Despite having a population of only about 127,000, the canton of Zug boasts of having almost 25 000 businesses registered in the city. That means the population of registered businesses in the canton is almost a fifth of the number of people living in that city! But that is by no surprise as the attractive Zug corporate tax rate is not only the lowest in Switzerland but also among the lowest in the world.
Thanks to tax reforms that came into effect on January 1, 2020, the corporate income tax rate on profit before tax in Zug now sits at a mere 11.91% down from 14.35% in the previous year. But what does this tax rate include, and are there any benefits or exemptions? More on that in this article.
Structure of Zug Corporate Tax
Resident companies are required to pay corporate income tax on their worldwide income, with exemptions on income from foreign permanent establishments (PE) and foreign real estate. Foreign businesses are not required to pay corporate taxes unless they have a PE and real estate located in Switzerland.
The overall Zug corporate tax rate is a combination of two different tax levels: federal, cantonal, and communal levels.
Federal CIT
Companies registered in Switzerland are required to pay a direct federal CIT at a flat rate of 8.5%, with no corporate capital tax being levied at this level. With the CIT being deductible as a business expense, it reduces the taxable income such that the federal CIT can be estimated at 7.83% on profit before tax.
Zug Cantonal and Communal CIT
Different cantons have different tax laws, and for those registered in Zug, the cantonal and communal income tax rate stands at a uniform 3.5%, regardless of the profits recorded within a taxable period. However, there exists a tax-free amount of CHF 10,000. This means companies are only levied the cantonal CIT when their profits exceed CHF 10,000. In addition, Zug registered businesses are also required to pay the corporate capital tax at a rate of 0.5%, with exemptions existing for the first CHF 80’000. This exemption applies to associations, foundations, corporations, and any other legal entities.
With the federal and cantonal corporate income and capital tax rates brought together, the resulting Zug corporate tax rate on profit before tax can be estimated at 11.91%.
Corporate Tax Year in Zug
The corporate tax year in Zug runs for 12 months, along the calendar year. The deadline to file taxes falls 9 months after the close of the financial year. However, companies are free to choose a different accounting period, from which the 9-month deadline can be deduced.
Zug Corporate Tax Deductions
Several corporate tax deductions are available on request. The first of these is an OECD-compliant patent box, which allows for income generated from patents and comparable rights to be included in the tax base at as low as 10%. This represents a deduction of up to 90% of the income generated from patents and other comparable rights. In addition, the canton of Zug promotes research and development (R&D) by allowing the R&D expenses to be increased by up to 50% for taxable profit calculations. In other words, the taxable income can be reduced by up to an additional 50% of the cost of research and development activities.
Lastly, the tax reforms of January 2020 abolished the privileged tax regime of status companies to comply with international standards. Where these status companies used to benefit from not being taxed on profits related to hidden reserves, an increased tax burden has now been imposed. Status companies that had hidden reserves at the time of change of status can request to realize their hidden reserves within the five years ending December 2024, albeit at a privileged tax rate. The special tax rate started at 0.8% in 2020 and will increase every year by 0.2% to reach 1.6% by the end of 2024.
These tax deductions can be combined and should not exceed a maximum of 70% as set out by the Tax Harmonization Act which requires that at least 30% of the profit should be taxed.
Corporate tax advice and planning in Zug
While you focus on expanding and growing your business, Sigtax can help you remain tax compliant in Zug with expert tax advice and tax planning services. Contact us today for a free case evaluation or request a callback. We are here to help your business grow.