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Thomas Nabholz
In late September 2014, the Swiss Federal Council started the formal consultation process regarding draft legislation on a comprehensive reform of corporate taxation. The legislative project was driven by international pressure exercised by international bodies such as the EU and the OECD. The pressure mainly concerns certain cantonal tax regimes such as the holding company status and the mixed and domiciliary company status. The Swiss Federal Council now proposes to abolish these tax privileges. In order to preserve Switzerland’s attractiveness as location for both domestic and foreign businesses, a number of changes to the existing corporate tax system are proposed. As these changes are expected to have a negative impact on the Swiss public revenue, certain compensatory measures are proposed as well.
Proposed Changes
- Introduction of a nationwide license box regime: As of today, only one canton applies a license box regime. Under this concept, the IP definition is broad with almost to barriers to entry into the regime. The proposed nationwide license box is accessible to patents only and requires that the company applying for the status be involved in the development of the patent. The concept would result in an effective tax rate of patent-related income of between 8 and 9%.
- Notional interest deduction: It is proposed to introduce a notional interest deduction on surplus equity. The surplus equity of a company would be determined based on the asset classes as per the balance sheet. The applicable interest rate would be based on 10-year federal loans plus 50bp, but not less than 2%.
- Participation relief: The current participation relief operates as an indirect exemption and requires a minimum shareholding of at least 10% (or CHF 1 million in fair market value of the participation). For capital gains, a minimum holding period of 12 months is required also. Under the draft legislation, no minimum holding periods or quotas / fair market values would apply. Also, income and capital gains from participations would be exempted from the taxable basis directly.
- Tax loss carry forwards: In the existing legal framework, tax losses can be carried forward and set against taxable profits for a maximum of seven years. No restrictions as to the amount of tax losses apply. The proposal of the Federal Council now limits the amount of losses that can be used to set off profits to 80% of the profits of the future period. On the other hand, the seven year carry forward limit would be abolished. A Swiss holding company could also set losses incurred in its foreign subsidiaries against its own income, provided that certain requirements are met.
- Capital duty: Switzerland levies a capital duty of 1% on shareholders’ contributions to the equity of a company. This duty is proposed to be abolished
Compensatory Measures
- Introduction of a capital gains tax on privately held assets: The current legislation exempts capital gains on privately held assets (except for real estate in Switzerland) from taxation. The Federal Council proposes to introduce a capital gains tax, with certain reductions in the taxable basis for capital gains realized on shares. Consequently, losses on privately held assets would become deductible, but only from capital gains realized in the same period.
- Dividend taxation for individuals: Dividends received from qualifying participations are subject to a reduced tax rate under current law. Under proposed legislation, the taxation would be slightly increased.
Timeline and Need for Action
The consultation procedure will be finished in December 2014. Depending on the outcome, the government will revisit the proposal. After that, the proposal will be discussed and voted on in the Swiss parliament. Irrespective of a potential call for referendum by the Swiss people, it is unlikely that the new legislation will be enacted before 2019.
The legislative project is controversial and the political debate will likely be intense. Therefore, it is difficult to predict whether or not the Corporate Tax Reform will be implemented as proposed. Parties who are potentially concerned by any of the measures outlined above are advised to await further developments and to monitor the Progress.