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Tax project 17 (TP17) – Tax reform and financing the statutory pension insurance (TRFPI)

Report of the situation

As already mentionned multiple times in our newsletters, the Swiss Confederation has been working on a corporate tax reform for several years now. Starting with the third corporate tax reform (CTR III) which had been rejected by the Swiss people at the beginning of 2017, followed by the tax project 17 (TP17) that finally became the TRFPI for « Tax reform and financing the statutory pension insurance ». Right wing and left wing politicians came together to ensure the best chance of success.

It is aimed to come into force on January 1st, 2020. A referendum against the reform project was launched, but by the end of November it had only received half of the necessary votes and the deadline occurs before Christmas. Thus, the success of the referendum seems uncertain. But, if successful, the vote would take place on May 19, 2019.

The concrete measures proposed by the TRFPI are very closed to the ones presented by the TP17 and the CTR III which we have already widely explained on our previous newsletters. Let us remind them briefly :

  • Abolition of the cantonal tax regimes ;
  • Introduction of a Patent Box at cantonal level ;
    • The project limits the regime to patents only and now includes software.
  • Introduction of a « deduction » on R&D costs at cantonal level ;
    • The measure allows a tax increase of up to 50% of the labour costs.
  • Reintroduced Notional Interest Deduction (“NID”), called a self-financing deduction for cantons with an effective tax rate greater than 18.03%;
  • Systematic reporting of the hidden reserves (“step up”) when a company sets up or leaves. This possibility also exists in the event of a change in status resulting from the end of special tax regime.
  • Limitation on deductions and special tax regimes up to 30% of the taxable income ;
  • Partial dividends taxation set at 70% for the Confederation and at least 50% for the cantons.
  • Increase from 17 to 21.2% of the cantonal participiation on the direct federal tax revenue ;
  • Adaptation of the financial equalization ;
  • Increase of the Confederation’s minimum requirements for family allowance (new)
  • Abolition of the 5% transposition limit ;
  • Social compensation of CHF 2 billion financed through the statutory pension insurance.

As a reminder, the abolition of special tax regimes will not affect every company or canton in the same way. The companies based in high tax cantons and who benefited from special regimes aiming to reduce the tax base will experience a severe impact (Western Swiss cantons, BS, BE, ZH, GR, TI, etc.). However, the presence of such companies in Western Swiss cantons is higher than in other cantons such as Basel or Zurich. For this particular reason, these companies which could benefit until now on from a low effective rate risk to see their tax rate double (for instance in Geneva with 24%). This could lead to a migration to others cantons that traditionnaly have a rather low rate (ZG, SZ).

The decision to lay down the rates remain a cantonal competence, subject to the approbation of each cantonal people. The TRFPI is going to abolish the special tax regimes but the hypothetical rates reduction only relies on the cantons decision. Let us remind that according to recent surveys, a company which employs 20 persons creates between 5 to 6 parallel jobs related to the company needs and its employees on the local market. In addition, according to a survey carried this spring amoung multinational companies and available on our website, it seems that an important rate increase would inevitably lead to departures or a cessation of investments in Switzerland.

As we write these lines, only 3 cantons took a decision that goes in that direction :

  • Waadt : the rate’s reduction will take effect on January 1st, 2019. This reduction will be cumulative with tax regimes that still apply. The average rate in the canton will be 13.78%. The effective rate will depend on each municipality.
  • Basel-City : Parliament adopted in September a plan to lower taxes for both companies and individuals as of 1 January 2019. For companies, the rate was supposed to increase to 13%. However, a referendum was successful and a vote is now planned for the first quarter of 2019.
  • Bern: At the end of November, the Bernese people had to vote on a reduction in rates. After the success in Waadt and the Basel project, many people thought that Bern had no choice, especially having so competitive neighbors like Lucerne, Zug or even Zürich. However, to everyone’s surprise, the project was relatively easily rejected. Bern is thus going to maintain one of Switzerland’s highest rates, about 24 %.

Many of the other cantons have already almost finalized their respective projects (GE, JU, FR, VS, ZG, ZH, etc.). Their rates vary between 13 and 16 % but they did not adopt the Act draft which will lead the way to referendum yet. Furthermore, all the uncertainties coming along with a popular vote should be kept in mind. Following the vote in the canton of Bern, it is now more than uncertain that all these projects will know a successful ending. In particular, the specific economic situation of each canton creates very different realities. Important disparities in clustered regions, such as between Geneva and Bern, would not fail to pave the way for large intercantonal competition and therefore large movements of companies within Switzerland, the latter already happening.

If you have any questions about these measures and their impact on your business, we kindly invite you to consult our previous newsletters on the matter and to contact Daniel Spitz, certidied tax expert., Head of tax Switzerland.

Contact : daniel.spitz@rsmch.ch or by phone at : +41 21 311 00 21

Authors

Daniel Spitz
Partner Tax

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