In a referendum held on 19 May 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. Further, the new tax rules will be accompanied by socially motivated measures to strengthen the funding of the old age and survivors social insurance. (AVS).
Shortly after Swiss voters rejected the Corporate Tax Reform III (CTR III) in 2017, the Swiss Government initiated a new tax legislation round due to pressure from international bodies (in particular the European Union). The legislation addressed certain preferential tax regimes applied in Switzerland (for example, the holding company and the mixed company regime at cantonal level, the Swiss finance branch and principal company regime at federal level). TRAF abolishes these preferential regimes and introduces new measures to preserve Switzerland's competitiveness, attractiveness as a business location and that are in line with international standards at the same time. These new tax rules are accompanied by measures intended to strengthen the funding of the old age and survivors social insurance (AVS).
The new tax measures
The new tax measures adopted by the Swiss people include the following:
- The introduction of a tax neutral step-up (including on self-generated goodwill) for companies relocating to Switzerland.
- Companies exiting out of a favourable tax regime (e.g. mixed company regime) may disclose their hidden reserves (including self-generated goodwill) accumulated until the end of the privileged regime. A certain portion of the profit (depending on the extent of profit formerly taxed at a reduced rate) generated during the five following years, which corresponds to such disclosed hidden reserves may be taxed separately at a lower rate to be determined by the cantons.
- For companies which have decided to already waive their preferential tax status prior to the entry into force of TRAF, a step-up on the hidden reserves, followed by respective amortizations and depreciations, is still possible in many cantons.
- The introduction of a patent box regime at a cantonal level, which allows for a preferential treatment of income arising in particular from patents and similar rights developed in Switzerland. The patent box regime will provide for a maximum tax base reduction of 90% on such income. Cantons may opt for a less extensive relief.
- The option for cantons to introduce a super-deduction of up to 150% of R&D expenditures in Switzerland. The super-deduction is possible with respect to personnel expenses directly allocated to R&D plus 35% of such R&D expenses. The deduction is capped at the amount of the total expenses of the company. Furthermore, also 80% of the fees paid for (Swiss) contract research will qualify for the super-deduction.
- The option for high-tax cantons to introduce a notional interest deduction on so-called excessive equity (NID). Because the NID will only be available in cantons whose capital is taxing companies at an effective ordinary corporate income tax rate (federal, cantonal and communal) of at least 18.03%, it is expected that only the canton of Zurich will meet the requirements to introduce a NID.
- The maximum tax relief on profits arising from the patent box and a potential R&D super-deduction and NID cannot exceed 70% of the net profit. The relief restriction also applies to companies that choose a step-up solution prior to the effective date of TRAF. Cantons may opt for a lower maximum tax relief. Furthermore, TRAF provides that no losses must arise from the new tax incentives.
- Option for cantons to provide a relief on capital tax in proportion to patents/comparable rights, (qualified) shareholdings and intra-group receivables.
- Permanent establishments of foreign companies that are subject to ordinary taxation on all levels in Switzerland may benefit from a tax credit on foreign source taxes, which is currently only available for tax residents.
TRAF also provides for further tax-related measures to ensure a social and/or fiscal balance of the new legislation. Such additional tax-related measures include:
- Increase of the so-called partial taxation of dividends received by individual taxpayers from qualified shareholdings (applicable in case of a minimum stake of 10%). At the federal level, 70% of the dividend income received will be taxed (instead of currently 60% in case of private assets and 50% in case of business assets). Cantons will have to tax at least 50% of such dividends as well.
- Amendment of the so-called transposition rules under which a gain realized on the sale of shares held as private assets by an individual to a company controlled by such individual is taxable as income and not qualifying as a tax-exempt capital gain from movable property. While under the current rules, a minimum 5% interest needs to be sold to trigger a taxation under the transposition rules, no minimum threshold will apply under the amended rules.
- Introduction of certain restrictions and requirements for companies listed on a Swiss stock exchange with respect to the withholding (and private income) tax exemption for distributions stemming from capital contribution reserves.
- In order to compensate the cantons for the losses in tax revenues expected to arise from the proposed changes in legislation, TRAF foresees an increase of the cantons' share in federal income tax revenues from currently 17% to 21.2%.
TRAF shall enter into force on 1 January 2020. Cantons are generally required to adapt their tax legislation to the new rules introduced by TRAF by the same date. While in some cantons, the respective cantonal amendments have already passed the legislative process, the legislative process for other cantons is still ongoing.
How can we help?
TRAF provides the cantons with a certain flexibility in terms of how they may introduce the new measures into cantonal law. This will allow them to tailor their tax systems to local needs and strategies. Most cantons have already announced a decrease of their ordinary corporate tax rates as an accompanying measure to the new rules.
It is now important for companies to analyze the impact and opportunities of this new reform on their businesses. We would be pleased to assist you in this process.