Swiss corporate tax reform approved by popular referendum

ByDavide Anghileri, University of Lausanne, Switzerland

Swiss corporate tax reform was largely approved by a popular referendum on Sunday, 19 May, with 64.4 percent of the population voting in favour of the project proposed by the Swiss government. The corporate tax reform proposal was linked to old-age and survivor’s insurance (AHV) reform. In 2017, the third series of Swiss corporate tax reforms (CTR III) and the retirement provision reform (2020 retirement provision) were rejected.

The aim of the proposal is to create an internationally compliant, competitive tax system for companies and to help secure AHV pensions.

The tax reform is intended to safeguard the appeal and competitiveness of Switzerland as a business location and secure jobs and tax receipts in the medium to longer term.

The previous system allowed holding companies and multinationals that make most of their revenue abroad to pay little income tax at the cantonal and municipal levels. This system created strong incentives for foreign companies to relocate their head office in Switzerland but at the same it led to a growing number of discontented countries, mostly from the European Union. In fact, over the last few years, Brussels had increased the pressure substantially on the Swiss government to abolish its special tax regimes, threatening to re-establish trade tariffs and put the country on the tax haven blacklist.

Due to this changing international tax environment and the OECD/G20 BEPS project, the Swiss government initiated a process to reform its tax system in line with the latest international standards and with the purpose of strengthening the attractiveness of Switzerland as a business location.

On 28 September 2018, the Swiss Parliament passed the Swiss corporate tax reform proposal. The Council of States (upper house) approved the proposal with 39 votes in favour, 4 against and 2 abstentions, while the National Council had 112 votes in favour, 67 against and 11 abstentions.

Swiss corporate tax reform

The starting point for Swiss corporate tax reform is the abolition of the arrangements for cantonal status companies which are no longer accepted internationally.

For Switzerland to remain an attractive business location, this measure is accompanied by the introduction of a new tax-related special arrangement to promote research and development (R&D), the patent box, which will allow a portion of the profits from inventions to be taxed at a reduced rate in the cantons in the future.

The cantons will additionally have the opportunity to make provision for an additional deduction of no more than 50 percent of R&D expenditure. Moreover, cantons with an effective profit tax burden of at least 18.03 percent can introduce a deduction for self-financing. These special arrangements will be accompanied by a relief restriction, which includes a binding provision for the cantons whereby at least 30 percent of a company’s profits must always be taxed before the special measures are applied.

To balance the proposal, the proposal also contains increased dividend taxation to 70 percent for the Confederation and at least 50 percent for the cantons, although the cantons can also make provision for a higher level of taxation.

Moreover, the reform provides for an adjustment to the capital contribution principle, namely, a restriction on the tax-exempt distribution of capital contribution reserves and consideration of the cities and communes within the scope of the increase in the cantons’ share of direct federal tax.

Furthermore, the reform raises the cantons’ share of direct federal tax revenue to 21.2 percent (previously 17 percent). This will give the cantons fiscal policy leeway to reduce their profit taxes if necessary and thus remain competitive.

The cantons have disclosed their implementation plans. It is thus clear how the tax reform will affect each canton. Large corporations will tend to pay more taxes, while SMEs will pay less than today. With the additional CHF 1 billion from direct federal tax, the cantons will also compensate the cities and communes for any reduction in tax receipts.

After parliament approved the measures, critics gathered the 50,000 signatures needed to trigger the referendum in order to overturn the parliamentary vote.

Next steps

Now, after the positive vote, cantons have to abolish their special regimes. Next, they must rewrite their tax systems on the basis of the reform provided by the federal government. Every Canton can decide autonomously which measures to be implemented as all measures are voluntary.

In addition, to prevent upheaval among the cantons, fiscal equalization will be adjusted in line with the new reality in terms of tax policy. The financially weak cantons will receive around CHF 180 million from the Confederation for seven years.

The canton of Vaud has already voted at a cantonal level to accept its new rate (the new rate is 13.79 percent, down from 22 percent) and 87 percent of the population voted in favour of it. While, the canton of Basel Stadt on 10 February, approved, through a referendum, a proposal so that the tax rate reduction could be made effective retroactively to the beginning of 2019.

The canton of Vaud has already voted at a cantonal level to accept its new rate (the new rate is 13.79 percent, down from 22 percent) and 87 percent of the population voted in favour of it. While, the canton of Basel Stadt on 10 February, approved, through a referendum, a proposal so that the tax rate reduction could be made effective retroactively to the beginning of 2019.

The vote reflects the view of the main political parties, the Swiss People’s Party (UDC/SVP), the Liberal Party (PLR/FDP), and the Christian Democratic People’s Party (CVP/PDC). Also, all cantons, the association of municipalities and the entire business community were in favour of the reform. Only left-wing groups and labour unions are opposed to it.

Supporters of the reform believed this was the only solution to save more than 150,000 jobs directly related to companies that benefit from Switzerland’s preferential tax rates. They also pointed out that while multinationals will face slightly higher rates, the tax bill of ordinary companies will be much lower. That could stimulate investment and job creation, which in time would boost cantons’ coffers, though the impact is hard to predict.

Moreover, it was argued that bringing taxes in line with international norms would make Switzerland more attractive, securing jobs and prosperity.

In some cantons, the vote has been watched very closely. About 1,800 special status companies have their headquarters in Canton Zug, for example, and they contribute nearly a third of the canton’s tax revenue.

In some cantons, the vote has been watched very closely. About 1,800 special status companies have their headquarters in Canton Zug, for example, and they contribute nearly a third of the canton’s tax revenue.

Out of 330,000 companies, 24,000 currently benefit from privileged taxation. Between 2011 and 2013, the total tax bill of these companies ran to more than CHF 4 billion (USD 3.93 billion), which accounts for half of the Swiss government’s profit tax revenues.

During the same period, cantons and municipalities received a total of around CHF 2.2 billion in taxes from these companies a year. They also employ some 150,000 people who pay a significant amount of taxes and social security contributions.

Swiss corporate tax reform will be effective 1 January 2020. Regulations concerning a temporary special tax rate solution will be effective after the referendum vote. The cantons will thus be able to make use of this measure early to mitigate the de facto tax increase for those companies that plan to waive their cantonal tax status.

With the tax reform, Switzerland will in future remain among the best corporate locations in the world and maintain its tax base.

Moreover, thanks to healthy public budgets, Switzerland can offer high performance and good infrastructure while simultaneously standing its ground in international tax competition. Furthermore, the new tax system that complies with international standards will encourage firms to stay.

Davide Anghileri

Davide Anghileri

Researcher and lecturer at University of Lausanne

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].

Davide Anghileri
Davide can be reached at [email protected].

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