The National Council and the Council of States are in agreement. The necessary tax reform will be connected to additional AHV financing. Authors: Dominik Bürgy, Karin Steimer Benz
This Monday, the Council of States cleared up the last differences with the National Council. Have you also lost track of what’s going on? Please find below a short overview of the main elements of the new Federal Act on Tax Reform and AHV Financing (TRAF) former Tax Proposal 17:
Abolishment of existing tax regimes
At cantonal level, tax privileges for holding companies, domicile companies and mixed companies are to be terminated. At federal level, the profit allocation rules of principal companies and Swiss finance branches are to be repealed.
Patent box with a maximum relief of 90%, mandatory at cantonal level
A core element is the introduction of a patent box regime in accordance with the OECD 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%. Before the patent box can be applied for the first time, the corresponding tax deducted 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% 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, optional at cantonal level
High-tax cantons have the possibility of introducing a notional interest deduction on excess capital. According to the current intentions of the cantonal governments, only the canton of Zurich would meet the requirements.
Overall tax relief of 70%, mandatory at cantonal level
The patent box, R&D super deduction, notional interest deduction 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 already partially exempt from taxation. At federal level, the taxation rate increases from 50% (business investments) and 60% (private investments) respectively to a standard rate of 70%. At cantonal level, there is a harmonization of the relief method and an introduction of a maximum taxation rate of 50%.
Capital tax relief, optional at cantonal level
Privileged taxed companies usually profit from a low capital tax rate. In order to compensate for the loss of this tax advantage, the cantons are given the opportunity to reduce the capital tax rate on patents and similar rights, qualifying participations and intra-group loans.
Adjustments of the capital contribution principle
Listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Not affected by this scheme are capital contribution reserves from assets transferred from abroad after 24 February 2008 and in case of a liquidation. The above rules shall also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.
Disclosure of hidden reserves
Hidden reserves including any self-created goodwill at the moment of the transition from privileged to ordinary taxation or migration to Switzerland are confirmed by the tax authorities.
In 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 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 privileged tax regime are subject to separate tax rate. The cantons are free to determine the amount of the special tax rate. The two-rate system ensures a competitive income tax burden during a five-year transition period.
Extension of the flat-rate tax credits on foreign companies permanent establishments
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 OASI)
It is assumed that the loss of tax receipts due to the tax reform will amount to CHF 2bn (in a static view). This shortfall will be compensated through the OASI:
- 3% increase in salary contributions (employers and employees one half each)
- allocation of the federal share of the demographic percentage of VAT to the OASI
- increase in the federal contribution to the OASI from the current 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 necessary to remain attractive from a tax perspective for former tax privileged companies. 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 18% (including federal tax).
The TRAF is ready for the final vote in parliament at the end of September 2018. The EU has given Switzerland until end of 2018 to abolish the internationally no longer accepted tax privileges. Certain parties have already announced their intention to hold a referendum. TRAF would thus probably be put to the people’s vote on 19 May 2019, possibly as early as February 2019. The entry into force of TRAF would be delayed accordingly.
The EU finance ministers could move Switzerland from the grey watch list to the black list of non-cooperative tax jurisdictions in March 2019. It is still unclear what sanctions this would trigger.
We will keep you posted. Please watch out for our Webcast on TRAF on October 2, 2018, 1.30pm.