From 1 January 2020, the Swiss tax reform becomes reality. It is time to assess its impact on cantons in the Romandie with special focus on the economically important Geneva.
In the public vote on 19 May 2019, the Swiss voters approved the Federal Act on Tax Reform and AHV Financing (TRAF). The reform at federal level will already enter into force on 1 January 2020. Following the approval at federal level the cantons are required to implement the new measure into their cantonal 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. At the same time, transitional rules are implemented to smoothen the transfer to ordinary taxation. Additional measures introduced with TRAF include the patent box, R&D super deduction and the notional interest deduction. Parallel to the cantonal implementation of TRAF measures, most cantons also plan a broad reduction of the cantonal tax rates which are necessary to outbalance the abolishment of the preferential tax regimes with the implementation of TRAF.
Tax Reform in Geneva
Reduction of cantonal tax rate
To maintain the tax attractiveness of Geneva, the corporate tax rate will be decreased from 10% today to 3.33% from 2020 onwards. This should result in a reduction of the overall corporate income tax rate (including direct federal tax) on pre-tax income from 24.16% to 13.99% (in the capital city, here Geneva city).
Transitional rules – two-rate system
Specific transitional rules will be available for companies that lose their preferential cantonal tax regimes. It should be noted that the step-up practice is not applicable in the canton of Geneva. The so-called “two-rate system”, however, 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.
The valuation of hidden reserves must be carried out using a generally accepted method. By default, Geneva applies the Circular No. 28 of the Swiss Tax Conference. Other methods could exceptionally be accepted (e.g. cash flow method) if justified and documented.
It is recommended by the Geneva tax administration to:
- request a tax ruling;
- complete and return the form relating to its status at the latest before the 2020 taxation will take effect: cantonal tax administration reviews and confirms hidden reserves with a formal decree/assessment which is subject to complaint; and
- report in your tax return 2020 the amount decided in the decree/assessment.
Capital tax rate
While the annual capital tax rate will remain unchanged at 0.401%, two other measures will be introduced. First, a reduced rate of 0.001% which will be applicable for the proportion of taxable capital on patents and similar rights, qualifying participations and intra-group loans. This is of special significance for holding companies which in general only pay capital taxes.
Second, a corporate income tax credit which will be gradually introduced. From 2024, the capital tax burden will be entirely offset against the corporate income tax. This will reduce capital tax burden for operational companies and will thus make the canton of Geneva equally competitive to the canton of Vaud in that respect.
Other tax measures
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. Geneva introduces a maximum relief of 10%.
To promote and develop R&D activities within the canton, the R&D super deduction will be set to the maximum of 50% in Geneva, i.e., taxpayers will be allowed to deduct 150% of qualifying R&D costs for cantonal tax purposes.
Geneva tax authorities recommend confirming the extent of such measures via tax ruling requests.
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 Geneva does not fall under the definition of a high-tax canton, the NID will not be implemented there.
Furthermore, Geneva will introduce a maximal cantonal tax relief restricted to 9% of taxable profit.
Status of other cantons in the Romandie
The other cantons in the Romandie are also on track to implement the TRAF measures into the cantonal tax laws. Please find in the following an overview of the status:
In the canton of Fribourg, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF on 13 December 2018. On 28 March 2019, a referendum was called. The public vote was accepted with a 55.8% majority on 30 June 2019. The modification will take effect on 1 January 2020.
In the canton of Jura, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF. The referendum period against the bill expired unused on 9 November 2019. The formal publication in the cantonal gazette is still pending.
In the canton of Neuchâtel, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF on 27 March 2019. The referendum period against the bill expired unused on 11 July 2019. The date of entry into force will be on 1 January 2020.
On 15 November 2019, the Valais cantonal parliamentary accepted the changes to the cantonal tax law. The law adopted is first published in the official gazette with a referendum deadline of 90 days. Then, if no referendum is called upon, an enactment act is generally adopted within a few weeks from the expiry of referendum period.
It is remarkable that the canton of Vaud already voted and accepted various changes to the cantonal tax law on 20 March 2016. While the reduced corporate income tax and transitional rules were already enacted as of 1 January 2019 and as of 1 July 2019, respectively, the other measures have not yet been officially published.
Federal tax holiday
The federal tax holiday scheme was introduced to improve the attractiveness of specific regional economic development areas. The legislation provides for discretionary relief from federal corporate income tax for a maximum period of 10 years for industrial enterprises and production-related service providers that meet certain criteria in terms of innovation; new headcount; and new investments. A federal tax holiday will only be granted if the canton also has granted a cantonal tax holiday for the same undertaking.
The Federal Council chose regional areas where qualifying corporations can apply for a federal tax holiday. In this respect, many regions in the Romandie are very attractive as business location, to name a few examples: Yverdon-les-Bains and La Chaux-de-Fonds. The selection of regional economic development areas takes into account strategic regional planning considerations and includes locations with closer proximity to urban areas, the qualifying areas do not mainly include micro communities spread over Switzerland in very remote mountain and rural areas.
In many Romandie cantons, cantonal tax holiday may also be granted in a similar fashion to the federal tax holiday but generally all cantonal territories qualify (at least to certain extent) for tax holiday not only specific regions.
Overall, the possibility to apply for tax holiday in cantons of the Romandie may be viewed as a key differentiator for new innovative businesses in comparison with some other less “generous” cantons of Switzerland.
Comparison of the Romandie cantons
In many cantons, privileged taxed companies can choose to alternatively disclose hidden gains (incl. goodwill) at the time of tax status change in a tax-free manner under the existing tax legislation. Depending on the canton, the stepped-up assets may then be amortized over a period of five to ten years or useful life for tax purposes (so-called “step-up”). In the Romandie, this step-up is only applicable in Jura and Neuchâtel. Accordingly, there is no step-up possible in Fribourg, Geneva, Vaud and Valais.
Although the reduction of cantonal income tax rates is not directly covered by TRAF, many cantons made substantial reductions in income tax rates to outbalance the abolition of cantonal tax privileges. The total tax burden, including federal tax, will range between 13.57% and 17% in the cantons of the Romandie (tax rate of capital city of cantons). The following diagram 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:
For a further comparison, the following table shows a more detailed overview of the planned TRAF measures in each canton of the Romandie.
The above discussed impact on cantons in the Romandie are on a competitive level on domestic and international scales. The planned TRAF measures should thus achieve its goal of retaining (sometimes even increasing) the cantons’ attractiveness.
In addition, the tax reform brings an unprecedented change to the Swiss corporate tax landscape and most corporate taxpayers will be impacted by the most significant overhaul of the Swiss tax system in decades. As the tax reform will enter into force on 1 January 2020 in most cantons, taxpayers are advised to analyze the impact of the upcoming changes and to evaluate appropriate measures to seize opportunities and prevent from competitive disadvantages.