Switzerland: The Swiss Tax Reform coming into force on 1 January 2020

Switzerland’s tax landscape was not a source of much news in the past. However, the Swiss public vote confirming the Federal Act on Tax Reform and AHV Financing on 19 May 2019 will now bring about a number of important changes! Changes that are in particular interesting in the context of cross-border transactions between related parties.

The implementation of the reform by 1 January 2020 will harmonise Swiss tax laws and practices with internationally accepted taxation standards and at the same time enable Switzerland to remain competitive within the increasingly narrow boundaries set for international tax competition.

Core elements of the reform are:

• The abolition of tax privileges, e.g. the cantonal tax statuses for holding, domicile and mixed companies and tax regimes for principal companies and financial branches;
• The implementation of new, internationally accepted measures that allow Switzerland to maintain an attractive corporate taxation system.

Essential and particularly important elements from a cross-border viewpoint

The recognition of hidden reserves (transitional measure)

Hidden reserves that are to be transferred from privileged to ordinary taxation will be taxed at a correspondingly lower rate (at cantonal and communal level).

Lower taxation is provided for by:

• The recognition and depreciation over time of hidden reserves and/or goodwill that have been built up during a privileged taxation scheme on the tax balance sheet (up­grading current law), and/or by
• The recognition and separate taxation over time of profit from realising hidden reserves and/or goodwill at a special tax rate (special tax rate solution).

The key element with these measures is the valuation of the hidden reserves and/or goodwill and its acceptance by the tax authorities as FY2019 comes to an end. Common past as well as future-oriented valuation methods are generally accepted.

Reduced ordinary corporate income tax rates

The ordinary combined effective corporate income tax rates are generally being reduced by a majority of cantons. In the case of Geneva by more than 10% to 13.99%, in other cases only by a few percentage points, but nevertheless reaching rates as low as about 12% to 15%. Internationally assessed and probably just about right for remaining within the expected band of tax rates, they are still accepted and not likely to be penalised in the future.

Notional interest deduction (NID)

Zurich as the only canton to do so has introduced a notional interest deduction (NID), which provides for an imputed interest deduction on equity capital which permanently exceeds the equity required for business operations.

Measures to support Switzerland as a research & development location

Patent box regime

The patent box allows income from patents and similar rights to be excluded in the tax base at cantonal and communal level (maximum reduction of 90%), provided there is a relevant connection to Switzerland and the modified nexus approach is met.

Additional R&D expense deduction

An additional deduction of up to 50% may be applied to expenses relating to R&D activities carried out in Switzerland.

Further measures include relief on capital taxes applied to equity that is attributable to participations, patents and similar rights, inter-company loans as well as a restriction on the disputed capital contribution principle for listed companies.

Minimum taxation to be 30%

The maximum tax reduction from the application of all new measures is limited to 70%, since the minimum taxation is to be 30%!