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CTR III and Switzerland versus EU Commission

11 Jul 2013
The Swiss Corporate Tax Reform III (CTR III) was initiated in 2008 by the Swiss Federal Council. The main goal of CTR III is to improve the tax environment for multinational companies with a taxable presence in Switzerland, in order to improve economic growth, employment, and ultimately prosperity in Switzerland. Taxand Switzerland details this corporate tax reform and its impact on MNCs operating within the jurisdiction.

CTR III also aims to resolve the current dispute between the EU Commission and Switzerland began in February 2005 arising with regard to some of Switzerland’s cantonal tax regimes. The EU Commission asserts that certain cantonal tax regimes (such as the holding, domiciliary and mixed company regimes) constitute unfair tax competition and are in violation of the 1972 Switzerland-EU Free Trade Agreement as these tax regimes permit privileged taxation of certain income, so-called “ring fencing”. The commission asked Switzerland to present alternative solutions by June 2013.

The CTR III report concludes that the overall effect of the proposed amended measures need to result in the following effective tax rates for “mobile” income taxable in Switzerland:

  • 0% for dividend income
  • 2 – 3% for interest income
  • 5 – 8% for licensing income
  • 10 – 12% for trading income

The report voices the expectation that international groups whose Swiss trading subsidiaries are currently subject to an effective (combined federal/cantonal/communal) rate of approx. 9 – 12% will accept an increase of approx. 2%. 

The steering committee recommended replacing cantonal tax regimes with a variety of measures: 

  • Substantial lowering of effective ordinary tax rate from currently approx. 12% - 24% to 12% - 14%. A rate of approx. 14% is expected to apply in particular for the “hub” cantons (Zurich, Basel and Geneva), whereas many of the smaller cantons would remain at 10 – 12% range. Certain Swiss cantons already offer ordinary effective income tax rates of approximately 12.7%. 
  • A “license box” for income arising from the exploitation and use of intellectual property and a greater deduction for research and development expenses. As of 1 January 2011, the canton of Nidwalden reduced the taxation of certain licensing income, whereupon net license income from the use of intangible assets is taxed separately, combined with a reduced corporate tax rate, resulting in an effective income tax rate of 8.8%. 
  • The introduction of a notional interest deduction on equity
  • Replacing the participation deduction system for dividend income (which provides “indirect” relief and often causes system-inherent dilutions and cut-backs) with a credit system that provides direct relief
  • Abolishment of the stamp tax on the constitution of or increase in equity
  • Option to waive annual capital tax

The interim report acknowledges that new taxation rules must not contain any elements of ring-fencing, must not aim to achieve international non-taxation, and must be based on sound taxation principles (or at least one EU member state must already apply such taxation rules).

Your Taxand contact for further queries are:
Roger Dall’O

T. +41 44 215 77 77

Ursula Wechner
T. +41 44 215 77 77

Taxand's Take

The goal of the proposed measures is to maintain - and even strengthen - Switzerland’s attractiveness as a business location, while remaining  “EU-compatible”.

The steering committee is expected to issue its final recommendations in the Autumn of 2013 so that the official legislative consultation procedure can start in early 2014. Grandfathering and grace period issues will require attention at this time too. It is expected that the changes will take at least five years which should give companies sufficient time to analyse the situation and align their business model if required. The long-standing and well established ruling practice in Switzerland will provide for legal security and planning reliability. 

In the short term, nothing should change. Privileged taxation regimes continue to apply and new rulings will still be possible.

Taxand's Take Author

Roger Dall'O

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