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EU tax dispute ends due to further Swiss CIT reform developments

Switzerland and the EU have recently signed a mutual understanding regarding corporate taxation which brings an end to a long dispute. With the envisaged CIT reform Switzerland is willing to abolish certain tax regimes, particularly those that provide different treatment of domestic and foreign revenue (known as ring-fencing). Taxand Switzerland explains the background to the lengthy dispute and how the corporate tax reform is positive for both Switzerland and the EU.

End of tax dispute between the EU and Switzerland
In July 2014 the delegation heads of Switzerland and the EU initialed a mutual understanding on corporate taxation. The understanding brings an end to a dispute between the EU and Switzerland which has lasted almost a decade.

Since 2007 in connection with the holding, domiciliary and mixed company tax status, the EU Commission has taken the position that cantonal tax regimes are an unauthorised state aid which distorts the competition and violates the 1972 Free Trade Agreement between the EU and Switzerland. In addition Switzerland was invited by the EU Commission to discuss the application of the EU Code of Conduct for Business Taxation (EU Code of Conduct). Switzerland categorically rejected the interpretation of the EU and turned down the application of the EU Code of Conduct since Switzerland is not part of the EU. However, the EU maintained its pressure and insisted on abolishing favourable Swiss taxation regimes.

According to the mutual understanding agreement recently signed the Swiss Federal Council reaffirms its intention to abolish certain tax regimes within the framework of the CTR III, particularly those that provide for different treatment of domestic and foreign revenue (ring-fencing). New tax measures shall be based on international standards. In return the EU Member States confirm their intention to lift any corresponding countermeasures taken as soon as the regimes in question have been abolished. The relevant parliamentary committees and the cantons will be informed accordingly. The Federal Council will decide on the signing of the understanding thereafter.

Further developments in the field of the CTR III
In order to resolve the tax controversy with the EU and improve the Swiss corporate tax system the Swiss Federal Council put together a task force for the envisaged CTR III. This reform will also consider the new international developments, in particular the requirements under the BEPS Report of the OECD.

In December 2013 the project organisation prepared a report that set out and evaluated various measures. According to this report the replacement measures must specifically satisfy the following 3 criteria:

  • They must ensure the ongoing fiscal competitiveness of Switzerland, be internationally accepted and financially viable for Switzerland
  • The report provides as replacement measures, in particular for “mobile earnings”, the introduction of an IP box taxation regime and of a notional interest deduction on equity
  • Depending on the possible arrangement of these replacement measures, the cantons will need to reduce their ordinary corporate income tax rates in order to achieve internationally competitive corporate income tax rates for “mobile earnings”

Based on the report of December 2013 a consultation regarding the envisaged CTR III with the cantons took place. According to the resulting report published in April 2014 the proposed measures have generally been welcomed and the tax reform is supported by all cantons.

The replacement measures of the CTR III and the reduction of the ordinary income tax rates shall result in the following effective overall tax rates for “mobile earnings” in Switzerland (including federal, cantonal and communal tax):

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

Due to the above mentioned measures Switzerland shall remain very attractive as a tax location for multinational companies. At the same time the aim of the CTR III is to consider international developments and requirements in the field of corporate taxation. This will provide clarity and legal security for all companies.

As a next step the Federal Department of Finance will prepare a consultation draft on the basis of the project organisation's report and the comments submitted by the cantons on it. It is planned that the consultation will be initiated by September 2014. International developments that occur in the meantime are to be taken into account as work progresses.

Your Taxand contacts for further queries are:
Roger Dall’O
T. +41 44 215 77 31

Oliver Jäggi
T. +41 44 215 77 77

Taxand's Take

In the framework of the Corporate Tax Reform III the existing privileged taxation regimes (holding, domiciliary and mixed company taxation regimes) shall be abolished or at least adapted and replacement measures shall be introduced (in particular introduction of an IP box taxation regime and a notional interest deduction on equity).

In addition the ordinary corporate income tax rates at the cantonal / communal level shall be reduced.

Finally the corporate tax system shall be improved in other aspects (for example improvement of the participation exemption, of the tax loss carried forward rules, of the lump sum tax credit rules or the abolishment of the capital tax at the cantonal / communal level).

Taxand's Take Author

Roger Dall'O