Corporate Tax Reform III (CTR III), adopted by Switzerland's Federal Assembly and on which Swiss citizens are expected to vote in the coming year, is crucially significant to Switzerland as a business location. It will ensure that corporate taxation in the country is both competitive and internationally accepted. An attractive tax system is essential to maintaining international competitiveness.
At first glance, the focus of the reform is on eliminating cantonal tax privileges for holding, domiciliary, and mixed companies. Around 24,000 companies of these types are subject to special taxation in the cantons, although their importance for tax revenues differs from one canton to the next. For instance, the share of taxable corporate profits stemming from companies with a privileged tax status in the cantons of Vaud and Basel-Stadt is over 80%. In Geneva, it is around 70%. By contrast, the figure for Valais is less than 10%.
Nevertheless, the reform will have an impact on all companies in Switzerland. Since the individual cantons have a plethora of measures with which they can react in order to maintain attractive tax rates, the reform will affect more than just those companies that will lose their current privileges. Corporate Tax Reform III will alter the tax landscape in Switzerland dramatically. It will create new contours that are relevant to all companies, even those who do not currently benefit from any corporate income tax privileges. For that reason, entrepreneurs in every economic sector, regardless of the size of their company, need to already start looking at what the tax reform means for them, for example, with regard to their future corporate structure, equity strategy, and the company's location. Doing so may help them to exploit certain advantages based on the new framework conditions or avoid possible negative consequences. This applies in particular to an entrepreneur's personal wealth planning. Both tax experts and specialized bank advisors are available to advise entrepreneurs on precisely these questions.
On the issue of choosing where to establish a business, it is already becoming apparent that CTR III will ring in a new era of tax competition between cantons. Several cantons are planning significant cuts to ordinary corporate income tax rates as part of implementing Corporate Tax Reform III.
Companies in Switzerland that already pay ordinary corporate income tax, many of which are small and medium-sized enterprises, stand to profit from this trend toward lower cantonal tax rates. In particular, mobile companies in the service sector that are not bound to a specific place on account of production facilities may have new options when it comes to their choice of business location. However, not all cantons have announced how high their future corporate income tax rates will be. That makes it important for entrepreneurs to stay up to date on further developments in the individual cantons.
However, basing a decision solely on future income tax rates would be a mistake. When analyzing their situation, entrepreneurs also need to consider the new instruments of tax policy that the cantons will have at their disposal as part of Corporate Tax Reform III. Some of those tools can be applied to corporate taxation to differing extents. Some of the terms being used in this context are patent boxes with a tax deduction on profits from intellectual property, the offsetting of up to 150% of the effective costs of research and development, and an interest deduction on surplus equity (referred to as the notional interest deduction).
Each canton will ultimately be concerned with determining the right mix of instruments to employ as a location for businesses. For individual companies, the deciding factor will be to what extent the new tax framework conditions affect their specific activities.
Companies in research-intensive sectors and with revenues from intangible assets, for instance, may benefit from patent boxes or tax deductions on research. The extent of that benefit will depend on details that still need to be laid out in the corresponding implementing provisions. What types of patent revenues will receive tax breaks? Which activities will qualify as research and development, and which ones will not? Based on those factors, relatively large companies in particular that have offices in different regions of Switzerland or around the world need to ask whether they ought to make changes to their corporate structure in order to be ideally positioned in a new tax environment.
The possibility of an interest deduction on the portion of their equity that exceeds the minimum requirement may be interesting for a wide range of companies. For example, a real estate holding company that has various property companies under its roof might examine how much of its surplus equity it can bundle to enable it to make the interest deduction. In the current interest rate environment, the impact of this option ought to be modest, but it could become more significant over the long term.
It should also be borne in mind that only those cantons where the taxation of dividends from qualified shareholdings is at least 60% or more of the regular income tax rate will be able to apply the interest deduction. For family-owned companies or entrepreneurs for whom dividends represent an important component of private wealth accumulation, in particular, this can change their situation and make it necessary to reexamine their withdrawal strategy – salary vs. occupational retirement insurance benefits vs. dividends vs. a shareholder loan.
Some cantons have yet to reveal their specific plans on how they wish to implement Corporate Tax Reform III. The voters of Switzerland are likely to be the ones who have the final say on the reform, which is due to take effect in 2019. However, entrepreneurs must not delay. With some help from the appropriate experts, they need to begin thinking now about possible scenarios they may face if Corporate Tax Reform III becomes law.
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