Monday, 27 June 2016

Switzerland: Parliament approves Corporate Tax Reform III

On 17 June 2016, the two chambers of the Swiss parliament formally approved the Corporate Tax Reform III (CTR III), which aims to align Swiss tax law with international standards and to enhance Switzerland’s attractiveness as a location for multinational companies. The approved law, which could enter into effect as soon as 1 January 2018, mainly contains the following measures to attract multinational companies:

  • Reduction of the headline corporate tax rates at the discretion of the individual cantons, so that more cantons could expect to be in the 12%-14% range for their effective combined federal/cantonal/communal tax rates;
  • Introduction of a patent box at a cantonal/communal level that would be mandatory for all cantons and applicable to all patented intellectual property (IP) for which the R&D spend occurred in Switzerland (the OECD modified nexus approach). The cantons would be able to exempt up to 90% of the patent income from taxation for cantonal/communal tax purposes;
  • Introduction of R&D incentives on a cantonal/communal level in the form of excess R&D deductions of up to 150% of qualifying expenditure, at the discretion of the individual cantons;
  • Allowance of a step-up (including for self-created goodwill) for direct federal and cantonal/communal tax purposes upon the migration of a company, or of additional activities and functions, to Switzerland;
  • Allowance of the tax-privileged release of hidden reserves for cantonal/communal tax purposes for companies transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation, over a period of five years;
  • Introduction of a notional interest deduction (NID) on “surplus equity” (which would be defined per asset class) at the federal level and at the cantonal/communal level at the discretion of the individual cantons. The permitted NID rate would be equal to the 10-year Swiss government bond yield. However, insofar as the surplus equity finances intragroup receivables, such as loans or trade receivables, an arm’s length interest rate could be applied on the surplus equity portion. Cantons that opt to introduce an NID on equity would be required to tax at a cantonal/communal level at least 60% of the dividend income received by individuals from qualifying participations of at least 10%, under the partial taxation regime for dividends; and 
  • Reduction of the cantonal/communal annual net wealth tax in relation to the holding of participations, patented IP and intercompany loans, at the discretion of the individual cantons.
  • The combined tax reduction available through the patent box, the release of hidden reserves, the NID and the excess R&D deduction would be limited to a maximum of 80% of the cantonal/communal taxes. Cantons could opt to introduce a lower percentage threshold.

A referendum that would result in a national vote on the CTR III has been announced and likely will be held in 2017, so the law could become effective as soon as 1 January 2018.

Source: Deloitte