By Davide Anghileri, University of Lausanne
On 1 September, the voters of Switzerland’s canton of Zurich endorsed a cantonal tax reform bill with a 56% majority as a consequence of the approval of the Swiss corporate tax reform in May.
The federal law, which will enter into force as of 1 January 2020, requires the cantons to implement the new measures into their cantonal tax laws and ensure conformity with the federal regulations.
To remain attractive as a business location and to respect the new international tax environment, the Canton of Zurich will reduce its cantonal tax rate and will introduce new tax measures.
Abolition of privileged tax regimes
The cantonal tax regimes such as holding company, mixed company, and domicile company are abolished.
As a consequence of this abolition, specific transitional rules will be available for companies that will lose their preferential cantonal tax regimes.
Hence, during a transition period of 5 years, the realization of hidden reserves (including original goodwill) can be taxed separately with a lower special tax rate of 0.5% if such income would not have been taxable under the old law. As a precondition for the application of this special tax rate, the respective hidden reserves must be reported for within time.
Alternatively, companies that are currently subject to special taxation in the canton of Zurich have the possibility to voluntarily waive their cantonal tax privilege until December 31.
In this case, due to cantonal tax practice. a corporate income tax free step-up of hidden reserves (including original goodwill) is available followed by a tax-effective amortization with a maximum amortization period of 10 years.
However, depreciation is subject to the overall limitation of 70% of the tax relief. Also, the stepped-up hidden reserves are subject to cantonal capital tax until the cantonal provisions of Swiss corporate tax reform enter into force.
Canton Zurich patent box and R&D expenses
An OECD-compliant patent box regime will be introduced. This measure grants a tax relief at the cantonal level of a maximum of 90% of the income resulting from patents and similar rights related to Swiss incurred research and development expenditures.
Moreover, an increased tax deduction of a maximum 50% of the effective research and development expenses incurred in Switzerland will be granted. The cantonal regime states that the additional deduction is allowed only for R&D expenses incurred in Switzerland directly by the company or indirectly through third parties in Switzerland.
Reduction of cantonal corporate income tax rate
As of January 1, 2021, the corporate income tax rate will be reduced from the current 8% to 7%. As a result, the effective tax burden for an ordinarily taxed company in the canton of Zurich with domicile in the city of Zurich will be reduced from currently 21.1% to 19.1% (federal, cantonal, and community tax; calculation based on profit before taxes and current conditions).
Furthermore, the cantonal council aims to reduce the corporate income tax rate from 7% to 6% as of January 1, 2023.
Notional interest deduction
The Canton Zurich tax reform introduces a notional interest deduction on surplus equity. For the cantonal law, surplus equity includes equity capital which, in the long term, exceeds the equity capital required for business operations.
Overall limitation of tax relief
The cantonal tax law provides that at least 30% of the net earnings (taxable profit before deduction of tax loss carryforwards and excluding net participation income from qualified participations) must be subject to taxation on the cantonal level.
Therefore, the maximum cantonal tax relief is set at 70%.
Reduction of capital tax
The capital tax on equity relating to investments, patents, and similar intangibles as well as intercompany loans will also be reduced under the Canton Zurich tax reform.
Consequently, taxable equity attributable to qualifying investments, loans to group companies, and qualifying intellectual property will be reduced by 90%.
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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