Swiss voters accept Federal Act on Tax Reform and AHV Financing

Background
In June 2016 the Swiss Parliament approved changes to the tax system, known then as Corporate Tax Reform III (CTR III). These changes were rejected by 59.1% of voters when put to the popular vote on 12 February 2017. So it was back to the drawing board for the Federal Council.

After public consultation, revisions to CTR III were published on 21 March 2018 under the name Tax Proposal 17 (TP17). On 28 September 2018 TP17 was approved by the Swiss Parliament, and from then on known as TRAF. It became clear in January of this year that another popular referendum would be held on the subject.

TRAF – What you need to know
The most important elements of TRAF are:

> Abolishment of preferential tax regimes
The cantonal tax privileges for domicile, holding and mixed companies will be terminated. In addition, the federal preferential tax practices for Swiss finance branches and principal companies will be abolished, whereby profit allocation rules for these practices have not been allowed since 2019.

> Step-up for hidden reserves
Companies subject to the current preferential tax regimes may choose to declare hidden reserves. Profits stemming therefrom will be taxed at a separate rate at the discretion of the cantons. The cantonal tax authorities will review and confirm the declared hidden reserves with a formal decree.
Similarly, companies migrating to Switzerland will be allowed to step up their hidden reserves including goodwill. Consequently, these companies will be allowed to depreciate such disclosed reserves at allowed rates.

> Notional interest deduction
The notional interest deduction – surplus equity would be subject to deemed interest deduction – is being introduced as an option for high-tax cantons. For now, this applies only to the canton of Zurich. At federal level the notional interest deduction will be obligatory.

> Patent box
Cantons will be required to introduce the patent box. While the cantons are allowed to choose their rates, the maximum rate of relief is set at 90%. Qualifying income excludes software in principle.

> R&D super deduction
Introduction of an optional 50% R&D super deduction at cantonal level. The cantons can decide the level of reduction. The basis for reduction is personnel cost in connection with R&D developed in Switzerland plus 35% surcharge, limited to actual total R&D cost or 80% of the cost of R&D performed in and invoiced by third parties in Switzerland.

> Overall tax relief
The combined effect of these tax relief measures shall be limited to 70%. If they wish, the cantons may opt for a lower percentage.

> Reduction in cantonal corporate income tax rates
Except for the cantons that already have low rates (e.g. Lucerne), most of the cantons will be reducing their combined tax rates. It is expected that the rates will be in between 12% and 18% (including federal tax).

> Increase in dividend taxation
In order to reduce the double economic burden, income from qualifying participations (i.e. participation of at least 10%) is subject to partial taxation. Partial taxation for shareholders is now at least 70% at federal level (previously 50% for private assets or 60% for business assets) and at cantonal level at least 50%.

> Capital tax relief
Cantons may choose to allow capital tax relief in connection with qualifying participations, patents and similar rights, and intra-group loans.

> Permanent establishments
Swiss permanent establishments of foreign companies will be able to claim a lump-sum tax credit, a measure aimed at preventing double taxation.

Timing
TRAF will – most likely – come into effect as per 1 January 2020. Some elements potentially earlier.

Next steps
Reviewing current set-ups with the aim of determining any potential action points is key.

How can we help?
We are on hand to help review Swiss establishments, and co-ordinate with tax advisors.