Taxand Switzerland explains the key elements of the final CTR III package adopted by the Swiss Parliament on 17 June 2016.
On 17 June 2016 the Swiss Parliament passed the bill on the Corporate Tax Reform III (CTR III). With the CTR III the current special tax regimes for international companies will be replaced by new internationally accepted tax measures at federal as well as at cantonal level. The main goal of the CTR III is to align Swiss tax law with the international tax standards while maintaining the attractiveness of Switzerland as a business location.
The key elements of the final CTR III package adopted by the Swiss Parliament on 17 June 2016 are as follows:
i) Abolition of the privileged tax status regimes for companies
At cantonal level the provisions which rule the preferential cantonal tax regimes (holding, domiciliary and mixed company) will be abrogated. At the same time certain federal tax practices (principal company and Swiss finance branch) will be abolished.
ii) Disclosure of hidden reserves upon change of tax status
At cantonal level a mandatory provision governing the transition from a preferential cantonal tax regime (holding, domiciliary and mixed company) to the ordinary cantonal taxation will be introduced. Undisclosed hidden reserves, including self-generated goodwill, realised by corporations benefiting from a privileged cantonal tax status regime will be taxed at a reduced tax rate within 5 years after the CTR III has come into force resp. from the change of tax status (separate taxation approach). In case of change of tax status prior to enactment of CTR III, most cantons allow a privileged disclosure of hidden reserves accrued under the preferential cantonal tax regime in the form of a step-up in the tax basis with subsequent tax effective depreciation in the following years.
iii) Step-up of hidden reserves upon migration to Switzerland
At federal and at cantonal level companies will be allowed to disclose hidden reserves in the tax balance sheet at the beginning of the tax liability in Switzerland. With exception for hidden reserves related to qualifying participations (of 10% or more, as at present), the disclosure of hidden reserves at the beginning of the tax liability is income tax exempt. Disclosed hidden reserves have to be depreciated in the following years according to the applicable depreciation rates for tax purposes (depreciation period for goodwill limited to 10 years). This provision is mandatory at federal and at cantonal level.
iv) Notional interest deduction on surplus equity
At federal level an imputed (notional) interest deduction calculated on surplus equity will be granted. The surplus equity corresponds to the share of equity exceeding the equity required by a company in the long term for its business activities. At cantonal level a similar provision can be adopted by the cantons (optional) only if at shareholder level (private person) they levy income tax on dividends from qualifying participations on at least 60% of the dividend received.
v) Patent box
At cantonal level a mandatory provision will introduce a patent box system (privileged taxation of royalties from patents and similar rights) in line with international standards (OECD’s modified nexus approach). The maximum tax relief on patent box earnings will be 90%. Not applicable at federal level.
vi) R&D super deduction
Cantons can opt for the introduction of increased tax deduction with respect to research and development (R&D) costs. This deduction will be limited to 150% of the R&D expenditures incurred in Switzerland. Not applicable at federal level.
vii) Limitation of cantonal tax reliefs
At cantonal level the overall tax relief in relation to notional interest deduction, patent box system, R&D super deduction and depreciation of hidden reserves disclosed prior to enactment of CTR III cannot exceed 80% of the taxable net profit before deduction of the losses carried forward and under exclusion of the net income from qualifying participations. Not applicable at federal level.
viii) Relief on capital tax
Cantons can opt for the introduction of a capital tax relief with respect to the equity relating to qualifying participations, patents and similar rights as well as inter-company loans.
ix) Lump sum credit for Swiss permanent establishments
At federal and at cantonal level the lump sum tax credit for foreign withholding tax will be extended to Swiss permanent establishments of foreign companies.
In addition to these CTR III measures, the cantons are planning to lower the cantonal corporate income tax rates. It is expected that the combined (federal/cantonal/communal) effective income tax rates will on average decrease from 20-21% to 12-14%.
The abolition of the federal issuance stamp tax as well as the introduction of a tonnage tax for shipping companies were removed from the CTR III package and moved to a separate bill.
The Social Democratic Party (SP), among others, called a referendum and the necessary 50,000 signatures were successfully collected. The Swiss population will vote on the CTR III on 12 February 2017. If the voters accept the bill, the reform will come into force not before 1 January 2019 at federal and at cantonal level. If the voters decide against the CTR III, a new bill will have to be drafted immediately, since international developments dictate timely adjustments.
The parliamentary approval of the CTR III bill in June 2016 was an important step in achieving an internationally accepted corporate taxation regime. Despite the abolition of the privileged tax status regimes, the CTR III measures together with the reduction of the cantonal income tax rates will allow Switzerland to remain a globally competitive business location for companies with business activities Switzerland.
The central aspect for international trading companies operating in Switzerland will be the decrease in the cantonal corporate tax rates, while their benefit from the new tax reliefs with respect to patent box system and R&D super deduction will be limited. The main winners of the CTR III will be the Swiss SMEs as they will take advantage from both lower cantonal tax rates as well as the different CTR III measures.