The Swiss government has gone the extra mile in leveraging low corporate tax rates as a competitive advantage. In Switzerland, corporate tax rates vary depending on the canton where you are operating your business.
Cantons are administrative units with a high level of autonomy compared to the central government—they competitively offer low tax regimes in order to attract large multinational companies. Between the Swiss cantons is a continuous "fiscal struggle" for the lure of big investors
For a long time, the winner of this inter-cantonal battle has been the canton of Zug, which managed to attract so many corporations that it began to have problems with "accommodation space." The canton is home to the general or regional headquarters of big corporations like Johnson & Johnson, Burger King Holdings Inc, and Siemens AG among many others.
At present, both established and new businesses can enjoy the lowest corporate tax rates in Switzerland in the canton of Lucerne(11.3%)
The tax regime in light of the reform
Two years ago, the Swiss rejected a similar idea to reform corporate tax. However, they have recently largely accepted new tax provisions in order to achieve international acceptance. The key objective of the tax reform is to eliminate the preferential tax regimes for holdings, domicile and mixed companies within the cantons.
Switzerland is home to over 24,000 international companies. This is a result of the low tax rates provided by its 26 cantons with their own competitive rates, in addition to the federal income tax rate of approximately 8%. In Zug, alone, the canton of Zurich, there are approximately 1,800 multinational companies, including global commodity traders, pharmaceutical giants and a group of blockchain and cryptocurrency firms.
Switzerland has an average effective tax rate of less than 20% when federal and cantonal taxes are combined. In the case of large companies, the negotiations made with the cantons can even reduce up to 9%.
Regarding legal security and investor confidence, the tax reform pursues three objectives:
- To protect the tax appeal of Switzerland as a business location
- Promote the acceptance of international corporate tax law
- Ensure sufficient tax revenues to finance public activities.
Notwithstanding, attractive tax rates will remain a natural strength in Switzerland.
The Swiss tax system aims to comply with the minimum international standards, and yet remain an attractive location for multinational companies.
Corporate tax rate reductions
Following the abolition of the preferential tax regimes, the multinationals are subject to taxation at the usual corporate rates for cantonal and communal taxation purposes. Currently, effective tax rates range from 12% to 24%. But the cantons announced a reduction in the corporate tax rates for all companies, considering that the reform could lead to a substantially higher tax burden.
Thus, the canton of Lucerne proposed effective tax rates between 11.27% and 14%, and the three major cantons, Zurich, Bern, and Aargau, between 16 and 20%. Also, the corporate taxation in the canton of Zug across all levels drops to 11.91% (so far 14.35%). Our consultants can provide you with all the information you need regarding the measures planned in the other cantons.
Tax measures at cantonal level
As of January 1, 2020, the cantons must implement some mandatory tax provisions, in addition to the elimination of preferential tax regimes. For companies that lose their preferential tax status, a special low tax rate should be implemented for a step-up in the tax base. This serves as a smooth transitional measure. Furthermore, the patent box must be introduced, as well as a neutral step-up tax of hidden reserves upon migration to Switzerland.
The cantons may also opt for several voluntary tax measures, such as a super deduction for research and development costs. Also, a notional interest deduction can be implemented for cantons that have an effective tax of more than 18%, such as the canton of Zurich. Another voluntary measure that can be introduced is a reduced annual capital tax on net equity related to investments, patents and comparable rights as well as intra-group loans. Furthermore, it may be of interest to multinationals that, now, a Swiss permanent establishment of a non-Swiss company could apply for a tax credit of the residual non-Swiss withholding taxes.
It should be specified that the reduction of the cantonal tax rates on profit and the voluntary measures of taxation will be subject to a public vote or must be approved by the relevant cantonal council.
The cantonal governments have launched official announcements and it’s anticipated that most Swiss cantons will provide attractive tax rates for all companies: 12% -14% applicable to pre-tax income (including federal income tax).
Thus, Switzerland will remain a low-tax centre for big companies. The referendum on approving the overhaul of corporate income taxes will not change this.
In terms of Swiss competitiveness worldwide, the country retains its position in the first third, Hong Kong and Singapore, plus the traditional offshore domiciles remain the clear leaders in terms of fiscal appeal outside of Europe.
This year, Switzerland had a lower average tax rate overall, mainly due to cuts in the cantons Basel-Stadt and Vaud. These cantons have brought some movement in the situation of the corporate tax rate for companies. Moreover, they could be the first signs of a trend that could lead to fundamental changes in the Swiss corporate tax landscape shortly.
Lightly fiscal policy is Switzerland's most important asset, but the developed university environment, the public sector efficiency and the highly appreciated legislation in the field of intellectual property rights are also worth considering. Our company closely follows the process of fiscal reform, both from a political and economic perspective. Thus, our experts can provide periodic and comprehensive information on current discussions and may examine your company's tax planning in the context of tax reform.
For more details and assistance regarding taxes in Switzerland, you can reach out to our expert consultants. Our highly experienced and well-informed team is ready to answer all your questions and give you all the help you might need.