The Federal Act on Tax Reform and AHV Financing (TRAF) provides for several tax measures to maintain Switzerland's competitiveness and safeguard jobs. TRAF marks the end of all tax regimes that are no longer aligned to international standards.
During parliamentary debate in the autumn session of 2018, the National Council and Council of States agreed a compromise to include elements aimed at financing AHV (old age and survivors’ insurance). The result was TRAF, which was ultimately approved by Parliament on 28 September 2018.
The Swiss electorate exercised their right to a referendum, and the Swiss people voted to approve TRAF by a majority of 66.4% on 19 May 2019.
The new Federal Act entered into force on 1 January 2020. Unacceptable privileged regimes for status companies (holding companies, domiciliary companies, base companies, Swiss finance branches and principal companies) were abolished from that date onwards.
The tax reform includes instruments to promote corporate activity in the area of research and development (R&D). This helps strengthen Switzerland’s position as an attractive business location, including in connection with potential synergies arising from collaboration with renowned Swiss universities and universities of applied sciences.
Specifically, taxpayers can apply for a patent box. Under this arrangement, net profits from patents are taken into account in the calculation of taxable net profit at the ratio of the qualifying R&D expenses to total R&D expenses per patent. A reduction of 90% applies, although cantons can choose a lower discount rate.
In addition, the cantons will have the opportunity to provide for an additional deduction of no more than 50% for R&D expenditure carried out by the taxpayer directly or by a third party in connection with the taxpayer's business. Many SMEs in Switzerland have strong roots in R&D, and stand to benefit from this new deduction.
However, these two instruments are not suitable for tax optimisation in all cantons, and not all cantons can afford to cut income tax rates. Parliament has therefore included a deduction for self-financing (notional interest deduction). This option is voluntary and available to cantons where the accumulated tax burden at the level of the canton, municipality and any other local government bodies is at least 13.5% over the entire tariff schedule in the capital city of the respective canton. In practice, the canton of Zurich is the only one that qualifies for the deduction.
Maximum tax relief granted under the new measures is limited at the cantonal level. The tax reduction – based on the patent box, R&D expense deduction and the notional interest deduction - may not exceed 70% of income before tax loss carryforwards and deduction of the discounts. Cantons are free to choose a lower discount rate. This affords them flexibility in the way they respond, and allows them to take the specific features of their own tax system into account.
Partial taxation of private income from dividends has been the subject of extensive parliamentary debate. The Federal Council’s proposal provides for an increase in partial taxation of dividends from relevant participations to 70% for natural persons at federal and cantonal level. This is a significant increase compared to the current provision, which was introduced in 2008 with Corporate Tax Reform II. The new rule could negatively affect family-run SMEs in particular, as these tend to be held by a small number of shareholders. Parliament therefore decided to propose partial taxation of 50% instead of 70% at the cantonal level. However, cantons are free to choose a higher rate of taxation. This gives them an important weapon for use in the battle for tax competitiveness.
The capital contribution principle has already been amended for companies listed on a Swiss stock exchange. When such companies repay capital contribution reserves without distributing at least an equal amount deriving from other reserves, tax is payable on half of the difference between the distribution of capital contribution reserves and of other reserves. However, this is capped at the amount of the reserves available to the company and qualifying for distribution under commercial law. In order to prevent tax-free conversion of capital contributions into share capital, the new provisions apply mutatis mutandis for the issue of free shares or free par value increases from capital contribution reserves.
The cantons have taken a range of measures based on the changes approved by Parliament on 28 September 2018 to abolish regimes for cantonal status companies (holding companies, domiciliary companies, base companies) that were no longer compatible with international requirements. Implementation of these instruments is either obligatory or optional. Most of the cantons have cut the tax rate for juridical persons.
Our factsheets set out the most important details of TRAF implementation in all 26 cantons.
With TRAF having been implemented, it is important to analyse the tax situation of companies and their owners. The focus should include the following:
Partial taxation of dividends could lose its appeal for a large number of shareholders with tax liability in Switzerland. In connection with the abolition of privileges for cantonal status companies, many cantons have cut their income tax rates to create an attractive new cantonal tax regime. Measures have been implemented to manage patents and similar rights (tax status of the patent box), or in connection with research and development (additional deduction).
Denis Boivin
denis.boivin@bdo.ch