Switzerland’s Federal Council, on September 30, directed its finance ministry to write tax rules to facilitate accumulation of capital by large multinational banks, reducing the tax burden associated with issuing certain financial instruments to group members.
In short, the Federal Council has proposed that interest payments made to group members on convertible bonds (CoCos), write-off bonds, and bail-in bonds not be taken into account when calculating the participation deduction of the To Big To Fail (TBTF) legislation.
Under current law, dividend income and capital gains from qualifying participations are exempt from corporate income tax. The amount of gross revenue of corporations and cooperatives benefiting the participation exemption, commonly referred to as participation deduction, is reduced by interest paid on debt capital, though.
Moreover, interest paid on contingent CoCos, write-off bonds, and bail-in bonds will partially reduce the gross revenue benefiting from the participation deduction, as this kind of interest is deemed to be financing expenses.
Hence, if a Swiss company that is the top holding company of a banking group issues CoCos, write-off bonds, or bail-in bonds to group members, the holding company may have a higher federal and cantonal profit tax burden on the participation revenue.
The situation is exacerbated because of the effect of regulatory law. Top holding companies established in Switzerland are obliged to issue such financial instruments to a certain extent.
The consequence is an additional profit tax burden of several hundred million francs per year for the banks concerned. Furthermore, the existing tax scheme conflicts with the aim of the TBTF regulations, as it encourages a reduction in the capital of such banks.
The proposal would exclude interest payments for CoCos, write-off bonds, and bail-in bonds when calculating the participation deduction.
The result will be achieved by maintaining accounts by branch of activity for purposes of calculating the participation deduction for the financial instruments mentioned in the case of top holdings of banking groups that have issued CoCos, write-off bonds, or bail-in bonds
The outcome of the reform will be that banks will be able to more quickly accumulate capital, which is in line with the aim of the TBTF legislation.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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