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Switzerland backs new corporate tax regime

posted onMay 29, 2019

Voters in Switzerland approved on Sunday (May 19) an overhaul of the corporate tax code, ensuring the Alpine country remains an attractive low tax domicile for global companies while still being compliant with international rules. 

According to final figures, 64.4% of Swiss voters approved the Federal Act on Tax Reform and AHV Financing (TRAF), with none of the 26 regions voting against.

Two years ago, voters had rejected a similar attempt to reform the corporate tax, which critics say gives Switzerland an unfair advantage in attracting multinational firms. 

Under pressure from the Organisation for Economic Co-operation and Development (OECD) and European Union (EU), the Swiss had promised to fall into line with international rules and eliminate preferential rates that benefit around 24,000 foreign companies based in Switzerland, which generate a quarter of the country's jobs and a third of its economic output. 

“We’ll have a tax system that’s compatible with the OECD and the EU,” finance minister and current Swiss president Ueli Maurer told a press conference on Sunday afternoon. 

The reform is likely to be effective on Jan. 1. 2020. Under the new law, the government will scrap the “special status” for these companies that pay corporate rates in individual cantons as low as 7.8% to 12%, compared with 12% to 24% for “normal” Swiss companies.

Meanwhile, the“special status” firms will still be able to cut costs by claiming deductions on income from patents or spending on research and development. 

Swiss cantons in turn will cut the rates they levy on normal companies as part of the reform to prevent them fleeing to more attractive destinations.  

Swiss tax reform

The new rules are expected to produce an initial annual shortfall of around 2 billion Swiss francs ($1.98 billion) in lost tax revenues. 

To cover the corporate tax shortfall, the federal government will increase the share of direct federal tax that cantons get (up from 17 percent to 21.2 percent).

The other side of the equation will see an extra 2 billion francs a year poured into state pension funds, by raising contributions from employers and employees and having the federal government chip in more. Employer and employee pension contributions will be raised by 0.15 percent each while the federal government will contribute 800 million francs. 

The outcome of the referendum came as a relief to authorities and the country’s main business federation. Opponents of the plan argue it would lead to a higher tax burden for individuals and cuts to public services.

The main consequences of the Federal Act on Tax Reform and AHV Financing (TRAF)  at a glance:

1. Abolishing of cantonal regimes of tax privileges applicable to companies whose main activities are carried out abroad 
2. Adoption of a single corporate income tax rate of 13.99% that will apply to all companies domiciled in the canton of Geneva-where there is a high concentration of multinational companies-(instead of 24.2%).
3. Increase in partial taxation of dividends.
4. Reduction of the taxation applicable to patent profits with a maximum discount of 90% (patent box). The canton of Geneva will apply a maximum discount of 10%.
5. Additional deduction for expenditure on research and development will be granted.