Third series of corporate tax reforms

Status as at October 2016

Brief summary

The third series of corporate tax reforms (CTR III) is designed to increase the appeal of Switzerland as a tax location and to reinstate international acceptance of Switzerland's corporate taxation. Criticism has been expressed at the reduced taxation of holding, domiciliary and mixed companies. The reforms are designed to eliminate the different taxation of domestic and foreign company profits by the cantons. To remain competitive internationally, research and development will benefit from tax relief. The Confederation will give a greater share of direct federal tax receipts to the cantons. In this way, the cantons will be able to reduce profit taxes and maintain their competitiveness. A referendum will be held on the reform. Opponents fear that the population will be required to pay for high shortfalls. There will be a vote on the proposal on 12 February 2017.


Background

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. Corporate taxation has increasingly been facing international 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, multinationals' room for manoeuvre in the area of corporate taxation should be limited and the exploitation of existing weaknesses in the international tax system should be restricted.

International criticism has been expressed at the reduced taxation of foreign income of holding, domiciliary and mixed companies. These so-called status companies benefit from a cantonal tax status.

The status companies are of sizeable economic importance. In 2012, they paid approximately CHF 4.1 billion in profit tax to the Confederation (incl. cantons' share of direct federal tax). This is about half of all of the Confederation's profit tax receipts. In the cantons and communes, the estimated share of CHF 2.1 billion (incl. cantons' share of direct federal tax) is about one fifth of the annual profit tax receipts.

Content of the reform

The reduced taxation of status companies will be abolished with the CTR III. This abolition will be accompanied by a loss of competitiveness for Switzerland, which is to be offset with other internationally acceptable measures.

The primary objective of the new measures will be to promote innovation. Revenue from patents and similar rights will thus be taxed at a lower level by means of a patent box. For research and development, a deduction which is greater than the actual research and development expenses is to be granted. The tax policy measures will be implemented largely in the cantons and their communes. Each canton can implement the envisaged measures in such a way that they are in line with its tax policy.

Confederation to support cantons

As a result of the reform, many cantons intend to reduce their profit taxes to retain their appeal as a business location. The Confederation wants to share the financial burden of these tax reductions because it also benefits from attractive locations. The reform thus envisages that the Confederation will increase the cantons' share of receipts from direct federal tax. To this end, the cantons' share of direct federal tax will be increased from 17% at present to 21.2%. In addition, fiscal equalization will be adapted to the new tax law circumstances.

Financial impact

The increase in the cantons' share of direct federal tax (CHF 920 million) and the supplementary contribution for the financially weak cantons (CHF 180 million) will lead to annual declines in receipts of CHF 1.1 billion in the Confederation. With the interest-adjusted profit tax on above-average equity capital, further declines in receipts will occur, the amounts of which will be dependent on the interest rates used.

CHF 1.1 billion will flow from the Confederation to the cantons so that they will not be left alone to manage the decline in receipts. These will depend in particular upon the reduction in the tax on profits the amount of which cannot be predicted. The interest-adjusted profit tax will also lead to declines in receipts. To what extent these declines can be offset by adjusting the taxation of distributed profits will depend on the interest rates applied.

These figures do not include any effects from the influx or exodus of companies or the shifting of corporate functions. The CTR III will be factored into financial planning for the first time with the 2017-2019 legislature financial plan.

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