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Swiss Tax System 'Politically Unacceptable,' Says EC

by Ulrika Lomas, Tax-News.com, Brussels

27 April 2007


The European Union Economic and Monetary Affairs Commissioner Joaquin Almunia, has told European parliamentarians that it is politically unacceptable for Switzerland to have a tax regime which allows some foreign companies to pay little tax on their foreign income.

"The European Commission has no doubt that cantonal tax schemes qualify as subsidies because they offer an unfair tax advantage to companies in Switzerland for profits generated in the EU. Income generated in Switzerland is taxed higher," Almunia told the European Parliament.

According to Almunia, companies establish operations in Switzerland with the sole intention of avoiding taxes in the EU. "Politically it seems hard to accept that a neighbouring country which enjoys a privileged access to our market should grant such tax favours," he argued.

The European Commission believes it has grounds for a legal challenge to the cantonal tax system, which permits Swiss cantons to compete with each to attract international holding companies and wealthy individuals with generous breaks. According to Brussels, this system distorts competition and impairs trade within the EU and is therefore a form of illegal state aid which breaches the 1972 free trade agreement between the EU and Switzerland.

European law dictates that member states cannot grant tax breaks or subsidies to certain industries or regions in the interest of maintaining a level competitive playing field across the EU.

In response to the Commission's claims, Switzerland argues that no contractual regulations exist between Switzerland and the European Union on the harmonisation of company taxation and that consequently, it is not possible for there to be an infringement of any agreement.

"This applies in particular to the Free Trade Agreement," Berne stated in February, arguing that this agreement only covers trade in certain goods, and does not provide a sufficient basis for judging company taxation, in particular concerning distortion of competition.

Moreover, the Swiss government emphasised the fact that it is not part of the Single European Market, so neither the rules on competition in the EC Treaty - amongst others the rules on state aid - nor the code of conduct on company taxation agreed amongst EU member states are applicable to Switzerland.

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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