On 19 May 2019, in a popular vote, Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Federal Parliament last fall. The tax reform’s objectives include: (i) securing the long-term tax attractiveness of Switzerland as a business location; (ii) restoring international acceptance of the Swiss tax system; and (iii) securing an appropriate level of tax revenue. The tax reform brings the replacement of certain preferential tax regimes with a new set of internationally accepted measures. The legislative changes align with the broad reduction of the cantonal corporate tax rates.
The table below provides an overview of the corporate tax measures introduced with the reform:
|Tax measures||Federal level||Cantonal level||70% relief limit|
|Patent box||—||√ mandatory||yes|
|Research and Development super deduction||—||√ optional||yes|
|Notional Interest Deduction on surplus equity||—||√ optional||yes|
|Two-rate system||—||√ mandatory||no|
|Immigration step-up||√||√ mandatory||no|
|Relief of capital tax||—||√ optional||no|
|Corporate Income Tax rate reduction||—||√ optional||no|
Some of the cantonal measures are optional so that the cantons can tailor their legislation to their specific circumstances and needs. The measures are subject to a restriction limiting the overall tax relief to a maximum of 70%. A number of cantons have already held the vote and the remainder is scheduled for the coming months.
The last proposed tax reform with the same aim – Corporate Tax Reform III – was rejected by the Swiss voters at the beginning of 2017. Since the need for tax reform was undisputed, the Federal Council immediately drew up a new proposal. Based on the rejection of Corporate Tax Reform III, TRAF was combined with additional AHV financing as a form of socio-political compensation.
Core tax measures
Abolishment of preferential tax regimes
At the cantonal level, tax privileges for holding companies, domicile companies and mixed companies are terminated. At the federal level, the profit allocation rules for principal companies and Swiss finance branches no longer apply.
Patent box with a maximum relief of 90%, mandatory at the cantonal level
A core element of the reform is the introduction of a patent box regime in accordance with the Organisation for Economic Co-operation and Development standard. In the box, net profits from domestic and foreign patents and similar rights are to be taxed separately with a maximum reduction of 90% (rate at cantonal discretion). Before the patent box can be applied for the first time, the corresponding tax deducted research and development (R&D) expenditures must be recaptured and taxed.
R&D super deduction of maximum 50%, optional at cantonal level
The introduction of this super deduction for domestic R&D is Switzerland’s commitment to be recognized as an attractive location for R&D. For administrative reasons, the maximum deduction of 50% (rate at cantonal discretion) is limited to personnel expenses for R&D plus a flat-rate surcharge of 35% for other costs and 80% of expenses for domestic R&D carried out by third parties or group companies.
Notional interest deduction (NID), optional at cantonal level
So-called high-tax cantons have the possibility of introducing a NID on excess capital. According to the currently published intentions of the cantonal governments regarding tax rate developments, only the canton of Zurich meets the requirements.
Disclosure of hidden reserves
Hidden reserves including any self-created goodwill at the point in time of transition from privileged to ordinary taxation or migration to Switzerland are confirmed by the tax authorities. In the case of a migration to Switzerland, the so called step-up system is applied. The tax-free disclosed hidden reserves are to be depreciated annually at the rate applied for tax purposes to the respective assets. In the case of a transition, the so-called two-rate system is applied. Profits relating to the realization of hidden reserves that were generated under a (now abolished) privileged tax regime are subject to a separate tax rate. The cantons are free to determine the amount of this special tax rate. The two-rate system ensures a competitive income tax burden during a five-year transition period. It should be noted that taxpayers may revoke voluntarily their tax privileged status before the reform enters into force (so-called early transition). Depending on the transitional regulations offered by the cantons, this may be a beneficial option.
Overall tax relief of 70%, mandatory at the cantonal level
The patent box, R&D super deduction, and NID as well as possible depreciations from the early transition from privileged to ordinary taxation are subject to the overall tax relief of 70%.
- Adjustments in taxation of dividend income from qualifying participations
Dividend income of individuals from qualifying participations is currently partially exempt from taxation to mitigate double taxation at the shareholder level. At the federal level, the taxation rate increases from 50% (business investments) and 60% (private investments) respectively to a standard rate of 70%. At the cantonal level, there is a harmonization of the relief method and an introduction of a minimum taxation rate of 50% (rate at discretion of cantons).
- Capital tax relief, optional at the cantonal level
Privileged taxed companies usually benefit from a low capital tax rate. To compensate for the loss of this tax advantage, the cantons are given the possibility to reduce the taxable capital on patents and similar rights, qualifying participations and intra-group loans to also remain competitive from this angle.
- Adjustments of the capital contribution principle
Swiss-listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Intra-group dividends and capital contribution reserves from assets transferred from abroad after 24 February 2008 and in the case of a liquidation are not affected by this scheme. The above rules shall also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.
- Extension of the flat-rate tax credits on foreign companies’ permanent establishments
To prevent international double taxation, Swiss permanent establishments of foreign companies should be able to claim withholding taxes on income from third countries with a flat-rate tax credit.
- Social compensation via the AHV (Old-Age and Survivors Insurance)
It is assumed that the loss of tax receipts due to the tax reform will amount to CHF2b (in a static view). This shortfall will be compensated through the AHV:
- 0.3% increase in salary contributions (employers and employees one half each)
- Allocation of the federal share of the demographic percentage of value added tax to the AHV
- Increase in the federal contribution to the AHV from currently 19.55% to 20.2%
- Reduction of cantonal profit tax rates
The reduction of cantonal profit tax rates is not directly covered by TRAF but is necessary to remain attractive from a tax perspective for former tax privileged companies and thus a key part of the proposed tax reform. The increase of the canton’s share of the federal direct tax from 17% to 21.2% enables the cantons to reduce their tax rates. Based on official announcements made by the cantonal governments, it is expected that the majority of the Swiss cantons will provide attractive tax rates on pre-tax income between 12% and 14% (including federal tax).
The tax reform measures will enter into force as of 1 January 2020. The tax reform achieves its main goal of retaining Switzerland’s international attractiveness while having an internationally accepted tax system. The tight time frame requires prompt planning from taxpayers regarding the transition to the new regulations.
The reform represents the greatest change in the Swiss corporate tax system in decades and affects essentially all enterprises in Switzerland. Analysis has to be undertaken within the next few months to properly adjust to the new tax landscape and to avoid a competitive disadvantage.