On 12 March 2019, the Council of the European Union published an updated list of non-cooperative jurisdictions for tax purposes. Authors: Eric Duvoisin, Annette Mathot

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Despite the fact that Switzerland has not yet adopted its tax reform, the EU Council has confirmed that Switzerland has not been included on the 2019 blacklist and has granted an additional timeframe until the end of 2019 to implement the new legislation. In light of the anticipated legislative changes and considering the referendum that will take place on 19 May 2019 regarding the Federal Act on Tax Reform and AHV Financing (“TRAF”), corporations are advised to consider pre-reform planning opportunities.

The European Union list of non-cooperative jurisdictions

Over the past few years, abusive and aggressive tax planning practices have garnered substantial international attention and attracted worldwide scrutiny. The OECD, G20 and European Union (“EU”) have published several reports on the negative impact of aggressive international tax planning practices and have introduced various measures aimed at countering tax practices perceived as harmful. One of the measures introduced by the Council on 5 December 2017, consisted of the compilation of a list of countries considered as “non-cooperative jurisdictions for tax purposes” (often referred to as “EU blacklist”). Once qualified as a non-cooperative jurisdiction, a country and its taxpayers are at risk of becoming a target for punitive sanctions or defensive measures applied by EU Member States. As a result, a country’s inclusion on the EU blacklist could potentially negatively impact its economy and its competitiveness on the international market.

In order to establish the list, the EU reviews countries based on so-called “good governance criteria” which are related to tax transparency, fair tax competition and the implementation of minimum anti-Base Erosion and Profit Shifting (“BEPS”) measures. If a country fails any of the criteria set by the Council and does not commit to amending its legislation to comply with minimum requirements in the future, it risks being qualified as a non-cooperative jurisdiction and ending up on the EU blacklist.

If a country politically commits to addressing the deficiencies identified, the EU provides a specified timeframe to make the necessary changes and adds the jurisdiction to a watch list (often referred to as “EU grey list”). The EU closely monitors the progress made by the different countries on this list, and can decide to move countries from the grey list to the blacklist if they do not respect the implementation timeframe set by the Council.

Switzerland’s position on the list of non-cooperative jurisdictions

Since 2015, Switzerland has been engaged in a process to reform its tax legislation in order to align the Swiss tax framework with the new international standards introduced by the OECD. The consensus was that the reform should allow Switzerland to fully comply with the EU’s above mentioned criteria and OECD minimum standards.

However, whilst Switzerland was entering into the last stages of adopting the Swiss Corporate Tax Reform III (“CTR III”) Swiss voters rejected the proposed federal law in a public referendum on 12 February 2017. The Swiss government was therefore obliged to review its initial proposal and formulate a new reform package. Consequently, when the EU published its list of non-cooperative jurisdictions in December 2017, Switzerland was included on the EU grey list Switzerland was given a timeframe until the end of 2018 to implement its tax reform.

In September 2018, the Swiss government published a new tax reform package, called the Federal Act on Tax Reform and AHV Financing (“TRAF”). However, due to the fact that the reform package was subject to a 100 day constitutional referendum period, Switzerland was not able to implement new tax legislation before the end of 2018. Since this was in contradiction with the implementation timeframe initially provided by the EU, the decision whether Switzerland would continue to be included on the grey list, or whether the Council would include Switzerland on the 2019 EU blacklist was pending.

The updated list published on 12 March 2019 

On 12 March 2019 the EU Council published an updated version of the list of non-cooperative tax jurisdictions. As previously anticipated, the Council recognized that Switzerland was “prevented from abolishing its harmful tax regimes by the end of 2018 due to genuine institutional or constitutional issues despite tangible process in 2018” and maintained Switzerland’s position on the grey list. Furthermore, the timeframe provided for implementing the new legislation was extended until the end of 2019. We comment on the updated list regarding other countries in our Global Tax Alert.

Next steps regarding Tax Proposal 17 

On 19 May 2019 the Swiss population will vote on TRAF, aimed at implementing the framework legislation required to implement the new OECD compliant tax legislation into Swiss national law. The new federal law will allow the Swiss cantons to implement their own tax legislation in accordance with their own procedural requirements. The legislative autonomy granted to Swiss cantons may lead to substantive and timing differences in the laws adopted, but the general framework of the TRAF should become applicable as of 1 January 2020.

Independent from the outcome of the popular vote, companies should anticipate the replacement of the preferential tax regimes starting 2020 and plan the transition into the new tax framework now. There is no “one solution fits all” approach due to the differences in the cantonal legislations and applied practices and given that various tax regimes are available under current laws.