Swiss Corporate Tax Reform III
On 06.05.2015, the Federal Council adopted the message on the Law on Corporate Tax Reform III. The objective of the reform is the strengthening of the competitiveness of the Swiss tax system and, thus, the Swiss business location. The proposed measures are in line with current international standards and help to increase legal certainty and business planning:
Abolition of the cantonal tax regimes for holdings, mixed and domiciliary companies
In the past, the regulations regarding cantonal tax statuses for holdings, mixed and domiciliary companies have made a valuable contribution to the attractiveness of the business location Switzerland. However, they are no longer compatible with international standards and, therefore, shall be abolished. Furthermore, also the practices of the authorities regarding the taxation of principal companies and the Swiss Finance Branch shall no longer be applied.
Patent Box and greater deductibility of expenses for research and development
For cantonal tax purposes, an “IP box” shall be introduced which provides for a preferential treatment of income from patents and similar rights attributable to R&D activities in Switzerland. According to the so-called “Modified Nexus Approach" developed by the OECD, income derived from eligible IP rights may benefit from the IP box regime in proportion of the research and development expenditures incurred by the taxpayer in relation to the said IP rights. Consequently, a particular emphasis is placed on the existence of a substantial economic activity in Switzerland. Additionally, under certain circumstances, companies will be able to obtain a maximum 30% uplift of their qualifying expenditure.
The OECD has not yet issued concrete directives regarding the calculation of the privileged IP box income. At present, the Federal Council proposes to use the so-called residual method (top-down approach, indirect calculation method) according to which non IP-related profits and profits from routine functions (e.g. sub-contractors, commission agents) and trademark payments are deducted from net profits and are taxed ordinarily. The remaining amount of profits attributable to the use of IP, multiplied by the “Modified Nexus Approach” ratio, is allocated to the IP box. The Cantons may exempt up to 90% of the so determined IP box income.
Moreover, the Cantons may grant higher deductions for R&D costs as well as provide relief for equity in relation to IP for capital tax purposes (see para. 3 below).
Capital tax relief
The Cantons may provide relief for equity in relation to IP and qualifying participations. This measure also allows incentives for R&D through the capital tax and ensures that there are no multiple taxation even with respect to the capital tax.
Disclosure of hidden reserves
The Corporate Tax Reform III provides for uniform rules for the disclosure of hidden reserves in the case of migration into Switzerland (i) and transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation.
Hidden reserves may be disclosed upon immigration (step-up). The step-up would have to be allocated to individual assets to the extent possible and amortized according to the individual amortization period pertaining to such assets. The portion of the step-up that exceeds the fair market value of assets (goodwill) would have to be amortized over a period of 10 years.
Companies transitioning out of tax-privileged cantonal tax regimes (such as mixed and holding companies) into ordinary taxation could release hidden reserves (including self-created goodwill) in a tax-privileged manner for cantonal/communal tax purposes within a period of 5 years (taxed at a reduced rate). The hidden reserves have to be documented and confirmed by the tax authorities.
Abolition of stamp duty on equity
The issuance stamp tax on equity capital of 1% shall be abolished.
Harmonisation of partial taxation on dividend income for individuals
At federal and cantonal level, the relief on dividends from investments in stocks greater than 10% is to fixed at 30%. Consequently, 70% of the dividend income will be subject to ordinary taxation.
Extension of the eligibility for foreign tax credits to Swiss permanent
The eligibility for foreign tax credits shall be extended to Swiss permanent establishments of foreign entities that are subject to ordinary Swiss taxation at both a federal and a cantonal/communal level.
Reduction of cantonal corporate tax rates
Many cantons intend reducing their corporate tax rates that currently range from approximately 12% to 25% (combined federal/cantonal/communal rate).