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Switzerland: Update on tax reform legislation

Switzerland: Update on tax reform legislation

Legislation (known in English as the “Federal Act on Tax Reform and AHV Financing”) was accepted by Parliament on 28 September 2018. This legislation is subject to an optional referendum with a key date in mid-January 2019. If a referendum is called, a public vote could be held on 19 May 2019.

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Background

More than 10 years ago, the European Union, and later the OECD, began to look at Switzerland regarding the country’s privileged taxation of holdings—both mixed and domiciliary companies. Switzerland’s first attempt to respond, in the form of the Corporate Tax Reform III (CTR III), was rejected by Swiss voters on 12 February 2017. 

The Federal Council and cantons turned to take another attempt at potential responses. Following a new consultation process, the Federal Council submitted its dispatch on Tax Proposal 17 (TP17) to Parliament in March 2018. This proposal was influenced by CTR III—but was a “slimmed-down” version. Parliament made some amendments to TP17 and also linked it with a social equalization measure to secure additional financing of the old age and survivors’ insurance (AHV). The result was the combined Federal Act on Tax Reform and AHV Financing that was accepted by Parliament on 28 September 2018. 

Tax reform measures

In principle, the tax reform pursues the same three main objectives as CTR III: 

  • Safeguarding the tax appeal of Switzerland as a business location
  • Promoting the international acceptance of Switzerland’s corporate tax legislation
  • Providing sufficient tax revenues to finance public activities

The legislation focuses on legal and investment security and generally to enhance the competitiveness of the Swiss tax system, while repealing certain tax regimes. The loss of these tax regimes is to be cushioned in various ways, including cantonal measures. In a next step, it is up to the cantons to implement their respective measures based on the framework offered by the Confederation. 

Overview

Certain measures of the tax reform package include the following (read more in a blog item posted by the KPMG member firm in Switzerland).

  • The central component of the reform continues to be the repeal of status companies and certain tax practices at the federal level. A temporary special tax rate solution would be intended to allow the cantons to avoid over-taxation of companies switching to ordinary taxation.
  • The main element of the new proposed compensatory measures would be the mandatory introduction of the patent box at cantonal level. The box would be limited to (Swiss and—if comparable—foreign) patents and intellectual property (IP) rights similar to patents. Qualifying income would be exempted by a maximum of 90%, taking into account the modified nexus approach.
  • The (cantonal) additional deduction for research and development (R&D) expenses would be voluntary for the cantons and (like the patent box) reflects a clear commitment to Switzerland’s position as a location for research and industry. The basis for the additional R&D deduction of a maximum of 50% would be as follows: (1) personnel costs directly related to the R&D carried out in Switzerland by the taxpayer, plus a 35% premium (for other R&D costs), but not exceeding the total R&D costs; or (2) 80% of the cost of R&D performed and invoiced by third parties in Switzerland.
  • The notional interest deduction (NID) would be an optional (cantonal) measure in the new tax legislation exclusively for high-tax cantons (only the canton of Zurich would be entitled to introduce this measure). Due to the current low interest rate environment, this measure would be interesting for intra-group financing, whereby a higher (arm’s length) interest rate could be applied.
  • The overall limitation of measures would impose a ceiling or cap on the effect of the patent box, additional R&D deduction, and notional interest deduction (plus depreciation on disclosed hidden reserves in the tax balance in case of a change of status under current law) at 70% in order to guarantee a minimum taxable profit of 30%. There would be a greater rate of taxation of dividends for qualifying participations (at least 10%) of individuals. In the future, 70% (federal tax) or at least 50% (cantonal tax) of dividend income would be taxable (whereas currently, only 60% of income from investments held as private assets is taxable at the federal level, with the cantonal thresholds varying between 35% and 70%). 
  • Cantons would have optional capital tax relief on equity capital attributable to participations, patents, and similar rights as well as intra-group loans.
  • If foreign companies relocate to Switzerland, these companies could disclose hidden reserves, including goodwill, as "tax-exempt" and thus benefit from additional depreciation in the first few years (under the “step-up upon relocation” measure).
  • In order to avoid international double taxation, Swiss permanent establishments of foreign companies would be able to benefit from the lump-sum tax credit.
  • There would be an increase in the cantonal share of direct federal tax revenue from the current rate of 17% to 21.2%. 
  • The rules for natural persons residing in Switzerland would be “tightened up.” Under current law, individuals can generally sell a stake of less than 5% in a company to a company in which they own at least 50% of the shares tax-free. 
  • The capital contribution principle would be restricted. Companies listed on a Swiss stock exchange could only pay out tax-free capital contribution reserves if they distribute taxable dividends in the same amount (so-called “repayment rule”). 

 

Read a September 2018 report prepared by the KPMG member firm in Switzerland

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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