The Swiss voters approved in a referendum, on May 2019, a tax reform package to eliminate what the Ministry of Finance has called an existential risk for the country role as a financial and business center.
Under a new Organization for Economic Cooperation and Development work plan, fundamental reforms to tax the profits of multinationals will be agreed by the end of 2020. The vote in favor of tax reform and pensions, 66% for and 34% against, resolves an old dispute over the advantageous taxes offered to multinational companies. The acceptance of the reform was vital to prevent Switzerland to be labeled as an outcast because of low taxes, said Finance Minister, Ueli Maurer.
At the pressure of the European Union and the Organization for Economic Cooperation and Development, Switzerland has promised to respect international standards and to abolish the special taxes enjoyed by some foreign companies registered in Switzerland. The government intends to eliminate the special tax status of these companies, that pay corporate taxes in cantons ranging from 7.8% to 12%, compared with 12%-24% for ordinary Swiss companies. Instead, cantons will be able to reduce taxes for regular companies as a result of a higher rate received from the direct federal tax.
The tax reform aims to keep Switzerland as an attractive business location, gaining international acceptance and improving the efficient use of tax revenues at all governmental levels.
Taxes on corporate income so far
Resident firms are subject to the Swiss corporate income tax on the taxable profits generated in Switzerland. This tax is levied at federal, cantonal and communal levels. Income from foreign sources allocated to foreign permanent establishments or real estate property situated abroad is excluded from the Swiss baseline and considered only to increase the interest rate in cantons applying progressive tax rates.
On the other hand, non-resident companies are subject to the Swiss corporate income tax if they are (alternatively) Swiss business partners and have a permanent establishment in Switzerland. Also, if the company owns a real estate property, it is considered for this type of tax, as well as credit claims secured by a mortgage on Swiss real estate or dealing or acting as a real estate broker. Non-resident companies are taxed on income generated in Switzerland.
The Swiss tax system is a federalist one. It includes three levels: federal taxes, cantonal taxes, and communal taxes. So far, the 26 cantons had their own tax laws with different tax systems. Municipalities can determine the amount of their taxes according to cantonal laws. Federal tax is calculated as a percentage of cantonal tax. So, in Switzerland, taxation differs from canton to canton and from one commune to another.
The direct federal corporate tax income is charged at a flat rate of 8.5% on profit after tax. Therefore, this type of tax is deductible for tax purposes and reduces the applicable taxable amount (ie taxable income), resulting in a tax before the profit of approximately 7.83%. It should be mentioned that, till now, at the federal level, Switzerland does not levy corporate capital tax.
Cantonal and communal levels
Each canton has its own tax legislation and collects cantonal and communal corporate income taxes and capital taxes at different rates, in addition to direct federal corporate tax. Thus, the tax burden on income varies from canton to canton, and some cantonal and communal taxes are imposed at progressive rates. Therefore, as the current differences in the tax system are significant, the choice of the canton to open a company in Switzerland is important in everything that means tax planning.
General rates of taxation
The global range of the maximum corporate rate on profit before tax for federal, cantonal and communal taxes ranges between 11.5% and 24.2%, depending on the location of the company in Switzerland. Companies subject to a special cantonal tax regime, such as holding companies, domicile companies or mixed trading companies, benefited from reduced corporate income tax rates.
New type of profit allocation
The new work plan of the OECD will explore aspects and options related to the new profit allocation rules.
First of all, these issues should include the development of conceptualized methods for determining the amount of profit and loss that is the subject of the new taxing right. Of course, everything has to be in line with the principle of avoiding double taxation. Simplification measures are also expected to be used, if necessary, to limit the burden of new rules for both tax administrations and taxpayers. Finally, an assessment of the administrative character of any proposal should be made, taking into account capacity and resource constraints.
The tax reform, a project involving both OECD members, including Switzerland, but also a total of 129 states and territories, is based on two pillars. The first pillar is to stop taxing the profits of some groups at its premises or its production sites, but in "market countries", where they place the products or services, or where digital service users are. The second one concerns a minimum global corporate tax.
To implement the first pillar, it is necessary to redefine those countries that have the right to tax some of the consolidated profit, according to the Nexus rules. Until now, only countries that, in addition to the country of residence, are physically present with a "permanent establishment" have the right to tax the profits of a multinational.
According to the new model, countries in which the Group is not physically present, but are economically involved, have also received taxing rights. However, it must be established how the profits will be allocated to the countries that have been determined in this way.
Global minimum taxation
Minimum taxation, a minimum overall tax rate, will be set under the second pillar. It is important to note that if the tax rate at which the profits of a subsidiary or branch of a multinational company are taxed in the host state is below this minimum, the difference up to the global minimum rate may be required.
Further, according to the new approaches, measures must be taken to avoid double taxation, and losses should be shared in a similar way to profits.
The tax reform will bring Switzerland in line with international tax rules by reviewing preferential rates offered to multinationals, but will also reduce baseline rates. Those who support the new tax system say it will still ensure stability and security for the 24,000 foreign companies based in Switzerland. They will, however, be able to reduce costs by requesting deduction of patent revenue or research and development expenses.
In the canton where there is a large concentration of multinational companies, Geneva, voters have accepted a plan to set the baseline corporate rate for all companies at 13.99%. Previously, it was 11.6% for companies with special status and 24.2% for others. Instead, voters in Solothurn have firmly rejected the cantonal implementation plan made available to them. Therefore, the authorities will have to come up with an alternative, although Swiss cantons will no longer be able to reduce the tax rates of multinational enterprises.
The tax reform impact also implies an in-depth analysis of how the incentives faced by taxpayers and governments could be affected. Also, the impact on the levels and distribution of tax revenues and their global economic effects, including effects on investment, innovation, and growth, will also be studied. The economic analysis will take into consideration how these effects vary for different types of SMEs, sectors, and economies.
In conclusion, this reform is considered necessary to maintain the country's competitiveness with other low-income countries and to comply with international rules at the same time. Find out more about the new tax challenges and how appropriate it is for your company, from our tax planning consultants. Obtain now a free case evaluation from our Swiss team!