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Switzerland Plans Landmark Cantonal Corporate Tax Reforms

by Ulrika Lomas, Tax-News.com, Brussels

25 September 2014


After several years of preparatory work, the Swiss Federal Council has announced plans to abolish corporate tax breaks that it says will no longer be in keeping with international standards.

The proposals relate primarily to the cantonal tax statuses currently available to holding, domiciliary, and mixed companies. By using a practice known as "ring fencing," cantons can tax multinationals' foreign profits at a lower rate than their domestic earnings. By abolishing these statuses, Switzerland aims to bolster the nation's status as a leading business location with an attractive tax regime.

Companies with cantonal tax status have accounted for roughly half of the Confederation's profit tax receipts in recent years. However, the Federal Council says that, due to international developments and in particular the work of the Organization for Economic Cooperation and Development (OECD), it appears that these arrangements will no longer meet international standards. The Council is concerned that, as a result of the diminishing international acceptance of these arrangements, companies are increasingly faced with reduced legal and planning certainty.

The Council proposes the introduction of a "royalty box," to allow income from intellectual property to be taxed at lower rates, and an interest-adjusted profit tax. The cantons will be able to introduce targeted capital tax reductions, and the issue tax on equity capital will be abolished. Adjustments will be made to the rules on participation deductions and the offsetting of losses. Comprehensive regulations will be introduced for the disclosure of hidden reserves.

The changes are to be implemented primarily in the cantons and their communes and are likely to lead to a moderate fall in their profit tax revenues. The Council will therefore introduce a capital gains tax on securities to account for this shortfall. It will also make adjustments to the partial taxation system for dividends.

The federal Government will also implement "vertical equalization measures," amounting to CHF1bn (USD1.07bn), to ensure a balanced distribution of the changes' burden between the Confederation and the cantons.

In total, it is estimated that the reforms will cost Switzerland CHF2bn, but CHF300m will be offset through the introduction of the new capital gains tax on securities. Switzerland is to increase the number of tax inspectors in an effort to boost revenues.

In 2007, the European Commission expressed concerns about the differences in the treatment of domestic and foreign income under the cantonal tax regimes. In July, Switzerland and the European Union (EU) initialed a mutual understanding on business taxation. In the document, the Swiss Federal Council reaffirmed its intention to propose the removal of tax regimes deemed by the EU to be "harmful". In return, the EU pledged to remove corresponding countermeasures as soon as the regimes in question had been abolished.

The changes are to be subject to consultation until January 31, 2015. The Government said international tax developments that occur in the interim will be factored into the final plans.

TAGS: compliance | tax | business | European Commission | tax compliance | tax incentives | interest | revenue guidance | intellectual property | budget | Organisation for Economic Co-operation and Development (OECD) | corporation tax | tax authority | multinationals | tax planning | transfer pricing | tax rates | Switzerland | tax breaks | dividends | revenue statistics | tax reform | standards | regulation | European Union (EU) | Europe

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