Global Tax Alert | 20 December 2013

Swiss Federal Council presents final report regarding Corporate Tax Reform III

  • Share

Executive summary

On 19 December 2013, after more than six months of project work, intensive discussions and numerous meetings, the Swiss Federal Council presented the much anticipated final report on the Swiss Corporate Tax Reform III.1 The press conference was held by the Federal Finance Minister Eveline Widmer-Schlumpf and Peter Hegglin, Leader of the Cantonal Finance Directors.

It can be summarized that the Swiss government has provided a very clear statement that Switzerland shall foster its fiscal attractiveness. The proposed measures should ensure that Switzerland will have one of the most competitive tax systems for multinational companies. In this respect, it is worthwhile to note that the Swiss Government again acknowledges (as it did in the interim report in May 2013) that the internationally competitive tax burden is currently 0% for intra-group dividends, 2-3% for intra-group interest income, 5-8% for royalties and 10-12% for international wholesale trading income.

A corporate tax reform is needed since the European Union (EU) and the Organisation for Economic Cooperation and Development (OECD) are challenging certain cantonal tax regimes – such as the holding, domiciliary and mixed company regimes – as these regimes permit preferential taxation of certain income (namely different taxation of domestic and foreign income). The Federal Council already confirmed in its interim report2 that these taxation regimes need to be abolished, whereby given the process required to implement such changes a time frame of five to seven years was mentioned. Such statement has been reiterated several times during the last half-year. Additionally, it had been communicated that the principal allocation and the Swiss finance branch taxation may no longer be sustainable solutions, considering the recent and ongoing changes in international tax policy law (e.g., Base Erosion Profit Shifting or the OECD's Forum on Harmful Tax Practices).

The Swiss Government is fully aware of the economic importance of the holding, domiciliary and mixed companies. It reaffirmed several times that competitive alternative solutions are needed in order to foster the attractiveness of Switzerland. A steering body has been commissioned to analyze the situation and evaluate potential measures to avoid that the country may lose grounds with respect to its attractiveness for companies with movable activities such as financing or holding. Since May 2013, several hearings with representatives of the cantons and the economy were held. Additionally, expert groups organized by trade associations and other stakeholders contributed to the process. The result of the whole evaluation is reflected in the final report published on 19 December 2013.

Detailed discussion

Proposed measures

The final report confirms the Government's commitment to strengthen the competitiveness of Switzerland as a globally leading business location. It further specifies alternative measures that had already been mentioned in the interim report in May 2013. However, the report is still written in a rather general way and does not yet outline the details and specifics of the different regimes. This does not come as a surprise, given the rapidly changing environment and the time frame that may be needed to implement the changes. In light of this it may be wise to work out the details in the legislative procedure during the upcoming months.

The final report proposes the following measures:

  • Introduction of a license box system

The report confirms Switzerland's intention to introduce a nationwide license box system in order to support the use of intellectual property. This license box shall offer the same benefits that are granted by license/IP box regimes in other EU countries. The Federal Finance Minister noted, however, that the Swiss Government has no plans to introduce a license/IP box with an extremely broad definition of IP. It needs to be seen whether a Swiss license box will offer a privileged treatment of “embedded IP” income. Experts working in the technical groups currently believe that the introduction of such a concept should be possible. In that respect a lot will depend also on the outcome of the review of the different schemes available in the EU by the ECOFIN.

The license box regime will be applicable for the cantonal/communal taxes. Furthermore, it plans to integrate the license box in the tax harmonization act which is a law aiming at harmonizing the cantonal tax laws to a certain extent. However, the extent of the privileged taxation (i.e., applicable tax rate or reduction of tax base) is each canton's individual decision and it is likely that at least some of the cantons should have the ability, economically speaking, to significantly reduce the applicable tax burden for qualifying IP income.

  • Reduction of cantonal corporate income tax rates

The cantonal and communal income tax rates could be reduced from an average cantonal tax rate of approximately 18% to an average of approximately 14% (calculated on net income after tax). Every canton needs to individually decide on the extent of such reduction and whether it is even in a position to afford a general tax rate decrease. Such tax rate reductions may lead to effective tax rates (including the federal tax) that are as low as 12 – 14%. It needs to be noted that several Swiss cantons currently offer effective statutory tax rates (including the federal tax) that are in the range of 12% – 15%. There is currently no intention to reduce the statutory federal tax rate of 7.8%.

  • Notional interest deduction on equity (NID)

A NID shall ensure equal tax treatment of equity and debt since financing decisions shall not be impacted by fiscal considerations. This view is also shared by the EU and the OECD and a NID is, therefore, an internationally accepted regime.

The NID was not mentioned during the press conference although it had been thoroughly and widely discussed in the expert groups. However, the report confirms that a NID is still a potential alternative but that further clarifications are needed. The report even mentions the possibility to introduce a NID on federal level. That being said, the report indicates that a potential Swiss NID regime shall be limited to the so-called “surplus equity” as the basis for the NID calculation. The surplus equity refers to that part of equity which exceeds an average, sound equity financing of a company. The details of such NID concept (e.g., applicable interest rate, calculation of surplus equity) still need to be determined. Switzerland would be the first country with such surplus equity approach.

  • Other measures

Other measures cited in both the press conference and report are the abolishment of the one-time capital duty, changes to the Swiss withholding tax regime (adoption of a paying agent system for interest payments) or a further reduction or even complete abolishment of the annual capital tax on equity.

Besides the specific measures, the report confirms that the abolishment of the privileged cantonal taxation regimes should allow for a tax-free step-up of the built-in gains that were created during the privileged taxation period. The Swiss Supreme Court had come to the same conclusion on 13 March 2012. The details of such step-up and the potential subsequent amortization of the higher tax bases still need to be determined.


It is expected that the change of the Swiss corporate income tax system could lead to a reduction of fiscal revenue of up to CHF 3 billion. It is envisaged that this reduction should be equally shared by the Federation and the cantons. In order to fund this reduction, the Federation is analyzing, among others, the introduction of a capital gains tax for private individuals. Additionally, the privileged taxation of certain dividend income for private individuals could be reduced. Lastly, there might be sufficient room for a moderate increase of the Swiss VAT rate.


The Federal Finance Minister has been asked to conduct an official consultation with the cantons through the end of January 2014. Based on this consultation, the Federal Council plans to prepare a draft bill in spring 2014. Official consultation of the draft bill is envisaged to start in summer 2014. The law making process including a potential public referendum may need several years and it is currently expected that the Corporate Tax Reform III will come into force between 2018 and 2020. In the meantime, the current rules will still apply but it is advantageous for companies to initiate, sooner rather than later, forward-looking tax planning and to evaluate the long-term impact of the forthcoming changes.


On 17 January 2014, EY Switzerland will host two webcasts on the Swiss Corporate Tax Reform III. These webcasts will further analyze the implications resulting from the proposed measures. In addition, the webcast panel will discuss reactions to the report and provide additional details about the new regimes.


1 The report is dated 11 December 2013 but was officially published on 19 December 2013.

2 See our Global Tax Alert of 21 May 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young AG, Zurich
  • Daniel Gentsch
    +41 58 286 3613
  • Rainer Hausmann
    +41 58 286 3193
  • Peter Bruelisauer
    +41 58 286 4443
  • Marco Muehlemann
    +41 58 286 3128
Ernst & Young AG, Geneva
Ernst & Young LLP, Swiss Tax Desk, New York
  • Thomas Semadeni
    +1 212 773 8442
  • Eric Duvoisin
    +1 212 773 3091

EYG no. CM4055