After the publication of the dispatch on tax proposal 17 (TP 17) in March 2018, a social compensation in favor of the old age and survivor’s insurance (AHV) was included in the tax reform. The bill has now been renamed to Federal Act on Tax Reform and AHV Financing (TRAF). After the parliamentary debate in the autumn session 2018, the last differences could be ironed out and the TRAF was adopted in the final vote by the Parliament on 28 September 2018. However, the entry into force of the reform is again subject to a popular vote.
Background and content
The process to reform the Swiss corporate tax system was initiated several years ago with the Corporate Tax Reform III (CTR III; cf. Taxlink – September 2016: Issue 112). After the rejection of the CTR III by the Swiss voting population, the TP 17 was launched (cf. Taxlink – May 2018: Issue 117), which was recently renamed to TRAF.
In its autumn session, the Parliament largely agreed on the urgency and the measures of the tax reform. The last differences regarding the consideration of communes and the capital contribution principle could be settled.
As a result, the reform now includes the following measures:
- The cantons are financially supported by the federation so that they can reduce their income tax rates. At the moment, reductions of corporate income taxes to an effective rate between 12-18 % are foreseen by the cantons,
- Tax privileges which are internationally no longer accepted will be abolished,
- The realization of hidden reserves generated under a tax privilege will be taxed separately for a maximum of five years after the tax privileges have been abolished,
- A tax-neutral step-up of hidden reserves upon migration to Switzerland or upon transition to ordinary taxation will be allowed. As such, companies can disclose hidden reserves in the tax balance (step-up) and amortize them for ten years,
- A patent box will be introduced on cantonal level. Income from patents and comparable rights are excluded from the taxable base to the extent of a maximum of 90%,
- R&D expenses of up to 150% of effective expenses are tax deductible,
- A notional interest deduction (NID) can be implemented by cantons with high corporate income tax rates. The conditions will only be fulfilled by the canton of Zurich.
- A maximum tax relief is introduced in order to ensure a minimum level of taxation despite the measures patent box, R&D expenses, NID and depreciation of hidden reserves released after a voluntary change of status under current law,
- Cantons can allow a reduction in the calculation of capital taxes on equity relating to participations, intra-group loans as well as patents and similar rights,
- Taxation of dividends from qualifying shareholdings of individuals is increased to at least 70% on federal level and at least 50% on cantonal level,
- The 5% threshold of the so-called transposition will cease to apply. As such, a transfer of participation rights into a self-controlled company will be taxable,
- Corporations quoted on a Swiss stock exchange may pay out capital contribution reserves free of tax under the condition that an equal amount of dividends is distributed. Capital contribution reserves that have been created as part of a relocation to Switzerland after February 2008 can be paid out without restrictions.
- Swiss permanent establishments of foreign companies shall be entitled to the lump sum tax credit if they are subject to ordinary taxation in Switzerland.
The official referendum period for the tax reform started on 9 October 2018 and expired on 17 January 2019. As the referendum was called, the TRAF will be subject to a popular vote. The vote is planned to be held on 19 May 2019. As a result, the law could still enter into force on 1 January 2020 after implementation by the cantons until 31 December 2019.
Time is ticking as Switzerland risks facing sanctions from the EU without a timely reform of the corporate taxation system. Hopefully, Swiss voters are aware of their responsibility and the importance of the tax reform for Switzerland.
ADB ALTORFER DUSS & BEILSTEIN AG
Fabien Duss, certified tax expert, LL.M. UZH International Tax Law
ADB ALTORFER DUSS & BEILSTEIN AG
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