Corporate Tax Reform III: Swiss Federal Council tightens the scope of the reform

Since several years Switzerland is put under pressure by the European Union ("EU") and the OECD with regards to tax regimes for holdings, mixed companies, principal companies and "Swiss Finance Branches". As part of the Corporate Tax Reform III, these tax regimes will be abolished and replaced by appropriate measures. On September 22, 2014 the Federal Council started the consultation phase of the legislative draft among political parties, interest associations and Swiss cantons. On April 2th 2015 the Federal Council published the findings of the consultation process and proposed the parameters for an amended legislative draft. The Federal Department of Finance shall prepare a dispatch for the Swiss Parliament by June 2015.

The cantonal tax regimes for holdings and mixed companies have been subject to pressure by the EU since 2007. For this reason, a memorandum of understanding was signed on October 14, 2014 between Switzerland and the EU to settle the tax dispute. The international pressure also led Switzerland to be listed in the OECD report on "Base Erosion and Profit Shifting" (BEPS) action nr. 5 regarding harmful tax practices.

Following the presentation of the final report on measures designed to strengthen the competitiveness of the Swiss tax system, the Federal Council started the consultation process on Switzerland’s Corporate Tax Reform III on September 22, 2014. On April 2th 2015, the Federal Council published the findings of the consultation process and proposed the parameters for an amended legislative draft which shall cover the following:

  • Abolition of the cantonal tax regimes
  • Introduction of license box at cantonal level
  • Possibility for cantons to introduce an additional deduction for R&D expenditures
  • Lowering of equity tax
  • Step-up mechanism
  • Abolition of the issuance stamp study
  • Harmonization of the taxation of dividends
  • Possibility of introducing a tonnage tax regime

However, the Federal Council decided to reject the following measures which were initially included in the legislative draft:

  • Notional interest deduction
  • Amendment to the offset of loss carry forward
  • Amendment of the participation exemption
  • Introduction of a capital gain taxation on securities

The Federal Department of Finance shall prepare a dispatch for the Parliament by June 2015 which will then be debated by the Parliament.

The Federal Council’s proposal is a further step towards the Corporate Tax Reform III. However (important) changes should still be expected in the legislative processes as well as depending on the international tax developments.

Examples of potential changes:

  • The notional interest deduction, which has been removed by the Federal Council from the initial legislative draft, could lead to new parliamentary debates. The absence of such a tax instrument could disadvantage Switzerland in the context of international tax competition.
  • The License Box could still be subject to modifications depending on OECD developments (restrictive nexus-approach).
  • The lack of capital gain taxation on securities will lead to further parliamentary debates and possibly to a legislative referendum.

The funding of the Corporate Tax Reform III will be a major challenge and be brought in the center of the debate. The cantons are challenged to reduce their income tax rates. The Federal Government will likely not be able to compensate all cantonal tax revenue losses related to the Corporate Tax Reform III.

Although the new law - without a referendum – could come into force in 2017/2018 the earliest, it is important for companies to deal with the content and the future consequences of the Corporate Tax Reform III.

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