Glossary TRAF

AHV compensation fund

The central AHV fund to which AHV receipts are credited and AHV expenditure is debited. By law, the AHV compensation fund must generally have financial resources equivalent to one year's AHV expenditure. It is administered by a federal institution under public law known as Compenswiss, based in Geneva. Compenswiss must ensure that the money in the compensation fund is invested securely and profitably and that the AHV always has sufficient liquidity to pay out pensions and other benefits. See also: www.compenswiss.ch.

AHV financing

The AHV receives its money mainly from insured persons. They bear around three quarters of AHV expenditure, with employers paying half of the contributions for their employees. The second most important source of money is the Confederation: it pays a fixed share of 19.55% of AHV expenditure. This amounts to around CHF 8.5 billion p.a. The AHV has also been receiving money from value added tax since 1999 (see demographic percentage). This source covers slightly more than 5% of AHV expenditure. Further sources of money for the AHV include the revenue from the compensation fund's investments, the casino tax and receipts from recourse against liable third parties.

Apportionment result / pay-as-you-go deficit

The difference between receipts and expenditure for a year, excluding any investment income. The apportionment result shows whether the AHV is financially balanced. If it is negative, i.e. if there is a pay-as-you-go deficit, the AHV has a structural problem with its financing. Investment income is not taken into account, as it is not very important in the AHV pay-as-you-go system and can fluctuate significantly from year to year.

Baby boom generation

The number of newborns in Switzerland rose sharply in the 1950s to mid-1960s, after which the birth rate fell again before returning to its previous level in the mid-1970s. These baby boomers are also known as the baby boom generation. They will reach retirement age now and in the next 20 years or so. This is adversely affecting the AHV. The number of pensioners is rising faster than the number of people paying AHV contributions. AHV expenditure is growing faster than receipts.

BEPS

Base erosion and profit shifting (BEPS) is a project of the OECD (Organisation for Economic Cooperation and Development) and the G20 (group of 20 most important industrialised and emerging market nations). The aim of this project is to ensure corporate profits are taxed where added value is created. The OECD published the outcomes, including four minimum standards in this respect, in the autumn of 2015. The OECD is currently examining the implementation of the minimum standards in the individual countries.

Beta factors

Profits of companies with cantonal tax status (see tax status) are assigned beta factors and therefore have a lower weighting with respect to resource potential (see resource potential). Due to this preferential taxation, profits flow in reduced amounts into the resource potential. Beta factors will be abolished with the AHV and tax reform and fiscal equalization will be adapted to the new tax policy reality.

Contribution rate

Half of the employee's contribution to the AHV is paid by the employer and half by the employee and amounts to 8.4% of the salary. The contributions of the self-employed depend on their income and range from 4.2% to a maximum of 7.8%. Persons who are not in gainful employment pay contributions in proportion to their assets and any pension income. Their contribution is at least CHF 392 and no more than CHF 19,600 per year (all figures for 2018).

Corporate tax reforms I-II

The two earlier series of corporate tax reforms addressed different issues and involved different areas of focus: The first corporate tax reform came into force in 1997. It included improving Switzerland's appeal as a location for holding companies, and introducing a proportional profit tax scale and eliminating capital tax at federal level. The second corporate tax reform was accepted by the electorate on 24 February 2008 and was brought into force between 2008 and 2011. Its core elements involved alleviating the burden of double taxation for shareholders, reducing taxes detrimental to a company's asset base, providing relief for partnerships and introducing the capital contribution principle.

Crediting of foreign withholding taxes (formerly: flat-rate tax credit)

Based on a double taxation agreement, taxes paid abroad that cannot be reclaimed there are taken into account for Swiss tax with the crediting of foreign withholding taxes. Double taxation in an international context can thus be avoided.

Deduction for self-financing

Under applicable law, debt capital interest may be deducted from taxable profit as an expense. The deduction for self-financing extends the deduction for financing costs in that imputed interest on surplus equity capital (see surplus equity capital) can additionally be deducted.

Demographic percentage of value added tax

A percentage point of VAT has been levied for the AHV since 1999. This so-called demographic percentage serves to finance the development of the population's age structure. This development is unfavourable for the AHV, as the number of people retiring is rising faster than the number of people paying contributions. Current receipts are no longer sufficient to cover expenditure. 83% of the revenue from this VAT percentage goes to the AHV. The Confederation receives the remaining 17%, as demographic developments also create a burden for the Confederation. The AHV and tax reform provides for the full transfer of the demographic percentage to the AHV. In 2020, the additional receipts for the AHV correspond to around CHF 520 million.

Depreciation

Depreciation is undertaken so that the current value of assets can be seen in the financial statements at all times. It involves booking the decline in asset value (as a result of the "wear and tear" or ageing of fixed assets) as a cost from an accounting perspective. As an expense item, depreciation has the effect of reducing taxable profit.

Equalization measures, vertical

The term describes the increase in the cantons' share of direct federal tax receipts. This will be increased in order to give the cantons leeway in terms of fiscal policy and to balance the burden of the TRAF between the Confederation and the cantons. The AHV and tax reform will be implemented largely in the cantons and their communes, where it will lead to greater reductions in receipts than is the case for the Confederation. In contrast, the Confederation will benefit from these measures, as they will maintain tax competitiveness and thus secure direct federal tax receipts.

EU Code of Conduct

The Code of Conduct for Business Taxation (CoC) was adopted by the Council of EU Economics and Finance Ministers (ECOFIN) on 1 December 1997. The Code of Conduct is not a legally binding instrument. It obliges EU member states at a political level to rescind any existing tax measures that could lead to harmful tax competition and to pass no further measures of this kind in the future.

Federal AHV contribution

The Confederation bears a fixed share of 19.55% of AHV expenditure. This amounts to around CHF 8.5 billion per year. The Confederation can cover about a fifth of this amount with levies on tobacco and spirits and with its share of the percentage point of VAT earmarked for demographic change. The remainder comes from general federal funds. The AHV and tax proposal makes provision for increasing the federal contribution from 19.55% to 20.2% of AHV expenditure. In 2020, the additional receipts for the AHV correspond to around CHF 300 million.

Federal profit tax

The federal profit tax applies to all legal entities headquartered or effectively managed in Switzerland. This affects in particular corporations, i.e. companies limited by shares (Aktiengesellschaften), partnerships limited by shares (Kommanditaktiengesellschaften), limited liability companies (GmbHs) and cooperatives, as well as associations, foundations and other legal entities.

Fiscal equalization

Switzerland's fiscal equalization system regulates financial relations between the Confederation and the cantons. It encompasses the allocation of public tasks on the one hand, and the redistribution of public funds between the Confederation and the cantons, or between the cantons, on the other. Fiscal equalization pursues two primary aims: to reduce cantonal differences in financial capacity and to increase the government's efficiency in the performance of its tasks.

Forum on Harmful Tax Practices (FHTP)

The FHTP aims to highlight and prevent harmful tax practices in OECD member states as well as other countries. Switzerland is represented in this body. The OECD created the FHTP after publishing the report entitled "Harmful Tax Competition: An Emerging Global Issue" in 1998. The FHTP is currently part of the BEPS project under Action 5 and deals primarily with asset requirements for companies and transparency in tax matters. The OECD standard for patent boxes, among other things, was developed in this forum. The forum has reviewed 255 regimes since the beginning of the BEPS project, including the tax regimes to be abolished under the AHV and tax proposal.

Nexus approach, modified

This approach was drawn up by the OECD (see above explanations on the Forum on Harmful Tax Practices) in connection with patent boxes. The modified nexus approach is meant to ensure that, in general, only the revenue attributable to domestic research and development costs benefits from tax privileges within the scope of the patent box. In keeping with the model developed by the OECD, however, additional relief is possible to a limited degree (so-called uplift).

Partial taxation procedure

The partial taxation procedure was introduced as part of the second series of corporate tax reforms in order to mitigate/eliminate economic double taxation. This occurs if dividends are first fully taxed as the profit of a company and are then fully taxed as the income of a shareholder. The cantons are generally free to decide whether they introduce a partial taxation procedure and how they want to design it. However, partial taxation is applicable solely to interests of at least 10%. With the AHV and tax proposal, partial taxation should be increased to 70% at federal level (currently: 50% if the interests are held as business assets and 60% if they are held as private assets). In the future, the cantons will tax at least 50% of dividend revenue (under current law, no partial taxation rate is prescribed for the cantons). In addition, the relief method is to be harmonised.

Patentbox

Using a patent box, profits from patents and similar rights are taxed at a reduced rate. The patent box proposed by the Federal Council corresponds to the OECD standard (see Nexus approach, modified).

Pay-as-you-go system

The AHV is financed according to the so-called pay-as-you-go system. Current benefits are financed with current receipts, i.e. receipts are "apportioned" directly to expenditure. The opposite of the pay-as-you-go system is the funded system, where the contributions of the insured are set aside and earn interest so that pensions can later be paid out of the capital saved.

Principal company

International companies centralise functions, responsibilities and risks within the group by product area or market. The parent company in a centralised structure is referred to as the principal company. It typically assumes global responsibility for tasks such as purchasing, the planning of research and development, production planning and management, inventory management and logistics planning, the development of marketing strategy, sales planning and management, treasury and finance, and administration. If this principal company is located in Switzerland, part of the net profit is excluded from taxation in Switzerland on the grounds that this part of the net profit is attributable to a foreign permanent establishment, based on an FTA circular on direct federal tax. Effective since 1 January 2019, the FTA no longer applies this practice to companies wishing to use it for the first time.

Profit tax rate, effective

As the tax amount can be deducted from the assessment basis, the actual tax payable is reduced relative to the statutory burden (see: profit tax burden, statutory). At federal level, it is 7.83%.

Profit tax rate, statutory

This is based on the legally prescribed profit tax rates. At federal level, this is currently 8.5%.

Relief restriction

A relief restriction is to be introduced in the Tax Harmonisation Act with the AHV and tax proposal. This ensures that at least 30% of companies' profits are taxed even after the new tax-related special arrangements are applied (patent box, additional R&D deductions and deduction for self-financing). Insofar as the cantonal practice makes provision for the disclosure of hidden reserves when taxation as a status company ends, the depreciation in this regard will also come under the relief restriction.

Research and development deductions, additional

For research and development, the cantons may grant additional deductions of no more than 50% over and above the actual expenditure. As a result, the taxable profit is reduced.

Reserves, hidden

Hidden reserves correspond to the difference between the market value of an asset (e.g. a machine) and its lower book value. They can often arise as a result of value increases or write-downs. The realisation of hidden reserves (e.g. following a sale) results in a profit tax liability. The taxable realisation of hidden reserves also occurs if the tax liability comes to an end, e.g. as a result of a move away from Switzerland. Conversely, it is consistent to permit a tax-neutral disclosure of hidden reserves generated abroad at the beginning of the tax liability as a result of a move to Switzerland. When taxation as a status company ends, the disclosure of hidden reserves is based on the respective cantonal practice. Once the AHV and tax proposal has come into force, the existing hidden reserves of these companies will be set out in a ruling and they will be taxed at a special rate to be determined by the relevant canton if realised in the subsequent five years (so-called special rate solution). Both the disclosure of hidden reserves when moving in and the end of a cantonal tax status are designated as a step-up.

Resource equalization

Resource equalization is one of the instruments in the fiscal equalization system between the Confederation and the cantons and it helps to reduce the differences in financial capacity between the cantons and to preserve tax competitiveness by national and international standards. The procedure is financed by the Confederation and the financially strong cantons. The Confederation finances vertical resource equalization, while the financially strong cantons finance horizontal resource equalization.

Resource index

The resource index forms the basis for resource equalization. It shows the utilizable fiscal capacity of each canton in relation to the Swiss average, whereby the national average resource potential per capita is defined as an index value of 100. Cantons with an index value below 100 are deemed to be financially weak and those with a value of over 100, financially strong.

Resource potential

Resource potential reflects the utilizable fiscal capacity of a canton, and therefore the financial capacity of a canton. This forms the basis for calculating the resource index. It corresponds to the three-year average of the aggregated tax base (ATB), which is essentially based on the direct federal tax assessment basis.

Salary contributions

The contributions of working insured persons are levied on the total earned income. For employees, they amount to 8.4% of the salary, half borne by employees and half by employers. The contributions of the self-employed depend on their income and range from 4.2% to a maximum of 7.8%. Persons who are not in gainful employment pay contributions in proportion to their assets and any pension income. Their contribution must be at least CHF 392 and no more than CHF 19,600 per year (all figures for 2018).

Step-up

Cf. "Reserves, hidden".

Surplus equity capital

This is the term used to describe the portion of equity capital that exceeds an appropriate average level of self-financing. The deduction for self-financing (see deduction for self-financing) is granted only on surplus equity capital.

Swiss Finance Branch

The Swiss financial permanent establishment of a foreign company. It is mainly responsible for lending within foreign groups. The capital required for this comes from a foreign finance company, which is granted a usage fee for the capital made available to the Swiss permanent establishment. This results in a correspondingly reduced taxable profit for the Swiss finance branch. This treatment is based on the practice of the FTA and cantonal tax authorities. Effective since 1 January 2019, the FTA no longer applies this practice to companies wishing to use it for the first time.

Tax status, cantonal

Tax status, cantonal: Corporations, cooperatives and certain foundations which fulfil a specific function or whose commercial activity is predominantly exercised outside Switzerland can enjoy a special tax status at cantonal level. These status companies pay only a reduced profit tax or none at all at cantonal level. The Federal Direct Taxation Harmonisation Act (DTHA) distinguishes between different types of status companies: Holding companies (Art. 28 para. 2 of the DTHA): The principal activity of these companies involves holding and managing financial interests over the long term. Management companies: - Domiciliary companies (Art. 28 para. 3 of the DTHA): These companies do not exercise any commercial activity in Switzerland and fulfil only management functions. - Mixed companies (Art. 28 para. 4 of the DTHA): The commercial activities of these companies in Switzerland are of only subordinated importance. Direct federal tax does not recognise any tax status.

Contact
Last modification 15.02.2019

Top of page

https://www.efd.admin.ch/content/efd/en/home/dokumentation/legislation/abstimmungen/staf/glossar-sv17.html