Swiss Cabinet Presents Plans for Swiss Corporate Tax Reform
The Swiss government has made plans to abolish certain Swiss corporate tax privileges for international firms and introduce a royalty box and an interest-adjusted profit tax.
- Notional Interest Deduction on Equity
- Reduction of Headline Corporate Tax Rate
- Royalty Box Schemes Under Attack by OECD
- $1.8 Billion Estimated Swiss Revenue Shortfall
Swiss Finance Minister Eveline Widmer-Schlumpf said the aim of the reform is to adapt the fiscal policy to international standards, boost Switzerland’s competitive edge as an attractive business location and encourage companies to continue to make an important contribution to funding the tasks of the government, cantons and local authorities.
Switzerland has been under pressure from the Organisation for Economic Co-operation and Development (OECD) and the European Union for the past ten years to review its preferential corporate tax policy.
Switzerland has three levels of taxation: federal, cantonal and municipal. Under ordinary circumstances, Swiss tax rates historically ranged from 11.5 percent -24 percent, depending upon the canton. Pursuant to certain beneficial federal and cantonal tax regimes, however, the effective tax rate (ETR) for a foreign multinational could be as low as 0 percent – 10 percent.
About 25,000 firms – holding companies, mixed companies and management companies – are granted special tax breaks by Switzerland’s 26 cantons. The firms are either exempt from tax or subject to lower rates for the activities they engage in outside the country.
A key pillar of the reform is the introduction of so-called royalty boxes – a method of preferential tax treatment for certain types of profits, notably royalties from a patent.
The OECD is due to define the legality of royalty boxes by the end of next year amid calls to abolish their use.
But Widmer-Schlumpf is confident that the practice will not be scrapped as Britain, Luxembourg and Belgium are defending their corporate fiscal regimes.
“The question is not whether royalty boxes will continue to exist or not. The question is how they will be defined. Switzerland might have to adapt its law accordingly,” she said.
Adrian Hug of the Federal Tax Authorities hinted that Switzerland could maintain its corporate tax system for a while if the international community needs more time to find a consensus.
Widmer-Schlumpf maintained that Switzerland has to act now to give investors the necessary legal security.
“Many international companies would leave Switzerland,” she warned.
The planned reform is expected to lead to a shortfall in revenue to the tune of CHF1.7 billion ($1.8 billion) annually for the federal authorities. The finance ministry plans to offset the costs without spending cuts but by introducing a capital gains tax on securities. It also suggests increasing the number of federal tax inspectors from about 300 to about 370.
The overhaul of corporate taxes also has a major impact on the fiscal rates of the country’s largely autonomous 26 cantons and on the system of financial payments between rich and less affluent cantons.
|Summary of Present Swiss Tax Regimes and Likely Fate as a Result of Swiss Tax Reform|
|Model||Authority||General Description||Current Tax Features||EU Commission View||OECD
|Likely Effect of Swiss Tax Reform|
|Holding Company||Cantonal||Company or Swiss branch of a foreign company engaged in long term holding and administration of certain qualifying participations; no Swiss business activities||Federal participation exemption on certain dividends and capital gains income; cantonal tax exemption; ETR ~0% for income from qualifying investments and 7.8% on other activities
|Alleged to constitute unlawful state aid because income from certain activities is taxed solely at the federal level||Pursuant to BEPS Action 5 – “Counter Harmful Tax Practices,” identified as potentially harmful||To be abolished|
|Domiciliary Company||Cantonal||Company limited to the performance of administrative functions in Switzerland||Beneficial tax rates on qualifying participations and certain foreign source income;
ETR ranges from 0%-10% depending upon type of income
|Criticized because it may result in unequal treatment of domestic versus foreign sourced income||Pursuant to BEPS Action 5, identified as potentially harmful||To be abolished|
|Mixed Company||Cantonal||Corporations primary business is abroad (i.e., 80% or more of income foreign source / 80% or more expenses are paid outside Switzerland)||Beneficial tax rates on qualifying participations and certain foreign income and partial tax relief based on cantonal benefits; ETR 0%-11% depending upon type of income||Concern that home country profits are shifted to Switzerland||Pursuant to BEPS Action 5, identified as potentially harmful||To be abolished|
|Nidwalden IP Box||Nidwalden Canton only||Available to companies resident in the canton and which own IP||Reduced ETR of 8.84% on net royalty income||IP Boxes in general are suspected by EU Commission of unfairly benefiting mobile businesses without creating corresponding research and development activities; the Commission’s general probe of patent box regimes is ongoing.
|Assuming that patent boxes are ultimately determined to comply with EU rules this regime may survive|
|Principal Company||Federal||Available to companies that meet either the Domiciliary or Mixed Company status at cantonal level but that also sell through an affiliated company commissionaire or limited risk distributor||Certain income exempt from tax;
ETR can be as low as 0%-9%
|Pursuant to BEPS Action 5, identified as potentially harmful||To be abolished|
|Swiss Finance Branch||Federal||Company acting as internal affiliate group “bank” due to the volume of financing including loans, hedging and cash pooling||Certain beneficial deductions are permitted and the company can also apply for Domiciliary or Mixed Company regimes;
|Currently N/A||Certain financial instruments and interest deductions have been identified as problematic in BEPS Action 2 – “Neutralize the effect of hybrid mismatch arrangements” and Action 4 – “Limit Base Erosion via Interest Deductions and Other Financial Payments”||To be abolished|
Timing of implementation and the length of any grandfathering period is not yet certain. The Swiss government anticipates completing the first draft of the legislation, as well as the consultation process, by the end of 2014; entry into force will occur sometime after 2018, following parliamentary debate and the requisite referendums. At present, the grandfathering period is estimated to last from 2018-2020.