Barroso Sets Up New Tax Row Between EU And Switzerland

by Ulrika Lomas, Tax-News.com, Brussels

10 July 2006

The vexed question of Switzerland's corporate tax system is likely to figure prominently on the agenda of today's meeting between Swiss President Moritz Leuenberger and European Commission President Jose Manual Barroso, after the EU chief criticised "unfair" tax breaks given to companies located in Switzerland.

Speaking on Swiss television last week, Barroso stated that the cantonal tax system, whereby Swiss cantons are free to set their own corporate tax rates and tax incentives to attract foreign companies, represents "clear discrimination".

Barroso went on to warn that Switzerland "would have to accept the rules" if the country wanted to benefit from its relationship with the EU, and should apply tax breaks across a level playing field.

Switzerland is not a member state of the European Union, but the EU has consistently questioned whether certain Swiss tax rules run counter to the spirit of a Free Trade Agreement between Switzerland and the European bloc, signed in 1972. According to the EU, company tax breaks granted by cantonal governments are unfair because the activities of the registered firms take place in other countries.

In a letter sent to the Swiss Mission in Brussels last October, the European Union suggested that certain parts of the Swiss corporate tax regime "may be incompatible" with Switzerland's obligations under the 1972 agreement. The EU specifically took issue with pieces of legislation in place in cantons Zug and Schwyz which it said "grant fiscal advantage to undertakings for... economic activities taking place outside Switzerland".

Switzerland has repeatedly refuted the EU's arguments. Its latest response, a ten-page memorandum sent by the Swiss government to the European Commission in March stated Bern's "firm conviction" that Swiss tax rules do not breach the 1972 agreement.

In Switzerland, cantons are free to set their own tax rates within the framework of the 2001 Tax Harmonisation Act. This allows cantons to compete to attract foreign companies, and the country has gained a reputation for attracting wealthy foreign celebrities and business people with special tax deals.

Last year, voters in the small central Swiss canton of Obwalden approved new laws substantially cutting income tax for individuals and corporations. As a result, from January 1, corporate tax in the canton was slashed to 6.6% - the lowest rate in Switzerland.

In February, Schwyz followed suit after voters accepted proposals to to cut corporate and personal taxes.

Companies moving to Schwyz can enjoy special tax breaks for a maximum of ten years after relocation, while preferential tax treatment can be sought by companies in accordance with special directives.

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