On 21 March 2018, the Swiss Federal Council issued the dispatch to the Swiss Parliament on the draft legislation for the so-called Swiss Tax Reform Proposal 17 (STR 17, formerly known as Swiss Corporate Tax Reform III or CTR III). This proposal is for the most part in line with the main parameters set by the Swiss Federal Council, following the discussion with key stakeholders in January 2018 and with the legislative draft version that was put into the so-called consultation process last autumn.
While the final version of the legislation to be passed by the Swiss Parliament may still differ from the currently proposed version, it is reasonable to expect that the final legislation adopted may largely resemble the current version. However, there is in particular the possibility that the Swiss Parliament may make the legislation in parts even more business friendly.
The proposal represents a well-balanced and internationally competitive solution that would 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.
Main proposed elements of STR 17
The STR 17 contains the following main elements for Swiss companies and their shareholders:
- 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;
- The tax-privileged release of “hidden reserves” for cantonal/communal tax purposes (“transition mechanism”) for companies transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation, with the intent to mitigate such effect by providing companies with a lower tax rate during a transition period of five years. Under this transition mechanism, the amount of hidden reserves, including self-created goodwill, at the date of the sunset of the tax privileged regime has to be established and will be formally assessed by the tax authorities. These reserves can be amortized over a period of five years and will be taxed at a lower rate.
- A reduction of the general cantonal/communal tax rates at the discretion of the individual cantons; various cantons can be expected to be in the 12 – 14 % ETR bracket (effective combined federal/cantonal/communal tax rates);
- The mandatory introduction of a 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, with a reduction of qualifying patent income on a cantonal level of up 90%, whereas the cantons can opt for a lower reduction than 90%.
- The voluntary introduction of cantonal R&D incentives in the form of deductions of up to 150% of qualifying R&D expenditure incurred in Switzerland at the discretion of the individual cantons. Qualifying R&D expenditure are the direct R&D personnel costs, plus a 35% surcharge (limited to 100% of total expenditures of the taxpayer) and 80% of R&D expenditures incurred from third parties in Switzerland.
- 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, while the same mechanism will be applied upon an exit from Switzerland. The stepped-up assets have thereby to be amortized based on the Swiss amortization rules for tax purposes for the respective assets. Self-created goodwill as part of the step up has to be amortized over 10 years.
- An increase of the partial taxation for individual shareholders holding at least 10% in a Swiss company to 70% from 60% on a federal level and mandatorily at least to 70% for all cantons, whereby the cantons can opt for a higher percentage of taxation than 70%.
- The combined tax relief for the Patent box, the R&D super deduction, the amortization from the step-up of hidden reserves due to a status change prior to STR 17 and the tax-privileged release of hidden reserves on the sunset of tax privileged regimes due to STR 17 shall be limited to a maximum of 70% on a cantonal and communal level, whereas the cantons can opt for a lower maximum than 70%. It is important to note that, as opposed to the previous legislative proposal, the tax privileged release of hidden reserves at the date of the sunset of tax privileged regimes due to STR 17 (transition mechanism) is now also subject to the 70% limitation.
- The voluntary introduction of reduced annual capital tax rates on equity that is underpinning qualifying participations of at least 10% or patents. Annual capital tax is levied on the book equity of a Swiss company on a cantonal/communal level, but not on a federal level. This provision provides a benefit in cases where the annual capital tax is not offset by annual income taxes, because there is either not sufficient income tax or the respective canton does not allow for such an offset.
The Swiss Parliament is expected to vote on the legislation in its autumn 2018 session at the earliest. Since this is a well-balanced solution achieved with the inclusion of all stakeholders, it seems currently unlikely that there would be a referendum (public vote) on the legislation. In case there is indeed no referendum, some parts of STR 17 could theoretically enter into force as soon as in 2019, with the bulk of it becoming law in 2020.