On 19 May 2019 the Swiss voter finally lived up to its pro-business reputation and with 66% overwhelmingly voted “yes” to the so-called Swiss Tax Reform and AHV Financing Bill, after the previous Swiss tax reform bill was rejected by the voter in a referendum on 12 February 2017. It is now “all clear” for the enactment of the tax reform by the cantons as per 1 January 2020.
Yesterday’s vote was definitively one of the more important economic policy decisions for Switzerland in recent years. The corporate tax reform, as it stands, will ensure that Switzerland remains competitive internationally for multinationals and will be able to continue to attract foreign investments. The tax reform not only benefits around 24’000 companies, which have a special tax status in Switzerland, such as a mixed company or holding company status, but also brings broad based substantial tax reductions to approximately 500’000 small and medium sized Swiss companies. This will be achieved through a general cantonal tax rate reduction and other measures to boost innovation, such as the introduction of a patent box or R&D super deductions.
In addition, the reform will strengthen the Swiss social security (AHV) system, which will receive increased funding of CHF 2bn per annum through slightly increased employer and employee contributions and through a bigger contribution by the Swiss Federation.
Sunset of all special Swiss corporate tax regimes per 1 January 2020
Under the reform all special Swiss corporate tax regimes, i.e. the mixed company, the holding company, the domiciliary company, the principal company (governed by Federal Circular Letter No 8) and the finance branch/finance company regime will sunset as per 1 January 2020. These regimes will be replaced with measures that are both internationally accepted and that ensure Switzerland will remain attractive for multinational companies. Existing tax holidays on federal and cantonal/municipal level are not affected by this legislation and new tax holidays will still be granted.
Transitional rules for sunsetting regimes
The sunset of these special tax regimes is subject to transitional rules. These rules should enable companies benefitting from such regimes to maintain their existing level of taxation (including for financial statement purposes under IRFS or U.S. GAAP) by way of a special release of hidden reserves mechanism for another five years after the sunset of the regimes per 1 January 2020, depending on their specific facts and circumstances. There are two ways the intended benefit can be achieved. The “step up model” or the “two rate model/release of hidden reserve model” from which the taxpayer has to choose from.
We would expect that for the vast majority of international companies that report under U.S. GAAP or IFRS the “release of hidden reserves” model or “two-rate model” will be more beneficial. This is mainly due to the fact that the “release of hidden reserve /two-rate model” allows a company to reap both the cash tax and the financial statement benefit of the lower tax rate during a period of five years. Further, the benefit of the “release of hidden reserve/two-rate model” is not subject to the 70% benefit limitation, as opposed to the amortizations of the step up. The step up model, in turn, may lead to a greater cash tax benefit, especially in cases and in cantons that would allow to amortize the step up over a period of ten years, instead of over only five years.
Main replacement measures for corporate taxpayers:
- Reduction of general headline tax rates at the discretion of the individual cantons, where the majority of cantons will be in the 12 – 14 % tax rate range (effective combined federal/cantonal/communal tax rate, ETR) with various cantons with an ETR as low as 12%, such as Zug, Schwyz or Lucerne.
- Introduction of a Patent Box, which is following the so-called modified nexus approach by the OECD on a cantonal level with a tax relief for qualifying income of up to 90%. The proposed law allows for flexibility with regard to outsourced functions and covers Swiss and foreign patents as well as patent equivalent rights.
- Introduction of R&D super-deduction at the cantonal level up to a maximum of 150% of the effective qualifying expenses. The reform provides for a wide application of R&D activities that may benefit, including basic research as well as scientific application and knowledge based R&D.
- Step-up upon migration of a company or of activities and functions to Switzerland: A step-up would be allowed for direct federal and cantonal/communal tax purposes (including on self-created goodwill) for companies or additional activities and functions migrating to Switzerland.
- Reduction of the cantonal/communal annual capital tax in relation to participations, patented intellectual property and intercompany loans at the discretion of the individual cantons.
- Cantons with a “high” cantonal tax rate may introduce a notional interest deduction (NID) on a cantonal level. The canton of Zurich is the only canton to introduce NID on a cantonal level.
The combined benefit from the patent box, the R&D super deduction, the NID (canton of Zurich) and the amortization resulting from the step up on transitioning out of tax privileged regimes under current law, must not exceed 70% of the taxable income on a cantonal level. Not affected by this limitation is the benefit from the release of hidden reserves under the “release of hidden reserves/two-rate model” during the five-year transition period.
Revenue raising measures
There are no revenue raising measures at the income tax level of corporations. There is in particular no broadening of the income tax base under the reform.
There is a tightening of the so-called capital contribution principle that allows the withholding tax free repatriation of capital, but this affects only public companies listed at the Swiss stock exchange. To the extent that such companies have distributable reserves/retained earnings that are subject to withholding tax, any dividend distribution or redemption of shares must now at least be against such reserves in the extent of at least 50% - if such reserves/retained earnings are available.
There is further a revenue raising measure at the level of significant individual shareholders: The taxation of dividends on participations of at least 10% held by individuals will be increased from 60% to 70% on a federal level and to at least 50% on a cantonal level. However, there are currently only four cantons where the taxation is less than 50%.
Accounting for income taxes
The reform will have a tax accounting impact owing to the change in tax rates and other factors. The prevailing view of the tax and accounting profession in Switzerland is that the time of the enactment of the cantonal law will be decisive in regard to when to account for a respective financial statement impact. For most cantons this will be on or before 1 January 2020. For cantons that have already enacted the reform on a cantonal level, such as the canton of Basel Stadt, the change in tax rate already triggered tax accounting implications.
The yes vote on the referendum makes the legislation as previously approved by the Swiss Parliament on 28 September 2018 final. Detailed draft regulations, in particular with regards to the patent-box and the notional interest deduction, are expected to be circulated by the Swiss Federal Tax Administration prior to year-end 2019. The federal council already announced that all special tax regimes will be abolished as per 1 January 2020 and transitional measures come into play.
Swiss cantons will have to amend their cantonal tax laws to reflect the changes, so that the law can come into effect as of 1 January 2020. Some of the cantons have already done so, others are in the process of seeking the approval with regard to the respective cantonal legislation.
- Approved legislation: Basel Stadt, St. Gallen, Glarus, Neuchatel, Geneva (either no referendum or the reform was approved in a cantonal referendum to date)
- Legislation ready for approval: Fribourg (possible vote expected by 30 June 2019) Zurich (possible vote expected in September 2019)
- Legislation to be approved by end of 2019: Lucerne, Uri Schwyz, Nidwalden, Obwalden, Zug, Basel Land, Schaffhausen, Jura (possible vote expected until November 2019)
- Cantons that expect a vote only in 2020: Appenzell Ausserrhoden, Appenzell Innerrhoden, Graubuenden, Aargau, Thurgau, Ticino
The cantons of St. Gallen and Neuchatel did not hold a popular vote (no referendum sought by the parties), the canton of Vaud and Valais have not clearly stated their timeline yet. Further, the canton of Berne (negative vote in December 2018) and Solothurn (negative vote on 19 May 2019) currently have no cantonal proposal to introduce the tax reform into cantonal law.
What do you need to do as a taxpayer?
Taxpayers with companies the special tax regimes of which are sunsetting per 1 January 2020 (i.e. taxpayers currently benefitting from the mixed, domiciliary, holding, principal company and finance branch and finance company regimes) have to act now. They in particular have to evaluate the available options under the transitional rules for sunsetting regimes (step up or two-rate model), to potentially model the benefits of these alternatives, to obtain valuations and to start discussions with Swiss tax authorities to have their hidden reserves and goodwill confirmed. In addition, there are many further potential benefits and planning opportunities for taxpayers, such as the patent box, R&D deductions or the immigrations step up and other options. Deloitte tax professionals are happy provide you with additional information and guidance and to support you in all aspects of Swiss tax reform.
The tax reform as approved by the Swiss voter represents a well-balanced and internationally competitive solution that will ensure that Switzerland stays an attractive location for multinationals and domestic companies alike, while at the same time providing an internationally aligned tax system that is in conformity with international standards, such as OECD BEPS and others.
With headline tax rates of 12 - 14% in most cantons, which can be reduced to as low as 9% with instruments such as the patent box, Switzerland has very attractive corporate income tax rates. The value of low tax rates is further increased by a taxpayer friendly environment: There are no CFC, anti-hybrid, ATAD, subject to tax rules, or interest limitation rules (beyond thin capitalization limitations) currently in effect in Switzerland, nor planned for the foreseeable future. Further, Switzerland benefits from a culture of trust between the taxpayer and the tax authorities under which important issues can be discussed and resolved in advance, which is a very valuable asset in today’s rapidly changing tax environment fraught with uncertainty.