Switzerland’s Federal Council submitted a corporate tax reform plan to the Swiss Parliament earlier this month that focuses on abolishing preferential taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. treatment of holding and management companies while increasing preferential treatment of research and development (R&D) and intellectual property activities, implementing rules for the disclosure of reserves, and reworking the capital tax structure. The Council’s presentation of the plan comes as the European Commission’s (EC) competition and tax divisions are closely examining member states’ tax codes and rulings regarding profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. and erosion of the corporate base.
The plan, called Corporate Tax Reform III (CTRIII), aims to bring the Swiss federal tax structure in line with EU and OECD standards, but much of the tax burden that Swiss companies face is at the cantonal level. Cantons, similar to U.S. states, are entities separate but mostly subordinate to the federal government, which has limited power over their legal regimes, including their tax codes. CTRIII would abolish individual cantonal tax treatment of holding companies in favor of bringing their taxation under direct federal control, noting that cantonal tax arrangements “are no longer compatible with the international standards.” Cantons would also be free to lower their corporate tax rates provided that cantons stay within their budgetary constraints. CTRIII does not specify cantonal corporate profit tax rates, as these are not within the jurisdiction of the federal government.
A patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. , or a lower tax rate on revenue arising from intellectual property acquisition or holding, would be introduced at the cantonal level, and cantons would be able to increase R&D tax deductions for companies conducting research within Switzerland’s borders.
But CTRIII also provides for the disclosure of hidden reserves and performing a step-up, meaning that the formerly hidden assets would be assessed at fair market value, likely exceeding their previous book value, and taxed accordingly. Stepping-up of assets has precedent in U.S., German, and international tax law, and can actually lower a company’s tax burden, depending on the amount the formerly hidden reserve is stepped-up.
Dividends to shareholders would be taxed on 70% of their market value for shareholders that own at least 10% of the corporation’s stock.
Switzerland ranks third on the Tax Foundation’s International Tax Competitiveness Index, in part due to its competitive corporate tax structure. The Swiss tax system, along with the nation’s highly educated labor force, relatively stable currency, and diplomatic status, has long made it attractive to multinational corporations. It is safe to assume that the Federal Council does not want to throw away one of the nation’s most valuable assets—a competitive corporate tax rate—by harmonizing it with other EU nations. But the Council does not want to isolate Switzerland from the rest of the continent by flouting EU directives that attempt to restrict multinationals’ ability to invest or headquarter in what the EU terms “tax havens.” CTRIII provides a middle ground. It allows the Council—and the Parliament, should they choose to pass it—the ability to claim tax reform and harmonization with the EU without actually raising the tax burden on the overall corporate sector.
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