During its meeting on 13 November 2019, the Swiss Federal Council approved the Patent Box Ordinance, the NID Ordinance and the updated Ordinance on the Recognition of Foreign Withholding Taxes.
The draft wording of all three approved TRAF ordinances received positive feedback during the consultation process. Accordingly, the Swiss Federal Council made only minor changes. The approved TRAF ordinances will enter into force on 1 January 2020.
New Patent Box Ordinance
The Patent Box Ordinance governs the Swiss application of the OECD standard for patent boxes. It provides detailed guidance on the computation of the taxable profit derived from IP and related rights eligible for a partial relief.
The introduction of a patent box at the cantonal level allows for a preferential treatment of income derived from patents and similar rights developed in Switzerland. The patent box provides for a maximum tax base reduction of 90% on such income. Using the so-called modified nexus approach, the patent box complies with the anti-BEPS rule adopted by the OECD countries in 2015.
The approved Patent Box Ordinance generally corresponds to the draft ordinance issued by the Swiss Federal Department of Finance in September 2017. Only minor adjustments have now complemented the approved Patent Box Ordinance.
New Notional Interest Deduction (NID) Ordinance
With the NID, imputed interest on a portion of equity capital can now be deducted from the taxable profit. The new NID Ordinance provides for important guidance regarding the computation of the NID. This gives taxpayers necessary planning security with respect to the impact that this instrument will have. Currently, the NID is only introduced in the canton of Zurich.
The adopted NID Ordinance generally complies with the draft that has been issued in April 2019. An important improvement is, however, the new wording in art. 2 para. 4 and in art. 4, which provides for a consistent mechanism that aligns the international and intercantonal tax asset allocation with the computation of the NID. This is beneficial for eligible financing companies.
Update of the Ordinance on the Recognition of Foreign Withholding Taxes
The Ordinance on the Recognition of Foreign Withholding Taxes governs how non-recoverable foreign withholding taxes on dividends, interest and royalties are considered for taxes due in Switzerland.
The amendments align the Ordinance on the Recognition of Foreign Withholding Taxes with the TRAF. All references to the now abolished cantonal status companies have been deleted. The rules for the calculation of the maximum amount to be recognized now explicitly consider the impact of the patent box, NID and R&D super deductions.
Additionally, the updated Ordinance on the Recognition of Foreign Withholding Taxes implements important improvements for the computation of the maximum amount of foreign withholding taxes to be recognized. This enhances the avoidance of international double taxation. These improvements include namely the following:
- Introduction of a new rule in art. 2a that allows permanent establishments of foreign companies to apply for a recognition of foreign withholding taxes;
- Introduction of a new art. 8 para. 1 according to which the recognition of foreign withholding taxes is computed based upon the effective income and profit tax burdens on the federal and the cantonal/communal level. Under the former version of the ordinance, this amount was divided between the federal government and the cantons in the ratio of one third to two thirds. This flat-rate distribution key did not correspond to the real distribution of the tax burden and was disadvantageous for corporations.
Nevertheless, interesting measures proposed by stakeholders in the consultation process unfortunately were not considered in the adopted ordinance. For example, the Swiss Federal Council did not introduce a basket rule to determine the maximum amount of foreign withholding tax to be recognized. Furthermore, the Swiss Federal Council did not include more generous lump-sum deductions on royalties. Both proposals would have rounded up measures of the TRAF to attract and enhance R&D activities in Switzerland.
The approved TRAF ordinances mark an important closing of the legislative process of the TRAF at federal level.
The final technical subtleties have been ironed out. This allows now for a final and thorough analysis of the implications. It is very important that all taxpayers familiarize themselves with these measures now.