On 19 May 2019, with a majority of 66.4%, Switzerland approved the Federal Act on Tax Reform and AHV Financing (Tax Reform). Main goal of the Tax Reform is to abolish certain criticized tax features which will be replaced by internationally accepted tax regimes. Thereby Switzerland will remain attractive as a business location and will secure a reasonable amount of tax revenues. The new rules bring considerable changes to the Swiss tax landscape and shall enter into force on 1 January 2020.
Key measures of the Tax Reform are the following:
1. Abolition of preferential tax regimes
- Abolition of tax privileges for holding, domicile and mixed companies at cantonal level;
- Abolition of practices on tax allocation for principal companies and Swiss finance branches at federal level.
2. Patent box
- Mandatory introduction of a patent box, according to which part of the net profits from patents and similar rights are subject to reduced tax rates at cantonal level (limited to a 90% reduction).
3. R&D super deduction
- Optional introduction of an additional deduction of up to 50% for R&D expenses.
4. Notional interest deduction
- Optional introduction of a notional interest deduction on excess equity for cantons with an effective profit tax burden of at least 18.03% (currently only the canton of Zurich meets this requirement).
5. Maximum deductions
- Measures 2, 3 and 4 are subject to a relief restriction of 70%, i.e. at least 30% of the company’s profits must be subject to taxation.
6. Transitional rules for companies leaving the preferential tax regimes
- Mandatory introduction of a reduced tax rate at cantonal level applicable to profits generated by the realization of built in gains within 5 years of the company’s transition from a privileged tax regime to the ordinary tax regime (two-rate system);
- Possibility for the companies to request a change of tax status and a step-up in basis before the new rules enter into force (i.e. until 31 December 2019) followed by the depreciation of built-in gain within 5 or 10 years, depending on the canton (early transition, allowed in most cantons).
7. Migration step-up
- Mandatory introduction of a migration step-up regime at federal and cantonal levels: companies relocating to Switzerland may tax-neutrally disclose built-in gains and depreciate them in the following years.
8. Other measures
- Reduction of profit and capital tax rates at cantonal and communal level;
- Increase of the exemption for qualifying dividends for individuals owning at least 10% of the capital in legal entities to 70% at federal level and at least to 50% at cantonal and communal level;
- Limitation of the tax-exempt distribution out of the account for capital contribution reserves for publicly listed entities on the Swiss Stock Exchange (limitation not applicable in cross boarder parent-subsidiary relationships);
- Extension of the lump-sum tax credit to Swiss permanent establishments of foreign companies.
The Tax Reform entails the most significant changes in the Swiss tax laws. The interaction between the different measures is complex. Therefore, taxpayers should analyse the impact of the Tax Reform on their tax position, and develop with their tax advisors the most sustainable strategy to take advantage of the different measures introduced by the Tax Reform.