The report, entitled: 'State aid to companies: company taxation and tax competition - developments in the European Union', was approved by the Swiss Federal Council on Wednesday. It comes to the conclusion that the EU pursues the approach of restricted tax competition, which, despite being banned under EU law, is complemented by an extensive policy of state aid, in contrast to Switzerland's "positive" stance on tax competition and "sparing use" of direct state aid to individual companies.

The report was produced in response to a request made by the Committee for Economic Affairs and Taxation of the Council of States. The Committee for Economic Affairs and Taxation instructed the Federal Council on 1 February 2007 to present a report on "new company taxation models applied in other countries, in particular those of important trading partners, and on aid provided to companies".

The report confines itself to an analysis of the European Union's policy on state aid, as it is Switzerland's most important trading partner. It concludes that "all forms of state aid constitute an intervention in the free workings of the market and can therefore as a rule not be competition neutral".

"This is why European competition policy provides for a fundamental ban on state aid. However, the EU's policy on state aid allows numerous exceptions which are deemed to be compatible with the Single European Market," the Swiss government said in a statement released on the report's publication.

The Swiss report also noted that state aid is not only allowed in the area of taxes, but in non-tax areas as well.

"Examples of admissible tax aid include direct or indirect aid to companies to develop certain economic sectors or encourage SMEs. In the last few years the European Commission has severely restricted the leeway for the member states in the tax sector with the code of conduct on company taxation. The EU is therefore critical of tax competition in terms of competition between member states."

The Swiss government noted that it is "less inclined to provide direct aid, preferring instead to ensure the existence of a business-friendly economic framework".

"Part and parcel of this is a moderate tax burden for companies as well as for individuals," the statement explained.

It continued:

"Tax competition creates important incentives and promotes innovation in the public sector. Switzerland is less inclined to provide state aid to companies because aid to individual companies or sectors very often distorts competition and is detrimental to efficiency."

The Swiss government concluded that in terms of global locational competition: "Switzerland's overriding consideration is the continued capacity to shape the taxation system on an individual and autonomous basis."