Swiss Government publishes Bill on Tax Proposal 17
More than a year after the rejection of the Corporate Tax Reform III, the Swiss Federal Council released a revised bill on corporate taxation on 21 March 2018. The bill, commonly referred to as Tax Proposal 17 aims to abolish preferential tax regimes and introduces tax relief measures such as a patent box and research and development deductions. Thereby, Switzerland complies with international standard of taxation and remains competitive.
The CTR III was intended to adjust the Swiss tax system to international standards. Particularly, preferential tax regimes (holding, domiciliary, and mixed company regimes) considered as harmful tax practices, were to be eliminated in order to avoid adverse counter-measures by the EU. In addition, CTR III contained new state of the art legal provisions, compatible with international standards, which were intended to provide for an attractive tax environment to companies. A decisive factor for the Swiss people’s rejection of CTR III was its complexity and a perceived uncertainty on its consequences. Thus, it is no surprise that TP 17 represents a consensus which does not fundamentally defer from CTR III.
Contents of the Tax Proposal 17
The bill contains the following modifications of the Federal Tax Harmonization Act and the Federal Direct Tax Act: The first feature of TP 17 is the abolition of cantonal preferential tax regimes (holding, domiciliary and mixed company status). The same fate befalls preferred federal regimes (Swiss finance branch and principal company). Companies with such regimes will no longer benefit from preferential tax rates and will henceforth be taxed based on ordinary federal and cantonal tax rates. To mitigate the increased tax base some cantons have already announced their plans to reduce their corporate tax rates in order to keep their attractiveness. Furthermore, the transitional measures provide for preferential taxation of hidden reserves of such companies, provided those reserves will be realized within 5 years. As an important new feature, the bill further contains the possibility to unveil hidden reserves (step-up in basis). Companies which relocate to Switzerland are allowed to unveil their hidden reserves and self-generated goodwill income tax-free. Because of the possibility to amortize such assets, the income tax liability can be reduced in future years.
Additionally, the TP 17 bill aims to introduce a mandatory patent box regime on a cantonal level in accordance with the modified nexus approach, developed by the OECD. As a result, tax relief of up to 90% will be available for profits arising from patents or comparable rights (such as supplementary protection certificates or semi-conductor topographies). To strengthen Switzerland’s position as an innovative country, the Swiss Federal Council considers it appropriate that computer-implemented inventions may as well qualify for the Swiss patent box. The profits arising from patents and comparable rights shall be determined pursuant to the residual method. Further, the bill authorizes the cantons to implement an R&D super-deduction of up to an additional 50% of business-related costs for R&D activities performed in Switzerland. The super-deduction will be calculated as follows: general R&D costs plus 135% of personal costs plus 80% of invoiced third party R&D costs. The aggregate amount will then be multiplied by maximum 1.5 resulting in the deductible amount.
The tax relief resulting from the patent box and the R&D super-deduction is capped at 70% of the taxable profit before offsetting any net operating losses of the Swiss legal entity. It is paramount to mention that Swiss cantons announced their intention to reduce their effective tax rates. This should be affordable because the cantonal share of federal income tax will be increased from 17% to 21.5%. On average, the ETR for all companies will be approximately 14%, whereas in some cantons there will be an effective tax rate of about 12% (including federal, cantonal and municipal taxes).
In order to find a majority for TP 17 in the political process, the proposal comprises some further measures: an increase of the taxation of dividends for individuals from qualified shareholdings which in the future shall be exempt from taxation up to 30% and a slight increase of family allowance.
The bill has been handed over to Parliament and is due for approval in the September 2018 at earliest. Subject to an optional referendum, the new provisions could enter into force at the beginning of 2020. The transitional provision regarding preferentially taxed companies may enter into force immediately upon approval of the bill.
So far the bill was favorably received by most cantons and political parties. Some cantons will most likely promote the inclusion of the notional interest deduction in the final tax law. We will continue to closely monitor the parliamentary debates and follow-up with alerts as the bill develops.