Overview of the Swiss Tax reform of May 2019
Historically, Switzerland has been known to appeal to businesses around the globe. One of the reasons behind its appeal is the multitude of interesting and privileged tax regimes, divided over the 26 cantons of the Confederation.
Over the course of the years, the European Union (EU) and the Organization for Economic Co-operation and Development (OECD) have been countering harmful tax practices. The OECD launched a report in 2015 called the Action 5 report of the Base Erosion and Profit Shifting (BEPS) initiative.
In short, BEPS targets two issues:
1. Base Erosion
Base erosion is the (ab)use of legislation and the (ab)use of sometimes very elaborate constructions to artificially circumvent taxes by reducing the size of a company’s taxable profit in a certain country.
2. Profit Shifting
Basically this means that a company will shift its profits from a high-tax jurisdiction to a low-tax jurisdiction (e.g. by transfer pricing).
The OECD was not very keen on several Swiss tax regimes and listed four regimes that needed to be removed for Switzerland to comply with the BEPS initiative.
These regimes are:
1. The cantonal holding company regimes
2. The cantonal mixed company regimes
3. The cantonal domiciliary company regimes
4. The federal principal company regime
In order to comply, Switzerland drafted a first reform keeping in mind that they need to stimulate the acceptance of their tax system and at the same time try to preserve Switzerland as an attractive business location.
In spite of its efforts, the first draft was strongly rejected by a vast majority in a federal referendum.
The Swiss authorities took into account the considerations made by those who opposed the first reform and drafted a second proposal, which was accepted by a following federal referendum which took place in May 2019.
The federal reform mainly targeted the abovementioned regimes, by slowly abolishing them over the course of 4 years (2020 – 2024) with transitional measures, combined with an overall reduction of corporate tax rates in the Cantons to keep Switzerland’s competitiveness.
The reform would make the Swiss tax system more in tune with the demands of the OECD and the EU and the Cantons can opt for several regimes prescribed by the Confederation, while other measures are mandatory.
Geneva held a cantonal referendum on the same day as the federal reform. The Geneva reform was also accepted and its corporate tax will be lowered to 13.99%. In comparison, the current tax rate in Geneva is 24,2%.
Below you will find some other measures that the cantons can or must implement as of the 1st of January 2020:
A “patent box” allowing qualifying net profits from patents and associated IP rights to be included in the assessment basis to a reduced extent of at least 10% and maximum 90% (at discretion but mandatory)
A “super deduction” for R&D of up to 50% (optional – accepted in Geneva)
A notional interest deduction for cantons having an effective tax rate higher than 18%, e.g. Zurich (optional – refused in Geneva)
If you require assistance or advice in regard to these changes or to your company in general, we at Vanbelle Law offer years of experience in the field, so feel free to contact us.