Swiss tax changes affecting international companies

Many of us who come from abroad to live in or around Switzerland are here either directly or indirectly because of favourable tax rules that generously benefit certain companies and branch offices in Switzerland.

Switzerland’s harmful state aid
Unfortunately, the European Union (EU) does not like Swiss tax rules that tax certain income differently. In particular, it does not like Switzerland’s favourable tax treatment of foreign income, viewing it as a distortion that prevents the proper functioning of the 1972 free trade agreement between the two parties. The EU sees such tax benefits as harmful state aid that distorts cross-border competition.

Goliath beats David
The long running debate between Switzerland and the EU, euphemistically called “tax dialogue”, began in February 2005. After more than ten years of wrangling Switzerland is buckling and the EU is set to get its way.

Swiss holding companies, domiciliary companies, mixed companies, principal companies and finance branches are all likely to be affected.

Switzerland is caught between a rock and a hard place. It has to try to satisfy EU demands without losing companies that benefit from the current regime. If the replacement tax regime results in large increases in corporate taxes, the country could experience a of wave companies leaving, taking jobs and tax revenue with them.

Switzerland is putting on a brave face in these extremely difficult negotiations where it has little of the political and economic power of its adversary. There is a silver lining however. One Swiss-based partner of a big four accounting firm put it like this: “the reform package represents a great opportunity for Switzerland to retain and further develop its position as one of the most attractive business locations worldwide, while increasing international acceptance of its corporate tax legislation.”

Losing and winning
Because the EU does not mind low corporate tax rates that are applied universally to all companies, these will be a major element of the new rules.

Ireland, an EU member state, successfully introduced a low universal corporate tax rate of 12.5 % in 2003. A major difference between Ireland and Switzerland however, is that Ireland had a relatively low local corporate tax base before introducing this low universal rate. In other words Ireland had less to lose from a universal tax rate cut than Switzerland.

Swiss corporation tax has three components: federal, cantonal and communal. Lowering standard corporation tax rates in Geneva and Vaud will require large cuts to the cantonal component.

The Canton of Geneva has announced that it will apply a new lower overall corporate tax rate of 13% from 2020 onward. This rate includes federal, cantonal and communal taxes. The canton of Vaud will employ Swiss precision and apply a reduced rate of 13.79% from the same date. Between now and 2020 rates are likely to be gradually lowered towards these percentages.

The canton of Neuchatel has already reduced its rate to 15.6%, so cantonal tax competition remains alive and well.

The second key element of the reform will be the introduction of a licence box regime. One canton, Nidwalden, has already introduced such a system, where net licencing income from the use of intangible assets such as software is taxed separately at a reduced rate of one fifth of the regular rate. However, it remains to be seen how successful Switzerland will be at attracting companies with this new licence box system. Numerous other European countries offer them including, Belgium, Lichtenstein, Luxembourg, the Netherlands and the United Kingdom. In addition the OECD has heavily criticized licence boxes so they could come under attack further down the line.

Other ideas were considered but then later dropped. Belgian inspired notional interest deductions, a tax-deductible notional interest based on a company’s equity, was discussed and rejected. Similarly a capital gains tax on the sale of privately held securities was considered before being excluded.

Not over yet
The next hurdle for these tax reforms could be public approval. Voters could reject the changes in a Swiss referendum. And after the 9th February 2014 vote to curb mass immigration we now know how unexpected referenda results can be.

Whatever happens, resolving this long standing corporate tax disagreement with the EU will bring greater certainty to all businesses operating in Switzerland. Those familiar with the financial markets will know that bad news is often better received than nagging uncertainty. Add to this, new low universal company tax rates, Switzerland’s enviable track record of successfully weathering rough storms, and the future starts to look brighter.

By Ludo Schockaert
Ludo works for International Tax Consult in Nyon
Email: ludo.schockaert at internationaltaxconsult.com

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