The Swiss tax conference in late 2018 released an amended and updated version of Circular 5 concerning the inter-cantonal (and international) allocation of net income and net wealth of banks for Swiss tax purposes.
The revised Circular 5 is effective for financial years ending in 2019. Banks have an option to apply the guidance under the revised version of Circular 5 for previous “open” financial years (e.g., financial year ending 31 December 2018), providing the relevant cantons agree. Read the updated version of Circular 5 (in German, French and Italian).
The following discussion focuses on the inter-cantonal application of the updated Circular 5.
Circular 5 was originally issued in 1995 to provide banks with guidance on the method to allocate the net income and net wealth for corporate tax purposes in Switzerland at an inter-cantonal, as well as at international level. Circular 5 has now been amended to reflect the current practice in the tax allocation and to address certain developments regarding the digitalization of the banking sector. In particular, the revised Circular 5 includes three fundamental changes:
The revised Circular 5 abolishes any “Praecipuum” for the head office canton, given the change in the approach for allocating the net income (from a direct to an indirect method based on the gross salaries). The indirect method already takes into account the importance of the head office by relying on the gross salaries.
The recent changes to Circular 5 will likely affect the overall corporate tax liability of banks that operate in numerous cantons and/or abroad. Banks need to consider running a test simulation applying the new rules to quantify this implication. Moreover, the application of the revised Circular 5 could require amendment of existing rulings with the cantonal tax administrations.
Read a February 2019 report prepared by the KPMG member firm in Switzerland
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