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Switzerland: Tax allocation rules, net income and wealth of banks

Switzerland: Tax allocation rules, net income

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.


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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:

  • Allocation of net income: The revised Circular 5 emphasizes that the inter-cantonal allocation of the net income for corporate tax purposes is only to be carried out by using the indirect method based on the gross salaries as defined for social contribution purposes (AVS or AHV). The gross salaries approach is viewed as better reflecting the economic performance generated in each relevant location, rather than the direct method relying on the bank’s financial accounts. This approach is not entirely new as a few banks already relied on the gross salaries for allocating their net income and net wealth for inter-cantonal tax purposes.
  • Advance to the head office (so-called “Praecipuum”): The prior version of the circular foresaw an attribution of a profit pre-share (“Praecipuum”) of generally 10% of the net income to the canton of the head office.

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.

  • Allocation of net wealth (capital): Previously, the net wealth allocation for corporate tax purposes principally followed the assets (book value) reported in the bank’s financial accounts. Under the revised Circular 5, this regime is no longer applicable. The new version of Circular 5 foresees that banks must also use the indirect method based on the gross salaries to allocate the net wealth between the different cantons (using the same approach as for net income purposes).

KPMG observation

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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