Swiss People Reject Corporate Tax Reform III

On February 12, 2017, the Swiss people rejected the so-called Corporate Tax Reform III (CTR III) with a clear majority of 59.1%. Only four cantons (Zug, Vaud, Nidwalden and Ticino) out of 26 approved the proposal.

No doubt this is not the result multi-national companies and many other stakeholders in Switzerland were hoping for. Nevertheless, there is no reason to see only dark, negative scenarios with regard to the future of Switzerland as a business hub.

Reviewing the Rejected Proposal

Switzerland has committed to the OECD and EU that it will abolish ring-fencing schemes like holding or mixed company privileges. This is important for Switzerland to avoid appearing on any type of blacklist. The abolishment of these and other tax privileges is not controversial with the public.

It is further not controversial that increasing the tax burden of affected companies must be avoided in the course of abolishing existing tax privileges.

One of the reasons, or maybe the main reason, for the rejection of the proposed law, however, was that many voters did not understand how the reduction of ordinary tax rates and other tools to reduce the tax burden, such as R&D super deduction and Notional Interest Deduction, would be financed. In other words: Who would pay the bill?

Prospects Going Forward

Looking ahead, the following will most probably happen:

• The Federal Council will propose a new law within the next 12 months. This timing is already ambitious and a faster process would not be realistic.
• The new proposal might consist of two parts. Part 1 could include the abolishment of current tax privileges and the introduction of the Patent Box, which was also not controversial. Part 2 will possibly come a bit later and contain a number of other tools (e.g., R&D super deduction and compensation to cantons for reduced tax rates).
• Many cantons will reduce their ordinary tax rates as soon as the new proposal passes the political process; some cantons will even introduce a reduction before the proposal is passed.
• However, any new Federal law will not enter into force prior to 2021.

In the meantime, the situation remains as follows:

• The existing law (including tax privileges) is still applicable.
• No OECD or EU sanctions are expected, as long as the government is seriously working on abolishing the old ring-fencing schemes.
• The inter-cantonal tax competition works, which guarantees that corporate tax rates remain low or will be reduced even further.
• With Switzerland having one of the world’s lowest debt to GDP levels (35%), these low tax rates can be afforded even in the long-term.
• The existing law in many cantons allows for a tax-neutral step-up in the asset base (including goodwill) when a company decides to renounce a current tax privilege.
• Switzerland keeps its investor-friendly legal framework (e.g., liberal employment law) as well as countless initiatives to attract and support both start-ups and larger, established companies.

We recommend our clients to carefully evaluate their own tax positions not only from a purely Swiss perspective but also in light of BEPS (Base Erosion and Profit Shifting). This might mean renouncing existing tax rulings, strengthening the client’s substance (local management, personnel, premises, accounting, etc.) in Switzerland, or modifying business models to align value creation and exploitation of intellectual property with tax objectives.

In light of the recent developments around CTR III, it might also mean deferring taxation of profits, evaluating a tax-neutral step-up or other possibilities, but it definitely does not mean having to be concerned about the future competitiveness of Swiss tax law.

Christoph Niederer, Partner and Nadia Tarolli Schmidt, Partner at VISCHER AG, Zurich and Basel, Switzerland, a Transatlantic Law International affiliated firm. 

For further information or for any assistance regarding Swiss tax matters please contact Christoph and Nadia at switzerland@transatlanticlaw.com.

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