On 19 May 2019, the Swiss voters will vote on the Swiss corporate tax reform package. The below overview outlines some of the differences and points of attention with regard to the current and new step-up model.
On 19 May 2019, the Swiss voters will vote on the Swiss corporate tax reform package (see our article on the Swiss corporate tax reform here). Irrespective of the outcome of the referendum vote, it is expected that the current preferential tax regimes such as holding, principal and mixed company as well as finance branch regimes will be abolished as of 31 December 2019. Swiss companies currently applying a preferential tax regime can benefit from a tax-neutral step-up mechanism. Current rules for an income tax-neutral step-up (Depreciation Model) significantly deviate from the new rules (Separate Rate Model).
Multinational enterprises with Swiss operations are urged to work on a tailor-made solution within the next months in order to ensure an efficient taxation as from 2020 when the Swiss corporate tax reform package is expected to enter into force. A beneficial income tax-neutral step-up transaction under the current rules must be implemented before the new legislation enters into force, thus before the end of 2019.
Some of the differences and points of attention of the current and new step-up model as well as observations on the valuation of hidden reserves and goodwill that are relevant in this context are outlined below:
Valuation of hidden reserves and goodwill
- Valuation method to be applied should be assessed and discussed with cantonal tax authorities
- Backward looking valuation methods such as the Swiss practitioner’s method (Praktikermethode) result in comparatively higher values in case of business operations with decreasing profits
- Forward looking valuation methods such as the DCF method result in comparatively higher values in case of business operations with increasing profits
- Valuation of business operations with uncertainties such as in case of the development of a new drug require specific attention
Step-up under current rules: Depreciation Model
- Basic mechanism: tax-neutral step-up in asset basis for income tax purposes with subsequent tax-effective depreciation during 5 to 10 years
- In case the business year is not in line with the calendar year, the timing of the step-up in asset basis must be diligently planned to avoid an unexpected outcome
- Annual capital tax is a point of attention under the Depreciation Model: the step-up in asset basis may result in a higher annual capital tax basis, however, several mitigation measures can be applied such as a reduction of the annual capital tax basis for certain categories of assets
- Possibility to apply a non-linear depreciation schedule (decreasing, increasing, tailor-made depreciations) should be considered
- If stepped-up assets are already depreciated in 2019, it is recommendable to discuss the application of the new base erosion limitation in the business year 2019 with cantonal tax authorities
- Impact of recognition of a deferred tax asset for IFRS or US GAAP purposes should be assessed
Step-up under new rules: Separate Rate Model
- Basic mechanism: separate taxation of built-in gains and goodwill at a lower rate in case of realization during 5 years
- Expected income during the next 5 years should be modelled against the applicable separate tax rates
- Quota of income which is taxed under the (lower) separate tax rate and the (higher) ordinary tax rate, respectively, should be reviewed, especially in case of change of business model or accelerated realization of income
- Impact of non-recognition of a deferred tax asset for IFRS or US GAAP purposes should be assessed