In June 2016, the Swiss parliament passed the final corporate tax reform package meant to strengthen Switzerland as a competitive business location for foreign companies or entrepreneurs. The tax reform plan (CTR III) includes several tax reform measures related to the federal and cantonal tax laws. These measures may affect especially multinational enterprises that are currently doing business in Switzerland.
The notional interest deduction
One of the changes included in the new corporate tax reform plan is the fact that cantons will need to pass respective legislations at cantonal level in order to determine which measures will be enacted.
CTR III introduces an interest deduction, calculated based on the equity exceeding a certain threshold, known as the NID (notional interest deduction). The notion interest deduction applies for direct federal income tax. The cantons have the option to introduce the deduction for cantonal and communal income tax, but only if they tax at least 60% of dividend income from investments higher than 10% of a company’s shares for individuals.
So far, 16 of the 26 Swiss cantons tax only 50% or less for individuals’ dividend income, therefore they are not able to apply the notional interest deduction, unless they increase the threshold. The remaining 10 cantons already met the requirements; in which case they are able to apply the notional interest deduction.
The Federal Department of Finance is responsible to enact the corresponding implementation of rules in all Swiss cantons.
Disclosure of hidden reserves
When assets of functions are transferred from another country to Switzerland, added values and hidden reserves can be disclosed in the tax balance sheet. The hidden reserves that are disclosed in the tax balance sheet may be deducted according to the applicable tax depreciation rates in subsequent years.
However, hidden reserves and added values must be accounted for at the end of the tax obligation, for example, when a taxpayer is leaving Switzerland, or assets and functions are transferred abroad.
This measure is applicable also to transfers of assets from foreign company branches into Switzerland, or in the case of abolishment of direct federal tax regimes.
Special cantonal tax regimes
One of the most important measures included in the CTR III eliminates the special cantonal tax regimes for holding companies, mixed companies and auxiliary companies. However, a five – year transition period is provided after the new law takes effect.
During the transition period, the cantons are allowed to subject goodwill and hidden reserves to a lower tax rate, if these items were not taxable under the prior law. The cantonal authorities will establish the special tax rate for this type of items.
Research & Development deduction
CTR III provides an optional deduction of 150% for R&D expenditures occurred in Switzerland, maintaining a favorable regime for such activities.
Restrictions on tax relief
All the benefits derived from the special deduction for R&D, the notional interest deduction and the depreciation deduction for disclosed hidden reserves can reduce the total cantonal corporate tax for up to 80%. However, the cantons are allowed to implement a lower percentage.
This measurement is meant to ensure a minimum tax assessment for companies that qualify for one or more of the above tax benefits.
Cantonal net wealth tax
Swiss cantons are allowed to implement a net wealth tax reduction for intercompany loans. The cantonal share of the direct federal tax revenues will increase from 17% to 21.2%. Subsequently, the cantons will receive more money in federal support after the increase. These funds are meant to partially support the reductions in the cantonal corporate income tax rates.
Many Swiss cantons already plan to reduce their corporate income tax rates. For example, Vaud passed a resolution to reduce the corporate tax rate to 13.78% and Geneva has announced plans to gradually reduce its corporate tax rate from 24.2% to 13.49% until 2019.
The Swiss electorate will most likely have to vote on the bill in 2017, at a referendum, because the country’s left parties are opposed to the measures announced by CTR III. If the bill passes, CTR III will take effect at federal and cantonal levels starting with 2019.
Overall, these reform measures were created in order to ensure Switzerland’s high competitiveness level for foreign investors. At the same time, small and medium – sized Swiss businesses can also benefit from these measures, as they have a positive impact on small companies as well. The changing dynamic of the Swiss corporate tax system requires careful tax planning. As a consequence, each company, regardless its size, should have a dedicated accounting department or acquire the services of professional accountants.