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Corporate Tax Reform

The consultation materials of the Corporate Tax Reform (CTRIII) joint project organization, appointed by the Confederation and cantons, claim that Switzerland, although being a small country with an open economy, still actively demonstrates its tax advantages.

Brief summary
The Corporate Tax Reform is designed to increase the appeal of Switzerland as a low tax location and to reinstate its international attractiveness. There has been criticism of certain tax arrangements for Swiss holding, domiciliary and mixed companies. The reform is to eliminate the different taxation of domestic and foreign corporate profits on the cantonal level. At the same time, dialogue is under way with the EU.
To remain competitive internationally, privileged taxation of royalties and adjusted profit tax are to be newly introduced on the federal level. The cantons also have the opportunity to lower profit taxes. The reduction in tax receipts associated with the reforms should be distributed equally between the Confederation, the cantons and the communes.
There is fierce international tax competition regarding corporate taxation. As a small and open economy, Switzerland is reliant on being able to prevail in this competition and actively shaping the competitive conditions. Corporate taxation in Switzerland has increasingly been facing international (MB GROUP: mainly European) criticism since the mid-2000s.
The most significant and comprehensive project is the OECD’s action plan on base erosion and profit shifting (BEPS). Here, the room for manoeuvre of multinationals in the area of corporate taxation should be limited and the exploitation of existing weaknesses in the international tax system should be restricted.
The Swiss practice of tax privileges relating to foreign revenues of holding, domiciliary and mixed companies, i.e. ring-fencing, has come in for international criticism. These companies enjoy a so-called cantonal tax status. Within the OECD, Switzerland is actively involved in the work on fair tax competition between countries.
Content of the Reform
The abolition of the cantonal tax status is the starting point of the corporate tax reform. Obviously, the abolition of these regulations would be accompanied by a loss of competitiveness for Switzerland, which is to be compensated for by other internationally acceptable measures.
For example, royalties should be taxed at a reduced rate at cantonal level by means of a royalty-box (MB GROUP: widely used in the EU countries). This should promote research, development and innovation. In addition, there are proposals for an interest-adjusted profit tax on above-average levels of equity capital. Both of these measures take account of the fact that certain business activities are subject to low levels of taxation when compared internationally. Adjustments are also to be made to cantonal taxes on capital.
In addition, a package of measures should improve the tax legislation system. This includes the abolition of the issue tax on equity capital, adjustments to participation deductions and the offsetting of losses.
Confederation to support cantons
The tax policy measures will be implemented largely in the cantons and their communes. In order to cushion their burden, the cantons’ share of direct federal tax is to be increased from the current 17% to 20.5%. The cantons will thereby receive approximately CHF 1 billion p.a. more than today.
Source – «Federal department of Finance»

Summary by MB GROUP
Over a period of several years MB GROUP experts have been constantly monitoring and analyzing developments concerning the Swiss Corporate Tax Reform to be implemented, which enables us to share the following conclusions (in a nutshell):
1. Swiss privileged taxation could not but provoke the EU outspoken displeasure: with the regard to crisis blooming in the euro area, the EU countries arduously seek to replenish their own budgets in the first line. As a result, the EU wants Switzerland to reshape its tax legislation so that certain privileged tax regimes get abolished.
2. The Federal Government met the challenge and is going to replace current tax advantages with the new benefits that will, on the one hand, aim at preserving Switzerland’s international tax attractiveness, and will preclude any chance of further tax system disputes with the EU on the other.
3. The new measures are meant to prevent Swiss tax policy from being internationally criticized any further. Consequently, the lack of pressure from the EU will allow entrepreneurs stably performing their business activities in Switzerland as well as in the EU countries.
Some experts consider that the adoption of the Corporate Tax Reform will very likely result in international companies relocating to Switzerland from other jurisdictions: apart from the new tax rates identical or comparable with those in the EU, Switzerland offers undeniable business benefits such as political neutrality, economic stability, access to the EU and China markets, and its impartial justice system.

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