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26 March 2018 Swiss Federal Council publishes revised bill together with dispatch on Tax Proposal 17 On 21 March 2018, the Swiss Federal Council published the revised bill together with the dispatch1 on the Tax Proposal 17 for parliamentary discussion. The proposal's objective is to secure the long-term tax attractiveness of Switzerland as a business location and to restore international acceptance of the Swiss tax system. Based on the results of the consultation on Tax Proposal 17, the Federal Council has made some marginal adjustments to the consultation paper. Corporate Tax Reform III was intended to abolish certain tax privileges while at the same time strengthening Switzerland's tax competitiveness. On 12 February 2017, the voters rejected the Corporate Tax Reform III. However, since the need for reform was undisputed, the Federal Council immediately instructed the Federal Department of Finance to draw up a new draft. On 6 September 2017, the Federal Council initiated the consultation on Tax Proposal 17. Tax Proposal 17 contains tax measures to ensure that companies can continue to benefit from a competitive tax environment. In addition, greater attention has been paid to the financial implications of the bill for the federal government, cities and municipalities. On 21 March 2018, the Federal Council adopted the dispatch on the Federal Act on Tax Proposal 17. Today's privileged tax regimes and existing rules of practice no longer comply with international standards and are to be eliminated. At the cantonal level, tax privileges for holding companies, domiciliary companies and mixed companies are to be terminated. At federal level, the practical rules on the tax allocation of principal companies and Swiss finance branches are to be repealed. A core element of the proposal is the introduction of a patent box regime in accordance with the Organisation for Economic Co-operation and Development (OECD) standard, which is mandatory for the cantons. In the box, net profits from domestic and foreign patents and similar rights are to be taxed separately from other net profits with a maximum reduction of 90%. Compared to the Corporate Tax Reform III, the proposal defines more narrowly what qualifies for patent box taxation. In particular, non-patented inventions by small and medium enterprises and copyrighted software are excluded. The calculation of the patent box profit is complicated and involves additional administrative effort. Due to the application of the so-called modified nexus approach,2 the company must also have sufficient economic substance. Before the patent box can be applied for the first time, the corresponding tax deducted research and development (R&D) expenditure of the last 10 years must be recaptured and taxed. Although the design of the patent box is based on current international standards, with the proposed strict definition of patents, Switzerland has not implemented the full benefit available under international standards. Nevertheless, the introduction of the patent box is very positive for the research intensive industry. The introduction of this super deduction for domestic R&D is Switzerland's commitment to be recognized as a location for R&D. For administrative reasons, the maximum deduction of 50% is limited to personnel expenses for R&D plus a flat-rate surcharge of 35% for other costs and/or 80% of expenses for domestic R&D carried out by third parties or group companies. The patent box, super deduction on R&D as well as possible depreciations from the early transition from privileged to ordinary taxation are subject to restrictions of an overall tax relief. The Tax Proposal 17 specifies a maximum tax relief of 70%, while the Corporate Tax Reform III still assumed a maximum tax relief of 80% of taxable profits. This means that companies should always tax at least 30% of its taxable profit before application of the special regulations and loss carry-forwards. And no losses may result from the application of the special regulations. In the event of a transition from privileged to ordinary taxation, the hidden reserves existing at that time, including any self-created goodwill, are confirmed by the tax authorities. Currently, the cantons have two different models: a five-year special rate taxation on realization (so called two-rate system) or a tax-free revaluation of these hidden reserves in the tax balance sheet with corresponding tax-effective depreciation (so called step-up model). Due to the current legal practice, the step-up model is no longer envisaged. However, the cantons are free to determine the amount of the special tax rate. Companies that are currently subject to a special tax regime should review whether the tax status should be waived before the Tax Proposal 17 comes into force in order to be able to benefit from the step-up model, if beneficial and possible. The waiver of a notional interest deduction (deduction of fictitious interest on excess equity) was criticized by many participants in the consultation process (e.g., Canton of Zurich3 or Conference of Cantonal Finance Directors4). The (optional) notional interest deduction is an efficient substitute way to increase the competitiveness from a tax point of view, especially for cantons without much scope for a tax rate reduction. The notional interest deduction is also not included in the dispatch. It can be assumed that this point in particular will lead to discussions in the parliamentary debate. In order to support the cantons in implementing Tax Proposal 17, the canton's share of the federal direct tax is to be increased from 17% today to 21.2%. Based on the results of the consultation process, the share of 20.5% has been increased again. This will enable the cantons to reduce their tax rate, so that in combination with the proposed measures, the attractiveness can be safeguarded. The reduction of cantonal profit tax rates is not directly covered by Tax Proposal 17, but many cantons have already announced or implemented it in order to remain attractive from a tax perspective for former tax privileged companies. Two different tendencies can be observed. Some cantons (e.g., Vaud or Geneva) are reluctant to implement alternative measures, but reduce tax rates in some cases substantially. The other cantons (e.g., Zurich) are only reducing the tax rate slightly, but are making full use of alternative measures. Dividend income of individuals from qualifying participations is currently partially exempt from taxation. In the future, the ratio subject to taxation shall be raised to 70% (instead of the current 50% for business investments and 60% for private investments) at federal level and at least 70%5 at cantonal level. The increase in dividend taxation will be offset by the expected reduction of cantonal profit tax rates. In order to compensate for the elimination of the low capital tax rate for companies with tax privileges, the cantons should be given the option of reducing the capital tax rate on qualifying participations and patents and comparable rights. For (socio) political reasons, the monthly minimum amount for child and education allowances shall be increased by CHF30 to at least CHF230 and CHF280 respectively. The Tax Proposal 17 is a slimmed-down version of the Corporate Tax Reform III. The Federal Council wants to achieve quick improvements for domestic and foreign companies. Therefore, the proposal is an overall balanced political compromise supported by the cantons, cities and municipalities. The Federal Council has once again pointed out that in order to avoid legal uncertainty, a referendum must be avoided, if possible. Nevertheless, parliamentary discussions must be expected, particularly in the areas of the dividend taxation, child and education allowances and notional interest deduction. Parliamentary discussions are expected to be concluded in the 2018 autumn session. The law on Tax Proposal 17 adopted by Parliament is subject to an optional referendum. The current view is, that certain socialist groups will seek a referendum. Unless a referendum is held, the bill could enter into force as of 1 January 2019, subject to transitional regulations. If a referendum is held within 100 days of the official publication, the Tax Proposal 17 will be submitted to the voters for a vote, which would then likely take place in the course of 2019. The entry into force of Tax Proposal 17 would be delayed accordingly. 1 The dispatch is a report from the Swiss Federal Council to the Parliament. It includes both the draft law changes (i.e., "bill") but also the commentary and reasoning of the Swiss Federal Council behind the suggested changes in law. 2 OECD/G20, BEPS Action 5: Agreement on Modified Nexus Approach for IP Regimes, OECD 2015, available at: http://www.oecd.org/ctp/beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf. 3 Press release canton Zurich 27 November 2017, available at: https://www.zh.ch/dam/Portal/internet/news/mm/2017/steuervorlage_17/Praesentation_Medienkonferenz.pdf.spooler.download.1512400200187.pdf/Praesentation_Medienkonferenz.pdf. 4 Press release FDK 24 November 2017, available at: http://www.fdk-cdf.ch/-/media/FDK_CDF/Dokumente/Themen/Steuerpolitik/Unternehmensbesteuerung/171124_SV17_Vl_Stn_MM_FDK_DEF.pdf?la=de-CH. 5 Under the current regime, the Cantons are not limited with regard to the relief of qualifying participation income. Document ID: 2018-5463 |
