On 10 July 2019, the canton of Ticino presented its proposal on how to implement the Swiss tax reform in Ticino. The new rules will enter into force as of 2020, so planning for the change is immanent.
Abolishment of preferential tax regimes
Like all other cantons, Ticino must abolish tax privileges for holding companies, domicile companies and mixed companies. In 2016, only 3.7% of all taxpayers were taxed according to a preferential tax regime. However, these companies contributed over 20% of the annual tax revenue generated by legal entities (CHF 144 Mio.) and are important for Ticino. Therefore, the Ticino government is proposing a set of internationally accepted measures to replace certain tax regimes and to maintain the attractiveness of the canton from a tax perspective.
Disclosure of hidden reserves
The abolishment of preferential tax regimes would result in the ordinary taxation of hidden reserves that were generated during the time that the privileged taxation applied. To mitigate this effect, cantons are required to introduce transitional rules. For that purpose, the so-called “two-rate system” will be introduced. Hidden reserves, including any self-created goodwill, at the date of transition from privileged to ordinary taxation, can be confirmed by the tax authorities upon request. Profits relating to the realization of hidden reserves that were generated under a privileged tax regime are subject to a separate tax rate over a period of five years. Ticino plans to apply a competitive tax rate of 1% to these profits. At the same time, the current step-up practice, set out in circular letter 29/2017, will be abolished from 2020. This means that the two-rate system will also be applied to companies that disclosed hidden reserves under the circular in the past.
It is important to start analyzing the opportunities presented by the transitional rules by evaluating the various scenarios. The different options for application of the transitional rules may present different beneficial outcomes for a company. Amongst others, aspects to be considered include timing, valuation method and the application of other available measures. EY has developed a comprehensive tool to simulate potential outcomes based on a variety of different scenarios and parameters. Using this tool, we can assist in identifying the most beneficial option.
In the case of a migration to Switzerland, the so-called step-up system is applied. Hidden reserves, confirmed by the tax authorities, can be tax effectively depreciated. According to the Ticino cantonal government proposal, the tax-free disclosed hidden reserves can be depreciated annually over a period of ten years.
According to federal legislation, all cantons must introduce a so-called “patent box”. This measure provides tax relief of a maximum of 90% of the income derived from patents and similar rights at cantonal and communal level. Ticino plans to make full use of this measure by introducing the maximum relief of 90%.
Overall tax relief
The canton of Ticino intends to introduce a maximum tax relief of 70%. This is a very positive development, as a lower relief limitation was previously planned. With the 70% limit, the canton of Ticino reaches the maximum possible tax relief in order to maintain the attractiveness compared to other Swiss cantons.
Capital tax relief
Companies with a preferential tax regime usually benefit from a reduced capital tax rate. To mitigate the increase from the reduced capital tax rate when moving to ordinary taxation, the cantons can introduce a capital tax relief on patents and similar rights, qualifying participations and intra-group loans.
Since 2018, a capital tax relief on qualifying participations has been available in Ticino. In addition, the government has proposed to introduce capital tax relief on qualifying patents and similar rights. Regarding intra-group loans, the government has decided (at this stage) not to implement a specific deduction. However, such a measure may still be introduced in a second step should this be necessary.
The change from privileged to ordinary taxation generally results in a significant increase of the capital tax burden. Such increase might be mitigated in case a company can apply for additional tax relief that will be introduced for capital tax purposes.
R&D super deduction
The reform allows for the introduction of a super deduction on domestic R&D costs at the cantonal level. This measure aims at promoting R&D activities. Cantons may allow the deduction of up to 50% of qualifying R&D costs from the taxable income. To promote and develop R&D activities in its territory, the Ticino cantonal government has decided to propose the maximum deduction rate of 50%.
Notional interest deduction (NID) on surplus equity
The notional interest deduction (NID) is basically granted on equity which, in the long-term, exceeds the average equity required for business operations. It is a measure only intended for application in “high-tax” cantons. Since Ticino does not fall under the definition of a high-tax canton, the NID will not be implemented in there.
In addition to the mandatory and optional measures outlined above, the canton of Ticino has decided to implement further tax measures.
Reduction of cantonal tax rate and cantonal multiplier
In order to maintain the tax attractiveness of Ticino, the corporate tax rate will be gradually decreased from 9% today to 8% for the period 2020 to 2024. From 2025 onwards, the rate will be further reduced to 5.5%. The cantonal multiplier will be reduced from 100% today to 98% for the period 2020 to 2024. From 2025 onwards, it will be further reduced to 96%.
These measures should lead to a future envisaged ETR of approx. 13.7% in the most attractive communes, which should allow the current tax privileged companies to almost maintain their current taxation level.
Differentiated communal multiplier
Today, the Ticino applies one multiplier for both individuals and legal entities. From 2025 onwards, communes will be entitled to introduce different communal multipliers. The different multipliers are subject to the following conditions: (i) the communal multiplier must not be below 40% for both individuals and legal entities and (ii) the spread between the communal multiplier for individuals and legal entities must not exceed 20%.
Increased creditability of corporate income tax against capital tax
The creditability of corporate income tax towards capital tax will be increased from 10% to 16% (as from 2025).
Currently, Ticino can be regarded as a high-tax canton when comparing its profit tax rates with other cantons. The reform aims to reduce the overall tax burden bringing Ticino to a competitive level within Switzerland. While Ticino plans to implement the measures foreseen by the reform to a large extent (R&D super deduction and patent box), it is also planned to reduce the cantonal profit tax rate and to increase the creditability of the corporate income tax towards capital tax. Following this, Ticino’s implementation should achieve its main goal of retaining the canton’s attractiveness.