Update on tax proposal 17
After the rejection of the Corporate Tax Reform III (CTR III) on 12 February 2017, the Federal Council adopted the dispatch on the tax proposal 17 (TP 17) containing new measures on 21 March 2018.
Background and content
The process to reform the Swiss corporate tax system was initiated several years ago with the CTR III (cf. Taxlink – September 2016: Issue 112). After the CTR III was rejected by the Swiss voting population, the TP 17 was launched. At the same time, the current tax legislation remains in force and preferential tax regimes for holding companies, mixed companies and domiciliary companies are available until revised legislation enters into force. However, there is still agreement on the necessity of a tax reform. The purpose of the TP 17 is to abolish the preferential tax regimes and to introduce countermeasures to preserve the international competitiveness of Switzerland. Further, the requirements of the cantons must be taken into account, and the reform needs to generate sufficient tax revenues.
Against this background, several measures were published in a consultation proposal on 6 September 2017 (cf. Taxlink – February 2018: Issue 116). On 21 March 2018, the Federal Council adopted the dispatch on the TP 17. There are no major changes in the dispatch to parliament as compared to the
consultation proposal. The tax proposal includes, but is not limited to the following measures (more details to the different measures can be found in Taxlink – February 2018: Issue 116):
- Abolishment of cantonal tax privileges for status companies (holding, mixed and domiciliary companies) as well as certain federal tax practices. After the abolishment, the realization of hidden reserves generated under a tax privilege can be taxed separately for a maximum of five years.
- Introduction of a mandatory patent box and optional R&D super deductions on cantonal level.
- Introduction of a tax-neutral step-up of hidden reserves upon migration (incl. transfer of businesses, operational units or functions) to Switzerland.
- Provision of support to the cantons so that they can afford to reduce corporate income tax rates (currently, effective tax rates between 12 and 18 percent are foreseen).
- Optional introduction of a reduction in the calculation of capital taxes on equity relating to participations as well as patents and similar rights.
- Increase of taxation of dividends from qualifying shareholdings of individuals to 70 percent on federal and to at least 70 percent on cantonal level.
- Extension of the entitlement to lump sum tax credit for Swiss permanent establishments of foreign companies.
Now that the legislative proposal is submitted to parliament, it will be discussed by the Council of State during summer session and by the National Council during autumn session.
A decision of the parliament shall be reached in autumn 2018. It is expected that the following subjects will be most controversial in parliamentary debate:
- The introduction of the notional interest deduction was removed from the TP 17 as compared to the CTR III. In particular, the canton of Zurich, as a financial center, is interested in the introduction of the notional interest deduction. Various cantons support this endeavor.
- The trade association is opposed to increased dividend taxation for individuals.
- Left-wing parties call for corrections of the capital contribution principle from the corporate tax reform II and even higher dividend taxation.
Hopefully, the initial reactions to the proposal are only political skirmishes and the politicians are aware of their responsibility and the importance of the tax proposal for Switzerland. First parts of the reform could – after the expiry of the referendum period or after the proposal has been accepted by the Swiss voters – enter into force in 2019. The major part would only be implemented in 2020.
Fabian Duss and Marc Dietschi, ADB ALTORFER DUSS &