On May 19, 2019, Swiss voters created the basis for the cantonal implementation of the tax reform, once the federal law on this reform was adopted. Thus, the effective integration of the tax reform takes place through its implementation in the cantonal tax laws. This refers in particular to the cantonal tax rate reductions. These are part of the reform strategy but are not formally part of the federal bill.
The cantons can implement, from now on, the regulation on the temporary special tax solution to mitigate the effective increase of taxes for those companies that want to forego the cantonal tax status early. They are still some obstacles that need to be overcome at the cantonal level, despite the adoption of federal reform. However, the cantons have already decided or at least announced the parameters of their implementation for the individual measures. Thus, on June 27, 2019, the Cantonal Council of Zug Canton adopted the transaction for amending the tax law. In this way, it will have an absolute top tax rate from 2020.
The tax privileges so far in the canton of Zug
In the case of domiciled companies, they were no restrictions regarding company purpose, even if they fulfill purely administrative roles in Switzerland. Therefore, any income in Switzerland is taxed at a uniform rate, be it interest, dividends, capital gains, income from intangible rights and property income. Besides, foreign and investment income, such as dividends and capital gains, are not taxed in Switzerland. Only the reduced capital tax is paid on capital (equity).
Holding companies, a network of various business, must pay reduced capital tax only based on their capital. Only in some cases, the income is taxable, namely when it comes to property income or DBA-protected income.
Mixed companies carry out limited business activity in Switzerland, and the basic rule is that at least 80% of this activity takes place abroad. For this type of company, the taxable income is determined using the so-called accounting segment, which is based on the number of Group employees in Switzerland. Therefore, if there are less than 6 employees, the controllable rate is 10%. Between 6-10 employees, 15%, 11-30 employees 20%, and for companies with over 30 employees, 25%. Capital gains or revenues from intellectual property rights, as well as investment income, such as interest and dividends, are primarily taxed at a regular rate.
New taxes in Zug
When amending the tax law, the effective income tax rate combining all levels, federal, cantonal and municipal decreases to 11.91% (the main city, up to now, 14.35%). Comparing, for example with the canton of Zurich, where the estimated effective rate of income tax is 19.7%, the rate in the canton of Zug is significantly lower.
But the usual capital tax rate remains unchanged at 0.0717%, and equity attributable to qualifying participations, intellectual property rights and disclosed hidden reserves will be considered in the amount of 2%.
The following reduced income tax rates may be available for hidden reserves within 5 years from the change of ordinary taxation: 0.8% for 2020, 1.0% for 2021, 1.2% for 2022, 1.4% for 2023 and 1.6% for 2024. At the same time, the net income from patents and comparable rights, with a maximum discount of 90%, will be included in the calculation of the net taxable profit. Also, an additional 50% deduction is allowed in Zug for research and development costs.
In light of the reform, the current tax privileges for holding companies, domiciliary companies and mixed companies will be abolished. In the canton of Zug, the partial taxation of dividends from qualified holdings in the case of natural persons remains at 50%. In contrast, for direct federal taxation, it increases to 70%, previously was 60%.
January 1, 2020, is the date on which the new tax law will enter into force. Given that this is a comprehensive review of the tax law, Zug companies should prepare in advance for the changes mentioned above. Our Swiss specialists are ready to support any additional questions you may have about this topic. Comprehensive and timely planning, along with simulating the impact of different aspects of tax reform, should be prepared as soon as possible.
Considering that on September 3 the referendum period has elapsed and no other referendum has been called, another measure to be implemented, based on the new framework is the maximum limit of reliefs of 70% on profits subject to cantonal tax. Also, the partial taxation (50%) of dividends received from investments of at least 10% by individuals.
The Canton of Zug will remain one of the most tax-favorable places for Swiss companies and internationally, even with the implementation of all planned measures. And due to the differences between the income tax rates between the cantons, Zug is expected to become even more attractive in the future. However, companies should identify the actions they need to take and start preparing for change. Our experts can provide comprehensive information on current discussions and may examine your company's tax planning in the context of tax reform. Some decisions must be taken before the updated Zug cantonal tax law enters into force, to adapt to the new fiscal environment.