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01 October 2018 / news

Swiss Corporate Tax Reform adopted

On 28 September 2018, the Swiss parliament adopted the bill for the Swiss corporate tax reform package, the Tax Proposal 17 (TP 17; Steuervorlage 17, project fiscal 17).

The reform package will strengthen Switzerland’s position as an attractive international business location and is expected to enter into force on 1 January 2020. Aside from favorable step-up mechanisms, TP 17 will introduce a notional interest deduction on equity financing for companies in the canton of Zurich. Any company which currently benefits from a preferential tax status such as the holding company, mixed company or finance branch status is now required to swiftly analyze its transition into the new tax system.

TP 17 – the bill as it stands

TP 17 replaces current tax regimes such as holding, principal, mixed company and finance branch regimes with new tax measures in line with international standards. As Switzerland is not tied back by the principles of the European Union, it provides more flexibility for R&D related activities, for instance by allowing outsourcing to related parties and third parties. Separately, many cantons announced significant tax rate reductions resulting in effective corporate tax rates in Switzerland of 12 to 14% in most cantons, thus effectively spearheading Europe as a business location. The final bill essentially mirrors prior drafts and does not contain any significant surprises:

Measures TP 17 – final bill and cantonal implementation
Patent Box
  • 90% reduction (modified nexus approach) on patents
  • Expected to include outsourcing to Swiss related parties or third parties (anywhere)
R&D Super-deduction
  • 50% super-deduction on R&D (salary) expenses
  • Includes outsourced activities
Step-up in basis in general
  • Tax neutral step-up on immigration or transfer of business operations/functions to Switzerland
Step-up in basis for regimes
  • Depreciation model on built-in gains/goodwill if tax regime ends
  • Separate rate model applies once TP 17 enters into force
  • Cantons to publish separate rate
Notional interest deduction
  • Deduction on excess equity financing up to an arm's length interest rate
  • Canton of Zurich only
Capital tax relief
  • Capital tax relief on qualifying investments (10%), patents and intra-group loans
Base-erosion limitation
  • Deductions under new tax measures combined (except general step-up regime) cannot exceed 70% of total income
Abolishing of tax regimes
  • Preferential tax regimes abolished
Foreign WHT credit
  • Swiss branches of non-resident entities will benefit from a foreign withholding tax credit (subject to certain conditions)
Cantonal tax rate reductions
  • Cantons to significantly reduce tax rates (12 to 14%)

In order to sweeten the deal, minor changes will be made, notably, to the preferential taxation of dividends for individuals (minimum tax basis of 70% on federal and 50% on cantonal level) and to the income and withholding tax treatment of qualifying capital reserves (additional paid-in capital). The latter changes only pertain to Swiss listed companies and due to broad exemptions essentially do not impact other multinationals.

Securing Switzerland as a prime business location

The final bill, in essence, closely follows the Swiss corporate tax reform III package which was rejected in a vote back in February 2017. A public referendum vote is expected for TP 17 in May 2019. Swiss businesses have one year to restructure and implement potential step-up mechanisms. Overall, the new corporate tax landscape will secure Switzerland's place ahead in the European landscape.

How to get ready for TP 17

TP 17 is expected to enter into force on 1 January 2020. Swiss businesses will have to evaluate which step-up mechanisms to apply as the results can be significantly different. Automated modelling tools and transfer pricing work will proof key in the new tax environment as most new measures cannot be implemented properly without a throughout transfer pricing check-up.

Action points for Q4 2018 and 2019

At the same time as TP 17, EU member states are implementing ATAD I and the multilateral instrument, which requires a step back to fully appreciate the big picture:

  • Step-up: TP 17 provides a new step-up mechanism (Separate Rate Model) which differs from current rules (Depreciation Model). The tax impact varies and thus needs to be analyzed on a case-by-case basis. Our software driven solutions which have already been accepted by various Swiss tax authorities will make it easy to evaluate the impact and chose the right model.
  • EU ATAD I: EU member states implement CFC rules, however, in different manners. Whereas some EU member states opted to target mainly offshore locations, others pose more tricky issues for Swiss business. As CFC rules will apply as of 1 January 2019, they will overtake TP 17 upon implementation, thus urgently requiring attention.
  • Relocation of activities/functions: Many groups have started to shift financing activities and R&D heavy functions to Switzerland in view of the highly competitive environment. The new rules on step-up upon immigration will secure the tax efficiency for the next decade.
  • MLI impact: On top of everything, the multilateral instrument will change the cross-border impact of tax treaties simultaneously prompting highly complex issues. Our automated software analysis developed in collaboration with our clients helps to effectively assess the impact of the MLI in minutes – where internal or external tax departments would need weeks.

We recommend clients to consider all elements of TP 17 and start the implementation process by focusing on the above topics for their Swiss operations.

Loyens & Loeff provides tailor-made multi-jurisdictional solutions to clients in order to ensure a smooth and efficient transition from the current Swiss tax environment to a post-BEPS world, both in Switzerland and the European market. We have already helped many clients to adapt to the new environment by simultaneously taking care of cross-border legal, tax and regulatory aspects of the transition process.

The new tax world appears to be a complex matter – we believe everything can be solved with dedication, the right attention to detail and drive for efficiency.