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Swiss corporate tax reform has just been approved
A further step in Switzerland’s alignment with international standards
Federal Act on Tax Reform and AHV Financing (TRAF) has been approved by referendum on 19 May 2019
After the approval of the BEPS Convention by Parliament on 22 March 2019, Switzerland has once again demonstrated its commitment to promoting transparency and creating conditions of fair competition in the taxation of multinational companies. The new provisions shall come into force and take effect as from 1 January 2020.
This tax reform will have a large and significant impact for many companies in Switzerland, not only those which currently benefit from special Tax status (such as mixed company or holding company status), as part of the introduction of a broad-based substantial tax reduction. In addition, the reform will strengthen the Swiss social security (AHV) system.
Challenge of the reform in the context of International pressure
The approval by referendum of the Federal Law on Tax Reform and AHV Financing (TRAF) will remain one of the most important political decisions in Switzerland in recent years.
This reform had become necessary in a context of strong international pressure from the Organization for Economic Co-operation and Development (OECD) and the European Union (EU) for Switzerland to align with international standard and fair tax practices.
The challenge was to preserve Switzerland’s fiscal attractiveness through internationally accepted alternative measures that could be adapted at a cantonal level.
Given its economic and political stability in the middle of Europe, Switzerland is a well established location for numerous international companies in different sectors, as well as global and/or EU headquarters, trading and hub companies providing high value-added management and other centralized services.
While not being the only factor, the potential tax burden for a business is a major consideration when evaluating where to locate affiliate companies and investments. Lower corporate taxes were until now an important counterweight to compensate for a higher cost of living in Switzerland.
The challenge has been met insofar as the tax reform has at the same time secured Switzerland’s long-term attractiveness and competitiveness as a business location while also restoring and safeguarding international acceptance of the Swiss tax system.
Main measures and consequences of the reform for global employment companies based in Switzerland
The tax reform provides for an end to preferential tax statuses and goes together with a broad reduction of corporate tax rates.
End of preferential tax statuses
As from 1 January 2020, all companies will be subject to the same tax rules. The reform aims to standardize corporate taxation through a common corporate tax rate varying slightly from one canton to another.
At a cantonal level, tax privileges will therefore end, especially for holding companies, domicile companies and mixed companies. Such privileged tax statuses will remain applicable pending the entry into force of the corporate tax reform on 1st January 2020 at a cantonal level. As from 1 January 2020, such privileged status will come to an end and benefits from Articles 23 LIPM in the Canton of Geneva will be repealed.
However, the achievement of a minimum profit and markup in compliance with OECD principles on transfer pricing between affiliates within the same Group remain mandatory.
Unified reduction of cantonal corporate tax rates
The reduction of cantonal corporate tax rates was necessary for Switzerland and the cantons to remain attractive from a tax perspective, especially for former tax privileged companies. The reform enables the cantons to reduce their corporate tax rates.
All Swiss companies will in future be taxed under the same rules. Based on official announcements made by cantonal governments, it is expected that the majority of the Swiss cantons will provide attractive tax rates through a tax rate range of between 12-14% (effective including federal / cantonal / communal tax rates).
The canton of Geneva, where there is a high concentration of multinational companies, already voted laws to implement tax reforms at a regional level. The baseline corporate rate for all companies at 13.99% has been approved in Geneva.
Social compensation via the AHV (Old Age & Survivors’ insurance)
In addition, the reform will strengthen the Swiss social security (AHV) system.
It is assumed that the loss of tax receipts due to the tax reform will be significant. This shortfall will be partly compensated through AHV financing measures:
- A 0.3% increase in salary contributions (0.15% Employers & 0.15% Employees);
- Allocation of the federal share of the demographic percentage of VAT to the AHV;
- Increase in the federal contribution to the AHV.
The tax reform allows additional funding for the AHV but does not prevent the need for further long-term structural AHV reforms, which will nevertheless be necessary. The Federal Council on 3 July 2019 has already taken actions in this sense (Federal Council Message AHV 21 proposal) making retirement more flexible and slowly increasing the retirement age.
European safeguard clauses and anti-abuse provisions to be considered
The Swiss tax reform remains acceptable in light of international tax principles and standards, but companies should nevertheless ensure compliance with safeguard and/or anti-abuse clauses that may otherwise exist in certain countries, in particular in France pursuant to Articles 238A and 209 B of the French General Tax Code.
Conclusion & recommendations
The new system ensures stability and certainty for foreign companies based in Switzerland, while preserving and strengthening AHV funding.
The tax reform, as approved by Referendum, is a well-balanced and internationally competitive alternative that ensure Swiss tax attractiveness for multinationals and domestic companies alike, while in the mean time providing a tax system aligned and in conformity with international standards including OECD BEPS and others.
The approved referendum makes the Federal Act as previously approved by Swiss Parliament on 28 September 2018 final. The reform will enter into force on 1 January 2020.
The Federal Council already announced that all special tax regimes will be abolished as of 1 January 2020 and transitional measures will apply.
The privileged tax statuses will remain applicable pending the entry into force of the corporate tax reform on 1 January 2020 at the cantonal level.
Companies should anticipate the replacement of preferential tax regimes from 2020 onwards and plan the transition to the new regulation, analyzing the consequences likely to result, although the negative effects of the reform have been mitigated with headline tax rates of 12-14 % in most cantons.
The information enclosed within the present newsletter are not exhaustive and do not cover necessarily all legal aspect of the subject. This in no case can replace a legal professional advice particularly regarding the considered case under any particular situation. Copyrights are reserved, except with prior written consent.