by Davide Anghileri
Switzerland’s Federal Council on 6 September initiated a consultation on a new proposal to reform the Swiss corporate tax system, known as Tax Proposal 17.
Tax Proposal 17 was announced in a Council meeting following the surprise rejection of Switzerland’s Corporate Tax Reform III by popular referendum in February. A steering group charged with preparing a new plan for tax reform presented its objectives and recommendations for the new tax proposal last June.
The proposal, on the one hand, provides for the abolition of special tax arrangements for cantonal status companies. On the other hand, it proposes the introduction of a generous patent box regime to attract foreign investment. This measure would be mandatory for the cantons.
Profits from patents and similar rights would be separated from other profits and taxed at a lower rate. This relief may not exceed a 90 percent reduction, the proposal says.
Qualifying income is defined more narrowly than the definition proposed in the earlier Corporate Tax Reform III measure. In fact, the box will be limited to patents and similar rights and will exclude of copyrighted software.
R&D deductions
The proposal gives the cantons the option to introduce additional deductions for research and development. The additional deduction on personnel costs which directly relate to R&D performed by the taxpayer in Switzerland is a maximum of 50 percent plus a premium of 35 percent for other R&D costs, or 80 percent of the cost for R&D rendered by third parties in Switzerland.
The Council proposes that tax relief based on the patent box and the additional deductions for research and development may not exceed 70 percent (instead of 80 percent proposed in Corporate Tax Reform III) of taxable profit. The calculation also includes amortization based on earlier taxation as a status company.
The reform suggests a higher taxation of dividends for qualifying shareholdings of individuals at a rate of 70 percent (instead the current 60 percent). From an overall perspective, this adjustment will be offset by an expected cantonal tax rate reduction at the company level.
The cantons will receive an increased share of the direct federal tax income, from the current 17 percent to 20.5 percent, Tax Proposal 17 suggests.
Tax Proposal 17 also provides the cantons with the option to reduce capital taxes on equity that relates to participations or to patents or similar rights.
Disclosure of hidden reserves
Foreign companies that relocate their headquarters to Switzerland can disclose their hidden reserves, including goodwill, without Swiss tax consequences; under the proposal there is no additional tax deductible depreciation the first few years.
To prevent international double taxation, Swiss permanent establishments of foreign companies will be entitled to benefit from the lump sum tax credit.
The reform also proposes to increase the child and education allowance by CHF 30 per month.
In contrast to Corporate Tax Reform III, a notional interest deduction, which would have led to a deemed deduction for excessive shareholder equity, is not included in the proposal.
The Federal Department of Finance is planning to submit the dispatch for Parliament to the Federal Council in spring 2018, the proposal says. Consequently, the Council estimates that the earliest possible date that Tax Proposal 17 can enter into force is 2020.
The consultation will last for three months and end on 6 December.
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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