Swiss reject corporate tax reforms in referendum
Switzerland has been under international pressure to abolish its preferential tax regimes, but the Government’s reform plans have been rejected by the electorate.
The Swiss Government’s ‘Corporate Tax Reform III’ (CTR III)) was put to a referendum and rejected by 59% of the electorate in February. As a result, Switzerland’s existing tax legislation remains in force and there will be no immediate changes. The Government is now working on a revised bill and its adoption by the Swiss Parliament could be completed by late 2018. If so, the reforms wouldn’t come into force until 2021 at the earliest.
Background and objectives
Switzerland has been under international pressure to abolish its cantonal preferential tax regimes for several years. As a result, the special provisions for holding companies, mixed companies and domiciliary companies will be abolished over the coming years. The practice of the tax allocation of principal companies as well as the practice relating to Swiss finance branches on a federal level will also be abolished.
To preserve Switzerland's reputation as an attractive business location, the revised bill will need to introduce measures that will counter the fiscal and economic consequences of losing its preferential tax regimes.
The reforms must meet international tax standards while preserving the country’s appeal as a business location. The different requirements of the cantons, cities and municipalities will also need to be taken into account, and the reforms will need to generate sufficient tax revenue.
The following measures are currently under discussion and will be crucial for the revised bill to pass scrutiny:
- The tax-neutral step-up of hidden reserves during a change of status is correct from a tax point of view and should not be disputed.
- The same applies to the tax-neutral step-up of hidden reserves in cases of relocation to Switzerland or transfer of assets or functions to Switzerland from abroad.
- Tax relief achieved through the patent box and/or the excess deduction for research and development costs may be restricted.
- The notional interest deduction was the most controversial element in the rejected bill, and this could be 'sacrificed' in the revised proposals.
- It is important that the cantons are free to reduce corporate income tax rates. This requires federal contributions (by increasing the share of direct federal income taxes allocated to the cantons).
- Left-wing parties are calling for reciprocal financing by shareholders, through an increase in the income tax rate for the (partial) taxation of dividends as well as the introduction of capital gains tax. While capital gains tax is unlikely to stand a chance, the increase in the taxation of dividends does not seem unrealistic provided that the corporate income tax rates are reduced at the same time.
Potential options for companies taxed under a preferential tax regime
For holding companies, mixed companies and domiciliary companies, the rejection of the CTR III will not result in immediate changes, and they will continue to be taxed under the existing legislation.
At the same time, a voluntary step-up of hidden reserves under current legislation should still be analysed by taxpayers. Such step-ups are based on Swiss Federal Supreme Court case law and on different cantonal regulations, and will not require any change in legislation. The release of hidden reserves at the time of a change of status is tax-neutral to the extent of a prior tax exemption. As a result, the hidden reserves released can be amortised for tax purposes over a five to ten-year period. This provides a corresponding period in which companies are subject to a similar tax burden compared to a preferential tax regime.
For more information, contact:
ADB Altorfer Duss & Beilstein AG, Switzerland
T: +41 44 267 63 00