The Swiss tax reform (STAF) has abolished important tax privileges and introduced new incentives with the aim of maintaining Switzerland's status as an attractive business location. This creates (transfer pricing) planning opportunities and questions on operational details.
With effect from 1 January 2020, the STAF has introduced the patent box and R&D incentive regimes so that Switzerland remains an attractive location for innovative companies. Irrespective of size and industry, the patent box regime enables companies to lower their tax base if they own patents or comparable rights (e.g. licenses) and incur R&D expenses in Switzerland. Under a relatively narrow definition of patents or comparable rights that qualify for the patent box, the income arising from such patents or comparable rights is subject to a reduced tax rate. In case companies solely generate royalties by licensing patents, this income can be determined easily and directly. On the other hand, if royalties are embedded in product prices, this income must be determined indirectly. However, the tax reduction for the patent box income is tied to substance requirements of the OECD's modified nexus approach, which is directly related to the R&D activities performed in Switzerland.
In addition to the patent box regime, many cantons (optional measure on a cantonal level) have introduced a special deduction for R&D expenses of up to 50% of Swiss R&D activities. Such special deductions for R&D costs can add up to 70% of the taxable income ("relief limit").
Adapted transfer prices / pricing systems can help taxpayers to increase the benefits from the new instruments. Over the last months questions and considerations came up primarily on the aspects outlined in the following. As always these TP considerations are linked to broader business topics:
Given the rising transparency demands globally, it can be expected that an instrument like the patent box in Switzerland will pique the interest of foreign tax authorities. Thereby, the nexus factor could draw misleading conclusions on the actual value contributions and profit allocations within the R&D setup. This is due to the fact that costs do not necessarily reflect the correct value of an R&D activity. This should be addressed appropriately in the transfer pricing documentation.
Conclusion: As we have seen, detailed questions and considerations can arise when analyzing or implementing the new measures available under STAF especially with regard to the patent box. Companies should be aware of this to avoid pitfalls while still tapping into its full potential.