In a referendum on 19 May 2019, the Swiss public voted in favour of the Federal Act on Tax Reform and OASI (Old Age and Survivors’ Insurance) Funding. The tax reform was necessary as the global tax environment has become tougher in recent years, with Switzerland under pressure from other countries to abolish tax privileges for companies or face sanctions. The canton of Zurich has implemented the federal statutory requirements into cantonal tax law, which was approved by the electorate in a vote on 1 September 2019. The tax reform will take effect on 1 January 2020.
Below we will outline the key changes as a result of the tax reform, with a special focus on the canton of Zurich.
At the cantonal level, tax privileges for companies with special tax status (such as holdings, mixed companies and domiciliary companies) will be abolished. The cantons have reacted by reducing the rate of profit tax as of early 2020 or 2021 to maintain their attractiveness as a business location. The level of reduction varies significantly from canton to canton, with the canton of Geneva cutting its rate from 24.2% to 14.0%, for example, compared to a reduction from 21.1% to 19.7% in the canton of Zurich. The reason for these differences is that cantons such as Geneva have a high number of companies with special tax status and are keen to keep these firms in the canton by offering a low rate of profit tax.
Temporary transitional provisions will be introduced simultaneously to cushion the adverse effects stemming from the abolition of tax privileges. Hidden reserves (including goodwill) booked by companies as a result of their special tax status will be subject to a separate lower tax rate during the first five years after the tax status has been changed (1.13% in the canton of Zurich). As an alternative – which has also been possible in the past – hidden reserves disclosed in the tax accounts can benefit from a tax-neutral step-up and be amortised tax effectively within 10 years. The canton of Zurich will implement a combination of these two methods, which should lead to an average tax rate of some 11% over the next ten years for companies benefiting from privileged taxation.
The cantons can assign a higher weighting to research and development expenditure in order to promote R&D. Companies headquartered in the canton of Zurich can apply a special deduction of 150% for such expenses if they are incurred in Switzerland. The situation for the pharmaceutical industry in the Basel area is not very favourable as the canton of Basel Stadt will not introduce any special deductions, while the deduction in the canton of Basel Land will only be 120%.
The instrument of the patent box is an attractive, albeit complex option for research-intensive companies based in Switzerland. Profits from patents under the Swiss Patents Act, the European Patent Convention or comparable rights will be taxed at a reduced rate at the cantonal level in consideration of the qualified research and development costs per patent. The tax-reducing effect of the patent box will be set at up to 90% of the taxable net profit in the canton of Zurich.
Companies can apply a notional interest deduction to the portion of equity capital that is not required for long-term business operations (surplus equity capital). The interest rate to be used for calculating the deduction is based on the yields of 10-year Swiss government bonds. This deduction is only permissible in cantons with an effective profit tax rate of at least 18.03%. As a result, it is only likely to be introduced in the canton of Zurich.
As of 2020, shareholders will have to pay federal income tax on 70% (currently 60%) of income from qualified shareholdings, while the tax rate at the cantonal level will be at least 50%, as previously. The canton of Zurich plans to postpone the increase in dividend taxation until 1 January 2023 at the earliest as part of a new bill. At the same time, the rate of profit tax in the canton will be reduced again from 19.7% to 18.2%.
Until now, sales by an individual of shares in excess of 5% to a company controlled by the same individual were subject to “transference”, involving the reclassification of what would otherwise be considered a tax-exempt capital gain into taxable income. As of 2020, the 5% rule will be abolished and any sale of shares by an individual to a company controlled by the same individual will be subject to transference. Income from an individual’s sale of shares to companies he/she does not control will generally remain tax-exempt.
Beat Sonderegger, Partner
Attorney-at-Law, Swiss Certified Tax Expert
Wealth Management
beat.sonderegger@swisspartners.com
Philippe Knecht
Fiduciary Services, Fiduciary Officer
philippe.knecht@swisspartners.com
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