The Swiss Patent Box

The Corporate Tax Reform III has been approved by the Swiss Parliament. This tax reform was created in order to preserve Switzerland’s attractiveness as a location for multinational companies that want to take advantage of a more relaxed taxation. Due to the potential referendums that are in order and implementation processes of the new reform, the new measurements are expected to enter into force somewhere before the beginning of 2019.

One of the innovations brought by the tax reform is the patent box regime. This regime will provide a lower tax on income made from intellectual property rights, especially patents, protection certificates and royalties on patents.

What are patent boxes?

Patent boxes allow the Swiss government to charge lower taxes on profits made earned from patented products. Patent boxes are not something new, as several other countries, such as Ireland, France, Hungary, Luxembourg, Spain, UK or Netherlands already offer this type of tax incentives. Unlike other forms of tax incentives, patent boxes seem to be “tolerated” by the EU, which makes them a great advantage for companies that hold patented products and that make profit from them on the European market.

The new regime will be applied on cantonal and municipal level of corporate income taxation and not on federal level. Swiss cantons may exempt up to 90% of the patent income, which will result in an effective tax rate of 10% for patent income.

Preferential tax treatment in Switzerland

Self – employed individuals and legal entities in possession of qualified intellectual property can benefit from preferential tax treatment in Switzerland. In order to benefit from tax relief on profits, it is required to contribute to actual research or development of the respective innovation. Therefore, patents acquired by corporations are not able to benefit from the tax relief. However, the upside is that the patent box regime will apply to those who have the power to control research and development activities within a group.

Patents and intellectual property rights similar to patents can benefit from the preferential tax treatment established by the patent box. The federal council, taking into consideration the requirements of the OECD directive, will determine the details of the respective taxation regime.

Income derived from intellectual property rights will qualify for a preferential tax treatment only if it stems from patents registered in Switzerland or from patents that will be registered in Switzerland. Non – patentable intellectual property, such as trademarks will not qualify for lower tax rates.

The patent box will also have an impact to research and development activities, as this type of business activities stand and the core of developing patented products. Swiss cantons could introduce some R&D incentives in the form of excess deductions for tax purposes, to the extent of 150% of the research and development spend in Switzerland. Thus, the deduction would be 150% of the actual tax expense for R&D activities.

How is the preferential tax regime calculated

The calculation of the tax regime will be made using a two-steps approach. Firstly, the residual method is used to determine the earnings on the total profit that qualifies as intellectual property. The second step is to adjust the remaining residual profit according to the OECD modified nexus approach, as it is provided under the Action 5 of the OECD BEPS initiative.

Considering these aspects, the patent box will have a relatively low impact on Swiss cantons that already had a lower corporate tax rate, such as Nidwalden, Obwalden or Lucerne, but it will considerbaly reduce the corporate tax burden in other cantons such as Bern or Basel. It all depends of the type of companies that holds patents and the percentage of profits derived from patented products.

The patent box, along with other tax measures provided by the Corporate Tax Reform III is expected to attract more foreign investors to Switzerland, as well as to keep already existing multinational companies in the country. The legislation introduces a competitive corporate tax regime that takes into account the requirements of the OECD BEPS agenda and is fully accepted on international level. 

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