Following the Swiss rejection of the Corporate Tax Reform III (CTR III) on 12 February 2017, the Federal Council published a new preliminary draft bill (Vernehmlassungsvorlage) on corporate taxation for public discussion on 6 September 2017. This new round of legislation is expected to lead to a comprehensive reform in Swiss corporate taxation.
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 regimes and practices currently applied in Switzerland (e.g. the holding, domiciliary, and 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).
Tax Proposal 17 – a new version "light"
The Federal Council has now published a new preliminary draft bill for public discussion which includes many of the elements of the CTR III, but also respective counter-financing and other measures in order to achieve a politically feasible solution. The proposed measures include:
- Abolishment of the current preferential cantonal tax regimes (holding, domiciliary, and mixed company status). The Federal regimes (Swiss finance branch and principal company) shall be abolished via changes in practice.
- Introduction of a mandatory cantonal patent box regime which complies with the OECD's modified nexus approach. The patent box will be available in case of patents or comparable rights. The maximum tax relief available for respective IP income will be limited to 90%. Cantons may opt for a less extensive relief. Unlike provided in the CTR III, the patent box will, however, neither be available for SMEs inventions without patent protection nor for software which is only protected by copyright law. However, according to the Federal Council, in case such software is protected by a foreign patent, it might still qualify for the patent box for practicability purposes.
- Option for cantons to introduce a super-deduction of up to 50% on certain Swiss R&D expenses. Such Swiss R&D expenses would be personnel expenses directly allocated to R&D plus 35% of other R&D personnel expenses. Furthermore, 80% of the fees paid for (Swiss) contract research will also qualify for the super-deduction.
- The maximum tax relief on profits arising from the patent box and a potential R&D super-deduction would be 70% of the net profit. Cantons may opt for a lower maximum tax relief. The preliminary draft bill provides that no losses must arise from the tax relief provisions.
- For companies currently benefitting from a preferential cantonal tax status (holding, domiciliary, mixed company status), the Federal Council proposes transitional rules with a separate taxation of certain hidden reserves created during the time such companies were benefitting from the preferential cantonal tax status. For companies deciding to already give up such status prior to the effective date of the future tax regulations via a step up on the hidden reserves, the tax benefit arising from the respective amortizations and depreciations will also be considered for the purpose of establishing the maximum tax relief available as described above.
- Permanent establishments of foreign companies which are subject to ordinary income and capital taxation in Switzerland may benefit from a tax credit on foreign source taxes which is currently only available for legal entities.
- Option for cantons to provide a relief on capital tax in case of patents and comparable rights as well as in case of (qualified) shareholdings.
- As a counter-financing measure, the so-called partial taxation of dividends from qualified shareholdings (applicable in case of a minimum stake of 10%), the Federal Council proposes to increase the taxation of qualifying dividends at a Federal level from currently 60% (in case private assets) to 70% on both. Cantons will need to tax at least 70% of such dividends as well.
- Also, the Federal Council proposes to amend the current regulations concerning the so-called transposition (taxation of income stemming from the sale of shares held as private assets by an individual to a company controlled by such individual while capital gains from movable property held as private assets are generally exempt from tax). While under the current rules, a 5% interest needs to be sold in order to trigger taxation, no such threshold shall apply based on the proposed rules.
- In order to compensate the cantons for the losses in tax revenues expected to arise from the proposed changes in legislation, the Federal Council further suggests to increase the share of the cantons in Federal income tax revenues from currently 17% to 20.5%.
- Finally, the proposal also provides for an increase of the minimum family allowance amounts cantons must provide by CHF 30 per month.
The general public is invited to participate in the public discussion until 6 December 2017. It is expected that Federal Council will then publish a tax bill for parliamentary consultation in spring 2018. A potential entry into force would be possible by 2020 the earliest whereby the Federal Council proposes that the abolishment of the current cantonal tax regimes with the respective transitional rules will enter into force separately and as a first step in order to give the cantons sufficient time to adapt their legislation with respect to the rest of the new regulations.