On 14 December 2015, the Swiss Council of States discussed the legislative draft of the Corporate Tax Reform III and in principle approved the reform package. In deviation from the revised draft legislation issued by the Swiss Federal Council on 5 June 2015, the Council of States voted against the abolishment of the 1% stamp issuance duty and the reintroduction of the notional interest deduction. Furthermore, the Council of States resolved that the cantons shall not be restricted in their privileged taxation of dividends for minimum 10% shareholdings.
The Council of States approved the introduction of a patent box regime, a super deduction for research and development expenses as well as the step up rules upon the change from a privileged tax regime to ordinary taxation.
The National Council is expected to vote on the Corporate Tax Reform III in its 2016 spring session. In view of a likely referendum, the reform is expected to enter into effect in 2018/2019.
Background and Objective of the Corporate Tax Reform III
The Corporate Tax Reform III (CTR III) has been heavily influenced by ongoing international tax developments starting with the EU Code of Conduct for corporate taxation, the EU rules on state aid and lately the OECD's Base Erosion and Profit Shifting (BEPS) action plan. Against the background of these developments, Switzerland has in recent years come under increasing pressure with regard to its preferential tax regimes, in particular the existing cantonal tax privileges for holding, domiciliary, auxiliary/mixed companies as well as certain federal tax practices pertaining to finance branches and principal companies. In reaction thereto, on 22 September 2014, the Swiss Federal Council issued an initial draft of the CTR III legislation and invited the cantons and interested parties to submit their comments until 31 January 2015 (cf. Bär & Karrer Briefing October 2014). Based on the feedback received during this consultation procedure, on 5 June 2015, the Federal Council issued the revised draft legislation and the dispatch on the CTR III.
The main objective of the revised draft legislation and the dispatch on the CTR III is to abolish the above mentioned special income tax regimes while introducing corresponding measures to reinforce the fiscal attractiveness of Switzerland. The proposed measures include the separate taxation of a step-up upon change to the ordinary taxation and the introduction of a new patent box regime at cantonal and communal level, in line with international requirements. At federal level, the revised draft legislation proposes to abolish the capital stamp duty of 1% and the introduction of a R&D super-deduction system. The reform package also intends to limit the privileged dividend taxation of individuals for shareholdings of 10% or above. As already communicated by certain cantons, it is generally expected that the cantons will reduce their corporate tax rates in order to maintain their attractiveness after the abolishment of the special regimes.
The Commission for Economy and Taxes of the small chamber pre-discussed during its summer session 2015 certain aspects of the CTR III. Based on its evaluation, the Council of States discussed the CTR III on 14 December 2015.
Conclusions of the CTR III Consultation by the Council of States
On 14 December 2015, the Council of States in principle approved the CTR III and undisputedly resolved to abolish the existing preferential tax regimes. To compensate the effects of the abolishment, the following measures were approved:
- Introduction of a Patent Box for cantonal/ communal tax purposes as featured in the revised draft legislation and in line with international standards. The Patent Box will be applicable to income generated from patents and comparable rights, provided the R&D expenses occurred in Switzerland ("modified nexus approach").
- Introduction of additional deductions for research and development (R&D) expenses ("super deductions") by the cantons on a voluntary basis up to a maximum of 150%.
- Introduction of tax-neutral appreciation of hidden reserves including self-created goodwill ("step up") for companies/activities migrating to Switzerland on federal/cantonal/communal level or for companies upon their change from the cantonal tax privileged sphere into the ordinary taxation regime on cantonal/communal level with a separate taxation of such step up.
- Reduction of cantonal/communal capital tax on participations and patented IP by the cantons on a voluntary basis.
No majority in the Swiss Council of States could be found in favor of the reintroduction of notional interest deduction (NID), and the abolishment of the 1% stamp issuance duty on equity contributions. Further, the Council of States resolved that the reduced taxation of dividends on minimum 10% stakes shall not be limited to 30% on cantonal level, but may be determined by cantonal legislation.
As a next step, the Committees for Economic Affairs and Taxation will discuss certain aspects of the CTR III on 18/19 January 2016 or on 22/23 February 2016. Based on their evaluation, the National Council is expected to vote on the reform in its 2016 spring session. It may introduce additional measures or reintroduce measures which had not been approved by the Council of States. The two Chambers will subsequently have to settle their differences, if any. In the likely event of a referendum, the law is expected to enter into effect in 2018/2019. Upon enacting, the cantons will be granted two years to adjust their legislation.