Swiss Corporate Tax Reform (TRAF)
Switzerland Remains an Attractive Location for Companies with Strong IP and R&D Practices
Pavel Kulikov – SFTA Ambassador, Partner at PLL Legal & Cross-Border Practice
Zurich, Wednesday, June 20th, 2019
Switzerland has always been an attractive location for incorporating a business and with amount of the Fintech companies registered has more than doubled there in the past three years alone, the country remains one of the most preferred jurisdictions for FinTech firms to set up in Europe. One of the main reasons behind this was a particularly attractive taxation regime in Switzerland: tax privileges were implemented at the federal and the cantonal levels for special status companies, such as the principal and Swiss finance branch, as well as holding, domicile and mixed companies.
On 19 May 2019, in a popular vote Swiss public approved by the majority of 66,4% an enactment of the Federal Act on Tax Reform and AHV Financing (TRAF). In a considerable step forward in reforming its tax law, Switzerland has abolished the cantonal and federal tax privileges. These special regimes have been under scrutiny by the OECD, G20 and the EU over the years. Now, special regimes will be replaced by new preferential tax measures. The most elements of the new tax regime are to become effective as of January 1, 2020.
Overview of the reform
The reform is aimed to guarantee the necessary legal certainty as well as to further preserve the attractiveness of Switzerland’s corporate tax regime in a global perspective by introducing new tax measures. A very brief overview of some of these measures may be helpful for both companies already incorporated here and those willing to relocate to Switzerland.
| Measure | Description |
| Patent Box | A mandatory for implementation at the cantonal level initiative, whereby the net profits attributable to patents and other similar rights developed in Switzerland (such as: license fees and the proceeds from the sale of patents etc.) must be taxed with a tax relief of up to 90%.
Issues to consider: (i) The individual cantons may provide for a smaller exemption, although half of them opted for a maximum exemption of 90%. (ii) The limit on aggregate tax relief granted under TRAF and more restrictive cantonal tax relief thresholds should be taken into account when planning. (iii) OECD`s “modified nexus approach” should be applied. (iv) Software is excluded. |
| Additional Tax Deductions for R&D expenditures on a cantonal level | To be introduced by the cantons on a discretionary basis.
The amount of the additional deduction could not exceed 50% (150% total of the costs occurred) and should be: – Applied to direct personnel expenses plus 35% of such R&D expenses; – Capped at the level of gross total of all the company`s expenditures. Issues to consider: (i) Similar to other countries, under Swiss law R&D expenses as well as all other expenses justified by commercial use are already deductible from taxable profit (ii) Outsourced R&D activities should be performed by third-parties in Switzerland; only 80% of such expenditures are qualified for the exemption. (iii) Broad definition of Research & Development is applied in accordance to the Federal Act of Promotion of Research and Innovation (RIPA). Thus, a broad scope of activities including fundamental research and science-based R&D will be deductible. |
| Increase of Partial Taxation of Dividends for Qualified Participations | The proposal provides for increase in the partial taxation of dividends derived from qualifying participations of at least 10% of the nominal capital of a company or cooperative of individuals to a standard rate of 70% at the federal level and to at least of 50% at the cantonal level.
Issues to consider: (i) The standard rate will be applicable to both business and private investments. (ii) Some of the cantons will be obliged to change their taxation method. (iii) The cantons can provide for higher taxation rates. (iv) Participation relief continues to exist (exemption from corporate income tax of dividends and capital gains). |
| Notional Interest Deduction (NID) | High-tax cantons may grant a notional interest deduction on equity exceeding the minimum required (excess capital), resulting in effective tax rate of approx. 11%.
Issues to consider: (i) It is envisaged that only the Canton of Zurich will introduce this measure. (ii) NID rate to be determined by the FTA annually. |
| Reduction of capital tax | The cantons may introduce participation exemption for capital tax – qualified equity attributable to patents and similar rights will be taxed at a lower rate.
Issues to consider: (i) Please also see the capital tax reduction rules that are applicable and in effect now. |
Transitional Measures and Aggregate Tax Relief
The transitional measures for the reform (current law step-up and new-law step-up) are aimed at reducing taxation of the hidden reserves, including the created added value (goodwill) that has arisen during the period companies were claiming special tax privileges. Under the “disclosure solution” (current law step-up) companies can apply for an effective tax-free disclosure of the hidden reserves accumulated under the special tax privilege regime in the tax balance sheet with application of the subsequent amortization in line with the depreciation tables. Some of the cantons have already been able to offer this solution of disclosing hidden reserves. Another option would be the “special rate solution” (new-law step-up) that provides that the accumulated hidden reserves can be taxed separately in the following five years up to the threshold these reserves have not been taxed previously (published by the cantons special rates vary with the lowest being 0,5).
Also, please note that the aggregate tax relief granted under the TRAF (all measures, including patent box, R&D super-deduction, amortizations on disclosed hidden reserves, the NID and other) may not exceed 70% in total. As it was noted in the table above, numerous cantons are planning to introduce a much lower threshold.
Summary
Obviously, Switzerland remains an attractive destination for FinTech companies with strong IP and R&D practices. Incorporating your company in Switzerland can also grant you a few strategic benefits, – now companies can continue to do business with the comfort that the Swiss tax regime is fully compliant with international standards. Also, the TRAF guarantees a minimum tax competition between the cantons, insofar as discretionary measures, which the cantons are free to endorse will continue to facilitate the “canton shopping rule”.
Although it is too early to discuss the financial impact of the reform, the TRAF measures are aligned with the internationally acclaimed standards and provide so much needed for some of the FinTech businesses legal certainty to further develop their activities in Switzerland.
