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Switzerland Builds Bridges With EU
In anticipation of the Corporate Tax Reform III (CTR III), the Swiss Federal Council has established a task force comprising representatives from the Confederation and the Cantons. The task force will be presided by the Federal Council for Finance itself and will also include working groups with representatives from the industry as well as tax advisors.
The Swiss Federal Council considers that an attractive fiscal environment is an important element for ensuring economic growth and employment in Switzerland, and international acceptance of the Swiss tax system shall be increased. CTR III shall provide solutions to resolve the controversy between the EU and Switzerland regarding special cantonal tax regimes for companies (domiciliary, mixed and holding companies). Furthermore, the aim of the CTR III is to strengthen Switzerland's position in international tax competition and to remove unnecessary tax burdens from Swiss tax resident companies. The key elements of the reform are the abolition of the issuance stamp duty on equity and the improvement of the corporate tax law. Taxand Switzerland investigates the changes included in the reform and their impact on national and multinational companies alike.
Tax controversy between the EU and Switzerland
In connection with the holding, domiciliary and mixed company tax status, the EU Commission took the position in 2007 that cantonal tax regimes are unauthorised state aid, and that they distort the competition and violate the 1972 Free Trade Agreement between the EU and Switzerland. Switzerland categorically rejects this interpretation.
However, in 2009 Switzerland proposed some amendments to the cantonal tax regime as a solution to the Swiss - EU tax controversy (including no business activity for holding companies, amendments for the mixed companies and the abolition of the domiciliary companies). The compromise was accepted by the EU Commission but failed due to the opposition of certain EU member states.
In 2010, Switzerland was invited by the EU Commission to discuss the application of the EU Code of Conduct for Business Taxation (EU Code of Conduct). According to the EU Code of Conduct the EU member states are committed to rolling back existing tax measures that constitute harmful tax competition and must refrain from introducing such measures in the future (standstill clause). Although Switzerland is not part of the EU, and the EU Code of Conduct is not applicable to Switzerland, the Swiss Federal Council has agreed to enter into negotiations with the EU Commission regarding the tax controversy. CTR III will provide solutions to resolve the controversy between Switzerland and the EU regarding the cantonal tax regimes.
Aim: strengthen Switzerland's position in international tax competition
The aim of the CTR III is to strengthen Switzerland's international tax position and remove unnecessary tax burdens from Swiss tax resident companies. The CTR III includes:
- Abolishment of issuance stamp duty
Switzerland levies an issuance stamp duty of 1% on the issuance of shares of Swiss corporations and increase of equity. Important exemptions are available, such as the exemption for tax-neutral reorganisations, for example the contribution of participations into a Swiss corporation. With the CTR III, the issuance stamp duty on equity should be completely abolished.
- New participation exemption system
The disadvantages of the current system of the participation system shall be abolished. In future, participation income will be directly deducted from the corporation's profit and therefore be fully tax exempted. Capital gains derived from the sale of participation will no longer be subject to income taxation, regardless of the holding period and the investment quota (currently a minimal investment quota of 10% and a holding period of at least one year are required).
- Full use of losses
Currently, losses suffered by corporations can only be credited against future profits of the following 7 business years. The Federal Council now intends to abolish any time limitation with regard to the crediting of losses against future profits. Furthermore, it is intended that final losses of Swiss and foreign subsidiaries which can no longer be credited against the profit at their levels can be credited against profit of a Swiss parent company.
- Further improvements
The task force of the CTR III will review and suggest improvements for the current research and development (R&D) situation for Swiss companies (eg multiplying the R&D expenses for tax purposes). Due to the tax competition within Switzerland, the cantons have also improved favourable taxation for international operating groups. For example, the canton of Nidwalden has already introduced a license box regime according to which royalty income is taxed at a rate of 8.8%.
CTR III will achieve two objectives:
- International acceptance of the Swiss tax system will be increased by resolving the tax controversy between the EU and Switzerland.
- Switzerland's position in international tax competition will be strengthened.
The tax reform shows that Switzerland will consistently improve its corporate tax system and will continue to remain a very attractive business location for nationals and multinationals in the future. Switzerland will make sure that the corporate tax burden for multinationals in Switzerland will still be very competitive and will certainly grant grandfathering clauses for the adaption under the new tax rules, in particular in view of the negotiations regarding the tax controversy with the EU.
Thanks to the domestic tax competition in the last few years, cantons have substantially reduced their overall corporate tax rates under the current tax system. Certain cantons have effective corporate income tax rates of only 11%-12% (including federal, cantonal and communal tax).
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