In less than two weeks, the Swiss tax reform will enter into force. The status of Eastern Swiss cantons is particularly interesting: only two out of five cantons will pass the cantonal tax law on time.

From 1 January 2020, the Federal Act on Tax Reform and AHV Financing (TRAF) will enter into force at federal level following the approval by public vote. The cantons are required to implement the new measures into their tax laws and ensure conformity with federal TRAF regulations. Cantonal tax regulations are only applicable once the cantonal process is completed.

This blog article focuses on the status of Eastern Swiss cantons: Appenzell Inner Rhodes, Appenzell Outer Rhodes, Grisons, St. Gall and Thurgovia.

TRAF overview and measures

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 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.

As a result of the TRAF, the Federal Tax Harmonization Act (FTHA) which is a general framework law will substantially be modified. The changes due to TRAF provide mandatory and voluntary guidance on provisions in the cantonal tax laws.

The following table illustrates the mandatory and voluntary corporate tax measures that will be implemented with the reform:

Legislative procedure and 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.

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 (ordinances) for the transitional period. For a few cantons with public vote in 2020, the tax reform law may have retroactive effect as per 1 January 2020.

The mandatory provisions which will become directly applicable at cantonal level from the beginning of next year are:

  • Abolishment of preferential tax regimes
  • Patent box
  • Two-rate system
  • Immigration step-up

Status of Eastern Swiss Cantons

Most Eastern Swiss cantons have not yet finalized the cantonal legislative process of their cantonal tax law. Please find in the following an overview of the status:

Appenzell Inner Rhodes

In the canton of Appenzell Inner Rhodes, the cantonal assembly “Landsgemeinde” will vote on the amendment of the cantonal tax law for the implementation of TRAF on 26 April 2020. The cantonal government issued an ordinance for the transitional period on 3 December 2019.

Appenzell Outer Rhodes

In the canton of Appenzell Outer Rhodes, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF on 2 December 2019 which is subject to an optional referendum with a deadline of 4 February 2020. No referendum is anticipated and there is no ordinance issued for the transitional period so far. If a referendum is called and a public vote will be held, the cantonal government plans to issue respective “emergency” regulations. In any case, concerned companies will lose their preferential cantonal tax regimes.

Grisons

In the canton of Grisons, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF on 29 August 2019. The referendum period against the bill expired unused on 10 December 2019. The expiry of the referendum period has been formally confirmed in the cantonal gazette on 19 December 2019.

St. Gall

In the canton of St. Gall, the cantonal parliament approved the amendment of the cantonal tax law for the implementation of TRAF on 10 February 2019. The referendum period against the bill expired unused on 23 April 2019.

Thurgovia

The mandatory vote on the amendment of the cantonal tax law will take place on 9 February 2020. The canton of Thurgovia has not yet issued any regulations for the transitional period. If the tax law will be rejected by the public, the canton of Thurgovia will likely issue regulations for the transitional period

Cantonal implementation: Eastern Swiss cantons

For a further comparison of the cantons, the following table shows a more detailed overview of the planned TRAF measures in the cantons of Eastern Switzerland.

Conclusion

Three out of five Eastern Swiss cantons will not have finalized their cantonal legislative procedures in 2019 in light of the TRAF. Appenzell Inner Rhodes already issued an ordinance for the transitional period while Thurgovia and Appenzell Outer Rhodes will need to issue an “emergency” ordinance if the public vote is rejected or the referendum is called, respectively.

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.

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