After the cantons of Grisons and Zug (see recent blog), the canton of Basel-City has now also presented its plans to strengthen its economic attractiveness. The package includes measures in the areas of innovation, society, and the environment as well as tax compensation measures. The focus is clearly on promoting the key life sciences industry. The trend in all cantons so far is towards location promotion outside the tax system and it is unclear whether the Qualified Refundable Tax Credits (“QRTC”) instrument will become established in Switzerland.

Background

Along with Zurich, Zug and the Lake Geneva region, the canton of Basel-City is one of the leading business locations in Switzerland, particularly in the life sciences sector (pharma, biotech, medtech). The introduction of the OECD minimum taxation means an additional tax burden and significantly reduces the attractiveness of the location for the 200 companies affected. The cantonal government is proposing a package of various measures to remain an attractive location for investments by existing and new companies in the future. For this purpose, an amendment to the existing Location Promotion Act and the Tax Act is proposed, which shall come into force at the beginning of 2025 (media release in German).

Promoted Activities

The Government Council ("Regierungsrat") plans to create a new "Innovation-Society-Environment" fund with an annual minimum of CHF 150m and a maximum of CHF 300m. The funds are to be used for three areas:

• Innovation: On the one hand, the canton wants to support personnel expenses for innovative activities (research, development, innovation) that are carried out in the canton of Basel-City. To this end, the DEMPE concept of the OECD transfer pricing guidelines is to be used. On the other hand, the intention is also to encourage the retention and relocation of physical facilities for research, development, and innovation in the canton or in Switzerland. For this purpose, contributions are to be made to the depreciation of facilities for innovation activities. The details are to be regulated at the level of an ordinance, which is not yet available.
• Society: The canton plans to support companies that grant parental leave that exceeds the legal minimum. The contributions are limited to 80% of the gross salary, up to a maximum of CHF 220 per day. Innovative research collaborations with universities are also to be supported, particularly in the field of life sciences.
• Environmental: The canton intends to support companies that reduce greenhouse gases and implement measures to promote energy efficiency. The details will also be set out in an ordinance.

Conditions

According to the proposal, only legal entities with unlimited tax liability in the canton of Basel-City (registered office or place of effective management) are eligible. Companies with permanent establishments in the canton are only eligible under strict conditions (top-level group company must be based in the canton, limited to grants for innovation and contributions to parental leave). Interested companies must apply for such benefits once a year, which will then be reviewed by a government unit yet to be determined. Around 80% of the available funds are to be channeled into the innovation funding area.

Payment Mechanism

The Government Council's proposal is relatively open, and funding can be granted in the form of government grants, Qualified Refundable Tax Credits (QRTC) or other recognized tax credits in accordance with the OECD Model Rules. QRTC can be offset against outstanding tax liabilities for cantonal corporate income tax, capital tax, and real estate capital gain tax. The payment mechanism will be regulated later in an ordinance.

Tax Compensation Measures

The cantonal government is planning two measures to finance the various measures: On the one hand, a second tariff level of 8.5% is to be introduced for a limited period of ten years for profits in excess of CHF 50m for the cantonal corporate income tax. On the other hand, the maximum reduction due to the patent box for cantonal corporate income tax is to be reduced from currently 40% to 5% of taxable profit.

Next steps

The package now enters the political process and is subject to a referendum. The measures should enter into force on 1 January 2025 at the earliest.

Deloitte's View

After the canton of Zug in mid-May (see recent blog), another important business location in Switzerland has now presented its measures to remain an attractive location in the future. By strongly promoting innovation, the canton has opted for a customized solution for the life sciences industry, which is key for Basel-City. However, to achieve a high level of political acceptance, employees and environmental protection measures are also to be supported. While the canton of Zug has spoken out in favor of government grants and against tax credits for the time being, the payment mechanism in Basel-City will only be regulated at a later stage in an ordinance. It remains to be seen whether QRTCs will really become established in Switzerland or whether the trend is not more in favor of government grants. So far, only the canton of Grisons has spoken out in favor of QRTC. Nonetheless, there is a trend in Switzerland that new location promotion measures are no longer regulated in the tax law and other government units than the tax administrations will be in charge. Hence, the trend is towards location promotion with other instruments than traditional tax incentives.

If you would like to discuss more on this topic, please do reach out to our key contact below.

Key contact

Thomas Hug - Partner, National Tax Office

Thomas is the leader of Deloitte Switzerland's National Tax Office. He has a proven track record of being at the forefront of international tax developments and analysing their impact from a Swiss tax technical perspective. Thomas has published thought-leading articles and books, and is frequently asked by industry groups, universities and tax and accounting associations to make presentations or lead seminars. He serves as a substitute judge at the Zurich Tax Court of Appeal.

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