2019 Federal Act on Tax Reform and AHV Financing—What’s New?

On the 19th of May 2019, Swiss voters voted in favour of the Federal Act on Tax Reform and AHV Financing (TRAF)—confirming the corporate taxation reform. The main purpose of the reform is to bring tax legislation in line with international standards and to remove Switzerland from the EU “Grey List”, which it has been in since December 2017. This list includes states that are under EU control and have agreed to cooperate to improve the tax system.
 
The new reform allows Switzerland to both comply with international standards of corporate tax and still remain an attractive investment destination for foreign investors. To add on to its allure, Switzerland also introduced low-income tax rates, a patent box and an additional tax deduction for research and development businesses.
 
The Federal Act on Tax Reform and AHV Financing is expected to enter into full force on January 1, 2020, as decided by the federal Council. If a canton fails to implement the mandatory provisions of the TRAF by this date, the federal law will apply directly.

 

Important points to note
 

  • Preferential tax regimes are canceled

According to the new reform, preferential tax treatments for holdings, domicile and “mixed” companies at the cantonal level are canceled. The profit allocation rules for principal companies and Swiss finance branches no longer apply at the federal level. As a result, next year, from the 1st of January 2020, all holdings, domicile and “mixed” organizations will be transferred to standard tax rates.
However, in the course of the transition period, businesses have the opportunity to disclose hidden reserves in tax reporting without incurring additional tax consequences. Furthermore, they can then apply depreciation deductions for these assets, thereby further reducing the tax base for corporate income tax. Nonetheless, this provision is not compulsory for implementation at the cantonal level.
Profit from the use of "hidden" reserves (which existed on the date of entry into force of the amendments to the legislation) will be taxed at a lower tax rate, which was applied when using the preferential tax treatment by the company. This transitional provision is mandatory for introduction at the cantonal level.
 

  • Reduction of corporate income tax rates

For organizations, transitioning from preferential treatment to standard taxation, rates will increase the tax burden. The same applies to companies migrating to other countries.
In efforts to keep Switzerland as an attractive tax haven, some cantons are reducing the income tax rate. A typical example is the canton of Zug which is planning to reduce its cantonal effective tax rate for ordinary taxed companies from currently 14.6% to 11.91% (municipality of Zug).
 
For more insights on the legislation changes at the cantonal level, please see Tax Reform in cantons.
 

  • Patent box regime and Research & Development

The patent box regime provisions a comparatively lower tax rate at the cantonal level for research and development organizations. As a general rule, the cantons, however, must tax at least 10% of these profits.
Before the patent box can be applied for the first time, the corresponding tax deducted from research and development (R&D) expenditures must be recollected and taxed. Cantons may allow R&D costs incurred in Switzerland to be deducted for up to 150% of the actual costs incurred. This is based on R&D personnel expenses incurred by the taxpayer plus a 35% markup for other R&D costs, and 80% of the R&D costs charged by third party providers in Switzerland.
The patent box, R&D super deduction and NID (Notional Interest Deduction), as well as possible depreciations from the early shift(from privileged taxation to normal taxation), are subject to total tax relief of 70% (mandatory at the cantonal level).
More information about patent boxes you can find here.
 

  • Disclosure of hidden reserves

Organizations that relocate their headquarters to Switzerland can benefit from additional depreciation in the first few years. If companies relocate their headquarters abroad, an exit tax will be due, as is already the case at present.
 

  • Deduction for self-financing

Some Swiss cantons may allow a deduction of interest on equity assets if the effective profit tax burden imposed by the Confederation, canton and commune is at least 18.03%.
 

  • Increased dividend taxation

Inclusion of dividends for individuals with corporate equity interests of at least 10% will rise to 70% at the federal level and at least 50% at the cantonal level (in some cases, cantons may further increase the inclusion ratio).
 

  • Transference adjustments

The profit from the sale of shares will generally remain tax-free. However, the new rules will abolish this exemption entirely if a person sells shares to a company they already control.
 
Conclusion
Overally, the new tax reform keeps everyone happy—Switzerland complies with international corporate tax standards, foreign investors are still confident to invest in Switzerland and the majority of the Swiss people find the reform beneficial.  Smart companies have already started evaluating how the reform will affect their organizations. Get in touch with our expert specialists to get a better understanding of the new reform and set yourself up for success.

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