Corporate Tax Reform III – A new version "light"
Following the Swiss rejection of the Corporate Tax Reform III (CTR III) on 12 February 2017, the Federal Steering Committee presented yesterday a more balanced version of a CTR III and a timetable, hereby emphasizing the urgent need to swiftly implement the reform proposal. The new tax regulation may be seen as a light version of the rejected CTR III, but still will lead to a major reform in corporate taxation in Switzerland.
In a referendum held on 12 February 2017, Swiss voters rejected the CTR III. The CTR III was initiated due to the continuous criticism and pressure coming from various international bodies (in particular the European Union) concerning numerous preferential tax statuses and practices currently applied in Switzerland (for example, the mixed company regime at cantonal level as well as the Swiss finance branch and principal company regime at Federal level). The CTR III was supposed to lead to the abolishment of those rules and to the introduction of new measures that are in line with international standards (namely a patent box, a R&D super-deduction, and a notional interest deduction).
A new light version
The Federal Steering Committee, which is comprised of federal and cantonal representatives, has submitted recommendations on a balanced corporate tax reform proposal 2017 for the attention of the Federal Council.
One of the most significant components of the proposed package is the change in the partial taxation of dividends from qualified participations (minimum stake of 10 percent). In view of achieving a political compromise, the Federal Steering Committee proposes an increase in the taxation of qualifying dividends from currently 50 percent on a cantonal level and 60 percent on a federal level to 70 percent. This means, that only a tax relief of 30 percent on dividend income for private individual shareholdings will be granted in the future. Against this background, companies may contemplate paying dividends to their shareholders before the proposed increase in taxation.
The Steering Committee also proposes the introduction of a mandatory Patent Box that is fully compliant with the modified nexus approach of the OECD. The patent box will only be available at the cantonal level and the maximum tax relief for income related to the patent box will be 90 percent. In addition to the introduction of the patent box, the cantons may allow increased tax deductions for research and development (R&D) costs. The deduction for R&D shall be limited to 50 percent of the actual costs and shall primarily focus on personnel expenses incurred in Switzerland. The maximum tax relief on profits arising from the Patent Box and the R&D deduction shall equal 70 percent of the net profit.
In order to compensate the cantons for the losses in tax revenues, the Steering Committee further proposes to increase the share of the cantons to 21.2 percent of the direct federal tax revenues instead of 17 percent.
The aim for the cantons is to disclose their plans for cantonal implementation before the decision on the new tax proposal is made in order to increase the transparency of the proposal.
It is expected that the Federal Council will decide on the parameters of the proposed tax reform already this month. It is anticipated that the Federal Assembly will consult on the tax reform proposal in spring 2018. The implementation at the cantonal level shall according to the Steering Committee take place parallel to the federal proposal. Certain cantons, for instance, the Canton of Zug plans to consult on the new proposal in 2019.
We will continue to closely monitor the developments concerning the potential proposal of a new corporate tax reform and keep you updated accordingly.