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Europe Tells Switzerland To Scrap 'Unfair' Company Taxes

by Ulrika Lomas, Tax-News.com, Brussels

14 February 2007


As expected, the European Commission has officially decided that certain company tax regimes in Swiss cantons in favour of holding, mixed and management companies are a form of state aid incompatible with the proper functioning of the 1972 Agreement between the EU and Switzerland.

According to the Commission, at stake are schemes offering "unfair tax advantages to companies established in Switzerland, for profits generated in the EU". The Commission is asking Switzerland to amend these tax schemes to bring them in line with the terms of the trade agreement. The EC has also asked for a mandate to start negotiations with Switzerland with a view to finding a "mutually acceptable solution".

“Switzerland enjoys the benefits of privileged access to the internal market and must accept the responsibilities that go along with this," explained External Relations Commissioner Benita Ferrero-Waldner. She continued: "The decision the Commission has taken is not about tax competition but about state aid undermining the level playing field necessary for our partnership and the trade relations between Switzerland and the EU.”

Under Swiss law, the cantons may fully or partially exempt profits generated abroad from cantonal and municipal company tax. All Swiss cantons have made use of this provision, although in different forms.

"Over the years, this has proved to be a formidable incentive for the headquarters, co-ordination and distribution centres of multinationals to be based in Cantons such as Zug and Schwyz, in order to minimize their tax liabilities," the Commission said in a statement.

"As these multinationals are mostly active in the EU market, such tax regimes may directly or indirectly affect trade between the EU and Switzerland. While the Commission is not against tax competition or low tax rates, it cannot accept schemes that differentiate between domestic and foreign source income," the EC explained.

Following alleged complaints by EU member states, members of the European Parliament and businesses, the Commission has reviewed some of the cantonal tax regimes to assess their compatibility with the state aid provision in Article 23 of the agreement between the European Economic Community and Switzerland.

The issue was referred to the Joint Committee established under the agreement at its meeting on 15 December 2005, and was further discussed with Switzerland at an expert meeting on 4 May 2006, and at subsequent meetings of the Joint Committee on 5 May and 14 December 2006. Switzerland has vehemently denied the EC's claims, and thus far no solution to break the deadlock has been forthcoming.

Following yesterday's decisions, the EC said it will discuss further proceedings with member states with a view to negotiating with Switzerland the modification of the tax schemes in question, "in order to remove the differentiated tax treatment of foreign profits in Switzerland and put an end to the resulting distortion of competition".

A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp

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