The left-green committee against the draft Federal Act on Tax Reform and AHV Financing (TRAF) announced that it has successfully collected the required signatures to call for a public referendum against the tax and social security reform proposal. A formal announcement by the federal government is expected to follow in the next days.
Authors: Dominik Bürgy, Conradin Mosimann, Janine Schmidli
On 17 January 2019, the referendum period relating to TRAF expired. Last week, representatives of the referendum committee – which mainly consists of the green party, smaller left-wing parties, unions, and some NGOs – communicated that they managed to collect about 61’000 signatures against the TRAF. 50’000 valid signatures are required to call for the referendum.
Most major political parties support the reform proposal. In mid-December, it was still open whether or not the left-green committee against TRAF can successfully gather the necessary number of signatures. Compared to the previous referendum, the timely collection of the signatures was slow and required extra efforts by the members of the referendum committee. Other opposing groups were only able to collect a few thousand signatures.
Assuming that at least 50’000 of the collected signatures are validated by the municipalities, the popular vote will already take place on 19 May 2019. Accordingly, taxpayers will have legal certainty regarding the outcome of the referendum within a relatively short period of time.
The entry into force of TRAF is still planned for 2020 even though this is an ambitious timeline for the cantons to implement the required cantonal reform packages. Therefore, some cantons, such as Vaud and Basel-Stadt, are implementing or have already implemented the revised cantonal tax laws in parallel with the federal reform. In other cantons, the governments released guidance on how they plan to amend the cantonal tax legislation to continue to provide for an attractive tax framework for international and domestic companies.
Regardless of the outcome of the referendum, companies should anticipate the replacement of the preferential tax regimes starting 2020 and plan the transition into the new regulations. The tight time frame requires swift planning from the taxpayers and companies should start preparing now for the upcoming legislative changes.
For further information please register for our Webcast on TRAF on 5 February 2019, 1.30 pm CEST.
Have you also lost track of what’s going on? Please find below a short overview of the key elements of the TRAF:
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%.
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 (“50/50 rule”). Not affected by this scheme are in particular capital contribution reserves (i) created in the context of a cross-border merger, restructuring or immigration after 24 February 2008, (ii) capital contribution reserves repaid to qualifying shareholders (at least 10% quota) and (iii) capital contribution reserves repaid as a result of a liquidation / transfer of domicile or PoEM abroad. The 50/50 rule 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:
- 0.3% 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).