The Steering Committee with representatives from cantons and the Swiss Federation on 1 June 2017 issued its recommendations to the Swiss Federal Council for a well-balanced Swiss Tax Reform Proposal 17 (STR 17, formerly known as Swiss Corporate Tax Reform III or CTR III) and considers a swift implementation of the reform as key.
The Steering Committee held a total of five meetings between March and May of 2017. Representatives of cities and municipalities were also invited to one of these meetings. This ensured that the municipal requirements were taken into account in the recommendations. In addition, consultations were held with political parties as well as business associations and labor unions for the making of STR 17. All sides supported the parameters of STR 17 and stand behind the following main goals of the reform, which are to ensure: the attractiveness of Switzerland as a business location, international acceptance of the Swiss corporate tax law and sustainable tax revenues.
Main proposed changes compared to CTR III
Taking into account the above, the Steering Committee recommends essentially the following main changes to CTR III which was rejected in its proposed form by the Swiss voters on 12 February 2017:
- The Notional Interest Deduction (NID) on federal and cantonal level is no longer part of the package;
- The partial taxation for individual shareholders holding at least 10% would be increased to 70% from 60% on a federal level and mandatorily to 70% for all cantons;
- The combined tax relief for the Patent box, the R&D super deduction and the amortization from the step-up of hidden reserves due to a status change prior to STR 17 shall be limited to a maximum of 70% (previously 80%) on a cantonal and communal level.
- (Important to know is that there is no limitation for the tax-privileged release of hidden reserves on a status change due to CTR III on cantonal level and for step-up in case of migration into Switzerland on cantonal and federal level).
Main proposed elements of STR 17
Accordingly, the STR 17 contains the following main elements:
- The sunset of all special corporate tax regimes, such as the mixed, domiciliary, holding and principal company regimes, as well as the Swiss finance branch regime;
- A reduction of the general cantonal/communal tax rates at the discretion of the individual cantons;
- The introduction of a mandatory cantonal-level patent box regime applicable to all patented intellectual property (IP) for which the research and development (R&D) spend occurred in Switzerland, based on the OECD modified nexus approach;
- The introduction of cantonal R&D incentives in the form of deductions of up to 150% of qualifying R&D expenditure at the discretion of the individual cantons;
- A step-up of asset basis (including for self-created goodwill) for direct federal and cantonal/communal tax purposes upon the migration of a company or additional activities and functions into Switzerland;
- The tax-privileged release of “hidden reserves” for cantonal/communal tax purposes for companies transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation;
The Federal Council will in the course of June 2017 decide on the basic parameters of STR 17. The Swiss Federal Department of Finance will then prepare a draft bill for the consultation process, which is expected to be completed by December 2017. The adoption of the dispatch of the bill to the Swiss Parliament is scheduled for spring 2018.
The Steering Committee considers a swift implementation of STR 17 at the cantonal level to be extremely important. The cantons are therefore supposed to push the cantonal implementation of the law parallel to the federal bill. This compels the cantons to shorten their usual legislative periods, which the Steering Committee considers necessary because of the urgency of the legislative proposal. Based on the above, STR 17 could come into force by January 1, 2020 or 2021, with corresponding transition periods lasting till 2025 or 2026.