Corporate tax reform
Under Swiss law, companies are subject to federal income taxes on their worldwide net income. Switzerland operates tax at two levels: the federal level and the cantonal level. There are tax privileges on the cantonal status companies: holding companies, mixed companies, domicile companies, finance branches and principal companies.
These tax privileges are no longer in line with international standards. In order to avoid being put on a blacklist of tax havens, Switzerland undertook to abolish the tax privileges.
The Tax Reform and AHV Financing (TRAF) was adopted by Swiss voters on 19 May 2019 and the act will enter into force on 1 January 2020. Temporary transitional provisions will mitigate the effects of the abolition of tax privileges.
Key points of TRAF
For Switzerland to remain an attractive business location, new tax special arrangements will be introduced, in particular:
- Patent box: profits from patents and similar rights will be taxed at a reduced rate at cantonal level with a maximum reduction of 90 percent;
- R&D expenditures: the cantons can institute an additional deduction of R&D costs up to a maximum of 50 percent above the effectively incurred costs of companies;
- Notional interest deduction (NID): high-tax cantons (i.e. corporate tax of at least 18.03 percent) have the possibility to introduce a NID.However, the tax relief based on the patent box, additional deductions of R&D costs and the NID may not exceed 70 percent. This includes a potential depreciation of disclosed hidden reserves during the transition period to ordinary taxation.
Cantonal implementation
Some cantons have already implemented or are implementing the new rules. For example:
- Canton of Vaud: the reduced corporate tax of 13.79 percent (from 20.95 percent) is already in force as from 1 January 2019;
- Canton of Geneva: the Grand Council accepted on 31 January 2019 to reduce the corporate tax rate from 24.2 percent to 13.99 percent. The revised cantonal tax law was accepted on 19 May 2019, together with the vote about TRAF;
- Canton of Basel-Stadt: the voters accepted by a large majority to reduce the corporate tax from 22.18 percent to 13.04 percent. The income tax reduction came into force with retroactive effect as of 1 January 2019;
- Canton of Zug: on 19 May 2019, the tax reform was enacted. On 1 January 2020, the effective corporate tax rate will drop to 11.91 percent;
- Canton of Luzern: on 17 June 2019, the cantonal tax reform was adopted. The new corporate tax laws will enter into force on 1 January 2020 and the effective corporate tax rate will remain at 12.30 percent;
- Canton of Zurich: on 1 September 2019, Zurich voters adopted the implementation of TRAF in the Canton of Zurich. The effective corporate tax rate will initially decrease to 19.70 percent.
We will keep track of the progress of TRAF and the incorporation of the new rules into the cantonal laws. Please contact us if you would like to discuss the implications in more detail.
