On 17 September 2019, the parliament of the canton of Aargau approved the draft bill for the tax reform in Aargau.

Overview

Following the approval of the Federal Act on Tax Reform and AHV Financing (TRAF) in May 2019, which will enter into force as of 1 January 2020, the cantons are required to implement the new measures into their tax laws and ensure conformity with the federal TRAF regulations.

The tax privileges for holding companies, domicile companies and mixed companies are internationally no longer accepted and will be abolished. Transitional rules are supposed to ensure a smooth transfer to ordinary taxation. Additional measures introduced with TRAF include the patent box, R&D super deduction and the notional interest deduction. More detailed insights into the corporate tax measures and the cantonal implementation status can be found in the blog article “Swiss cantons are on track to implement Swiss Tax Reform on time”.

Tax reform in Aargau

On 17 September 2019, the cantonal parliament approved the changes to the cantonal tax law regarding the Swiss cantonal tax reform. Thus, the draft bill regarding the cantonal tax reform may enter into force on 1 January 2020 subject to optional public vote.

To remain attractive as a business location and to smoothen the transition to ordinary taxation, tax reform in Aargau will introduce the two-rate model, the patent box as well as the R&D super deduction.

Aargau does not project to reduce its cantonal corporate income tax rate as it provides for the advantages of the transitional and additional measures above. Aargau will not introduce the notional interest deduction (NID) available for cantons with high corporate income tax rates. Aargau applies a progressive tax rate and its minimum tax rate does not meet the minimum effective tax rate of 18.03% required. However, the cantonal capital tax rate shall be reduced from 1.25‰ to 0.75‰ (without consideration of multiplier).

Specific transitional rules for companies losing their preferential cantonal tax regimes shall be available. Until 1 January 2020, companies may profit from the available step-up practice. Under the current step-up practice of Aargau, stepped-up assets can be amortized tax-effectively over a maximum period of ten years. In addition, the so-called “two-rate system” will be newly introduced. Profits relating to the realization of hidden reserves that were generated under a privileged tax regime will, upon request, be subject to a reduced tax rate until the end of 2024 (reduced cantonal income tax rate: 2.5%).

The introduction of an OECD-compliant patent box regime is mandatory for all cantons. This measure will provide tax relief of a maximum of 90% of the income derived from patents and similar rights at cantonal level. Aargau makes full use of this measure by introducing a maximum relief of 90%. With regard to entry cost for the patent box, Aargau choses the offsetting solution, which foresees for patent box benefits to be offset with accumulated R&D costs within the first 5 years.

In order to promote and develop R&D activities within the canton, the R&D super deduction will be set to the maximum of 50% in Aargau, i.e., taxpayers will be allowed to deduct 150% of qualifying R&D costs for cantonal tax purposes.

Furthermore, Aargau will make use of the maximal cantonal tax relief, which is set to 70%.

As the privileged tax regimes will also be abolished for net equity tax purposes, a net equity relief shall be introduced. The net equity tax relief in Aargau shall be claimable on the net equity attributable to qualifying participations, patents and intercompany loans.

Conclusion

After the approval of the tax reform, both the federal as well as the cantonal tax reform measures will enter into force on 1 January 2020.

The tax reform brings an unprecedented change to the Swiss corporate tax landscape. As the tax reform will enter into force on 1 January 2020, taxpayers are advised to start analyzing the impact of the upcoming changes and to evaluate appropriate measures now in order to seize opportunities and prevent from competitive disadvantages.