and intra group loans.
6. Abolishment of stamp duty on equity
The draft law proposes the abolished of stamp duty on the creation of equity. That would result in an improvement of the overall tax framework especially for companies with substantial equity.
7. Improvements to loss carry-forward regime
According to the proposal setting off loss carry forwards would no longer be limited in time (currently 7 years). However, according to the proposal 20% of net profits would be subject to tax regardless of any losses available for set off. That would result in a minimum profit tax in any profitable year.
8. Participation exemption
Under the proposal dividends received by corporations would be excluded from the tax base altogether. The current system has the disadvantage of potentially resulting in forfeiture of loss carry forwards.
9. Taxation of private capital gains
Under the current tax regime private capital gains are essentially tax free (gains on real estate excepted). According to the proposal, capital gains on shares and other securities should become subject to tax and related losses eligible for compensation and for carry forward. The proposal also suggests taxation of unrealised gains on securities upon relocation abroad (“exit tax”).
10. Privileged dividend taxation for individuals
The reduced taxation on dividends from qualifying participations for individuals aims at reducing the effect of economic double taxation (taxation of profit at corporate level and of dividends at shareholder level). Under today‘s rules qualifying participations of min. 10% allow for a tax reduction of 40% in relation to privately held shares and 50% in relation to shares held as part of business assets.
The proposal is to scrap the minimum participation threshold and, on the other hand, cut the reduction to 30%.
It is expected that, after the consultation process, the Federal Council will put a reviewed proposal before parliament as the formal legislator. If a popular vote is to be held on CTR III it seems unlikely that the measures will become effective before 2018 or 2019.
Summary and assessment
As the privileged tax regimes have been the subject matter of discussion at international level for some time the proposal to abolish them does not come unexpected. The proposal contains a string of anticipated and welcome measures such as revaluation and subsequent depreciation of hidden reserves, the licence box or the notional interest deduction. On the other hand, many were taken by surprise to see a proposal to tax private capital gains, including by way of “exit tax”. It should be remembered, though, that the (political) parliamentary discussions are yet to be held and a number of the current proposal‘s elements will very probably be used as “bargaining chips”.
To judge by the proposal, tax planning in connection with CTR III will centre especially around the possibility of revaluing and subsequently depreciate hidden reserves and the deduction of notional interest. With the right measures it will in many instances be possible to maintain favourable tax rates for a good ten years after CTR III comes into effect. Also, it is widely expected that overall tax rates will come down.