Swiss voters have approved the Swiss Tax Reform (TRAF). It will enter into force as of 1 January 2020. The tight time frame for the implementation at cantonal level required prompt actions by the cantonal legislators.
The approval of TRAF by the Swiss voters brings an unprecedented change to the Swiss corporate tax landscape. The tax reform’s objective is to secure the long-term tax attractiveness of Switzerland as a business location and to restore international acceptance of the Swiss tax system and at the same time securing an appropriate level of tax revenue.
One of the consequences of TRAF is the change of the Federal Tax Harmonization Act (“FTHA”). The FTHA is a general framework law. The changes in the FTHA due to TRAF provide mandatory and voluntary guidance on provisions in the cantonal tax laws for income and capital taxes, i.e. the cantons are required to implement the mandatory guidelines of the FTHA into cantonal law.
The following table illustrates the mandatory and voluntary corporate tax measures that will be implemented with the reform:
More detailed insights into the corporate tax measures can be found in the blog article “Swiss Corporate Tax Reform: result of the federal vote”.
The FTHA will enter into force at federal level on 1 January 2020. At cantonal level, however, the measures of the TRAF will be implemented through modifications of the cantonal tax laws. The legislative procedure and timing of the implementation varies from canton to canton. Cantonal tax regulations are only applicable once the cantonal process is completed. The interplay between the federal and cantonal tax laws also has tax accounting implications which need to be considered.
Status of cantonal implementation of TRAF
Due to the tight time frame, the cantons face the challenge to implement the TRAF measures into their cantonal laws on time. In a lot of cantons, the changes to the cantonal tax laws might be subject to a public vote, which requires additional time.
Certain cantons have already implemented the changes into their cantonal tax laws before the approval of TRAF at federal level. Other cantons had a public vote at the same time or soon after the approval of TRAF and in certain cantons no referendum for a public vote was called. Therefore, the legislative procedure is already finalized in the following cantons:
- St Gallen
- Vaud (in relation to the tax rate reduction)
In several other cantons, the parliamentary discussions about the cantonal tax laws have been finished and the period to call a public referendum is ongoing. Several public votes are still expected this fall with an entry into force of the cantonal tax laws as per 1 January 2020.
However, for few cantons a detailed time schedule is not yet available or a possible public vote is only expected in 2020. This also includes the cantons whose implementation at cantonal level was rejected by the public (Solothurn). In such case, the tax reform law will likely have retroactive effect as per 1 January 2020.
Parallel to the cantonal implementation of TRAF measures, most cantons also plan a broad reduction of the cantonal corporate tax rates. The cantonal corporate tax rate reductions are necessary to outbalance the abolishment of the preferential tax regimes with the implementation of TRAF.
At cantonal level, the implementation of reduced cantonal corporate tax rates is subject to the same legislative procedure as the implementation of the other TRAF measures. Certain cantons already lowered their corporate tax rates as per 1 January 2019, whereas most cantons plan an entry into force of the lowered corporate tax rates as per 1 January 2020.
The following table shows the ordinary tax rates (on pre-tax income) before the reform and the envisaged tax rates (on pre-tax income) after the reform as well as the current status of the implementation of the tax reform into the cantonal tax laws:
Interdependency between cantonal and federal law
If the legislative procedure for the cantonal implementation of the TRAF measures is passed on time, the cantonal tax reform provisions will enter into force simultaneously with the federal provisions, i.e. as per 1 January 2020. Currently, it is expected that this should be the case for most of the cantons.
If the cantonal implementation law is not passed on time, the mandatory provisions of the FTHA will generally become directly applicable on the date of the entry into force of the federal law, i.e. as per 1 January 2020. In such case, the cantonal governments would have to issue respective regulations (ordinance) for the transitional period.
Most cantons are on track to implement the TRAF measures into their cantonal laws on time. Also, most of the other cantons that will not be able to finalize their cantonal legislative procedure still in 2019 are confident to have a TRAF-compliant cantonal tax law for the year 2020 (likely with retroactive effect as per 1 January 2020).
Tax payers should closely monitor the updates on the legislative procedure in the relevant cantons. It is expected that also more and more specific information from the tax administrations regarding the transition to the new cantonal tax laws will be available. Therefore, it is time now to analyze the options and opportunities provided by the implementation of the tax reform at cantonal level.