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Tax reform and financing the statutory pension insurance (TRFPI) Approval

As already mentioned multiple times in our newsletters, and especially in our newsletter on this topic from December 2018, Swiss population was invited to vote on Mai 19, 2019 on the TRFPI project and this project has been approved! TRFPI project is an amended version of the previous third corporate tax reform (CTR III) and tax project 17 (TP17). The specificity of this project is that it mixes two complete different subject: on one side tax changes in the federal law and on the other side social benefits for all. This allows the Government to submit one unique project to the vote to reunite Right and Left political torrents with better chances of success. This compromise has been largely used with success in the past by the canton of Vaud.

Once again, the TRFPI project aims to implement federal changes only. Some cantons did organize a vote on the same day for the cantonal changes as well but the status at cantonal level is very disparate (see below).

The concrete actions proposed by the TRFPI are very closed to the ones of 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 an « additional deduction » on R&D costs at cantonal level ;
  • The regime allows a tax increase of up to 50% of the labour costs.
  • Notional Interest Deduction (“NID”), now called a self-financing deduction for cantons with an effective tax rate greater than 18.03%;
  • Systematic declaration of the hidden reserves (“step up”) when a company arrives or leaves Switzerland. This possibility also exists in the event of a change in status resulting from the end of special tax regime.
  • Limitation on deductions following special tax deductions to max 70% of the taxable income ;
  • Partial dividends taxation for individuals set at 70% for the Confederation and at least 50% for the cantons.
  • Increase from 17 to 21.2% of the cantonal allocation on the direct federal tax income ;
  • Amendment of the financial equalization system between the cantons ;
  • Increase of the Federation’s minimum requirements for family allowance (new)
  • Abolition of the 5% transposition limit ;
  • Social compensation of CHF 2 billion in favour of the statutory pension insurance.

Those changes will enter into force on January 1, 2020. Some have already announced their intention to file an appeal against this vote up to the Federal Court, based on the argument that such a vote can not link to object (social and tax) that have no specific link. Shall this appeal be successful, then the vote would be considered as nil and a new vote should be organized with two separate objects. The outcome should be known shortly.

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 Bern or Zurich. For this reason, these companies which could benefit until now on from a low effective tax rate bear the risk to see their tax rate double (for instance in Geneva with 24%). This could lead to a migration to other cantons that traditionally have a rather low rate (ZG, SZ).

The decision to reduce 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 depends on cantonal decisions.

At this stage, we can see the following situations between the cantons:

  • Vaud, Geneva, Basel : Significant decrease of corporate tax rate already approved by the cantonal people. Effective tax rate including federal tax between 13 and 14%.
  • Fribourg, Jura, Valais, Ticino, etc : Project to reduce tax rates and implement TRFPI actions under way but not yet finalized or awaiting referendum. Tax rates do vary between 13 and 16%.
  • Zug, Zurich, Schwyz, Luzern, St-Gallen, etc: No or little decrease of corporate tax rate. The cantons already had a low tax rate or do not intend to lower significantly their tax rate.
  • Bern, Solothurn,: Project denied by the cantonal people. No reduction of corporate tax rate and no implementation of TRFPI actions, except those which are mandatory and cantonal level.

During the next few months we are going to release Newsletters on those different actions to detail them one by one how they work and what impact they can have on your business. We will also organize a certain number of conferences around those topics. Please make sure you subscribed to our newsletters to stay informed.

If you have any questions about these topics and their impact on your business, we kindly invite you to review our previous newsletters on the matter and to contact Daniel Spitz, certified 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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