On September 17, 2018, the Swiss parliament approved the corporate tax reform (Federal Act on Tax Reform and AHV financing (TRAF). On one hand TRAF will abolish preferential cantonal tax regimes, such as holding or mixed companies, but will on the other hand implement measures to preserve Switzerland's attractiveness as a business location. In addition to such measures the cantons plan to drastically lower their ordinary tax rates on profit and capital (applicable for all companies). Overall, these developments will lead to a more favorable tax regime for most companies in Switzerland. Especially innovative companies will be promoted. The planned measures are the following:

Patent box On the cantonal level profit from patents and similar rights will be taxed at a lower level. The maximum relief amounts to 90 % of the relevant profit. The relief is based on the modified nexus approach and is therefore in line with the OECD standards.

Additional deductions for research and development Deductions of up to 150% of the research and development expenses incurred in Switzerland (qualifying R&D expenses) may be granted on a cantonal level. The qualifying R&D expenses are calculated based on the R&D personnel expense incurred plus a mark-up of up to 35% on these expenses for other R&D expenses and 80% of R&D expenses charged by third party providers in Switzerland.

Deduction for self-financing (notional interest deduction) TRAF also includes the possibility that cantons, whose capital city will have an effective profit tax rate of at least 18.03% over the entire tax scale to introduce a deduction of notional interest on surplus equity (i.e. equity exceeding certain thresholds). Presently, it is expected that only the Canton of Zurich will implement such a notional interest deduction.

Relief restriction The tax relief based on the patent box, the additional deductions for R&D and the deduction for self-financing must not exceed 70% of the taxable profit prior to the application of these special arrangements (i.e. the combined measures may not reduce the taxable profit to less than 30%). Cantons may define a lower total relief.

Further Advantages Disclosure of hidden reserves Companies relocating tangible or intangible assets, operations, functions or their headquarters from abroad to Switzerland can benefit from additional amortization during the initial years. At the time of the immigration to Switzerland, they will be allowed to disclose their hidden reserves (difference between the book value of an asset and its fair market value) including goodwill without taxation. Therefore, these assets may benefit from additional depreciation over the following years up to a maximum of 10 years. In the case of a transfer from Switzerland to a foreign country, an exit tax on the hidden reserves will be due, as is already the case today.

Capital tax adjustments The cantons can implement measures to reduce the capital tax rate on corporate equity with respect to participations, intra-group loans as well as patents and similar rights.

Additional Aspects Special rate solution During a five-year transition period, a temporary special rate solution is provided in order to facilitate the transition for companies losing their preferential treatment as a status company.

Adjustments to the capital contribution principle: 50 / 50 distribution rule Swiss companies listed on the Swiss stock exchange will face repayment restrictions on reserves from capital contributions. Currently, unlimited amounts of reserves from capital contribution can be paid to shareholders tax free. In the future, for every franc of tax free capital contribution reserves repaid, one franc of taxable dividend will have to be paid out. In the case of cross-border restructurings and group-relationships exceptions apply.

Increased dividend taxation Dividend taxation for individuals with qualifying holdings of at least 10% of the share capital will be increased from 60% to 70% at federal level and to at least 50% at cantonal level.

AHV Financing As a social compensation measure, salary contributions of employer and employee to the AHV (Old age and Survivors insurance) will each be increased by 0.15%.

Timing The main parts of TRAF, e.g. abolition of preferential tax regimes, patent box, and additional R&D deduction, will enter into force on January 1, 2020. Cantons have to revise their cantonal tax laws by then, but are free to implement initial measures (special rate solution) earlier. However, it cannot be excluded that some political parties will request a referendum be held on this matter (deadline is mid-January 2019). A potential referendum would be held on May 19, 2019. Let's hope that the Swiss people will vote in favor of the tax reform!

Conclusion The measures of TRAF aim to promote innovative companies and local R&D. Together with the planned substantial tax reductions at cantonal level, TRAF will ensure or even increase Switzerland's competitiveness as a business location for most companies.

The following table contains a summary of the effects of the key measures of TRAF: