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07 March 2018 / article

Draft bill on Swiss Tax Proposal 17 released – call to action

On 21 March 2018, the Swiss government finally published the draft bill for the Swiss corporate tax reform package, the Tax Proposal 17 (TP 17; Steuervorlage 17).

Despite significant inputs requested by stakeholders during the public consultation, the Swiss government essentially sticks with the main parameters of its previous discussion draft by including notably a tax neutral step-up and omitting a notional interest deduction (see our previous coverage) As indicated earlier, the government confirms that it intends to implement a first part of the reform as soon as possible – by providing a revised step-up mechanism if a Swiss operation no longer applies a Swiss tax regime.

TP 17 draft bill


TP 17 aims to replace current preferential tax regimes such as holding, principal, mixed company and finance branch regimes with new tax measures in line with international standards. Separately, many cantons announced significant tax rate reductions. The draft bill essentially mirrors the prior discussion draft and does not contain any significant surprises:

Measures TP 17 – Draft bill 
Patent Box
  • 90% reduction (modified nexus approach)
  • Excluding software, likely including outsourcing to related parties in Switzerland or third parties
R&D Super-deduction
  • 50% super-deduction on R&D (salary) expenses
  • Includes outsourced activities
Step-up in basis in general
  • Tax neutral step-up on immigration or transfer of business operations/functions to Switzerland 
Step-up in basis for regimes
  • Depreciation model on built-in gains/goodwill if tax regime ends
  • Separate rate model applies once TP 17 enters into force
  • Cantons may introduce separate rate model earlier
Capital tax relief
  • Capital tax relief on qualifying investments (i.e., 10%) and patents
Base-erosion limitation
  • Deductions under patent box, R&D deduction and step-up for regimes combined cannot exceed 70% of total income
Abolishing of tax regimes
  • Preferential tax regimes are abolished
Foreign WHT credit
  • Swiss branches of non-resident entities will benefit from a foreign withholding tax credit (subject to certain conditions)
Cantonal tax rate reductions
  • Cantons to significantly reduce tax rates (e.g. 12 to 14%)

Conclusion

The draft bill is mostly in line with the public discussion draft released in September 2017. Whether additional measures will be added – most notably the notional interest deduction regime for financing activities – will be decided in parliamentary discussion. 

The step-up mechanism and the expected reductions of effective overall corporate income tax rates in many Swiss cantons to about 12% to 14% will ensure Switzerland's place ahead of other European locations.

Next steps of TP 17

The draft legislation will be discussed in parliament and may still be amended. Essentially, if the project is not delayed, it is likely that TP 17 will enter into force in 2020 whereas cantons will have the possibility to apply the step-up rules already at an earlier stage.

Recommended action

The draft bill provides sufficient comfort to re-assess current structures and move forward with restructuring plans. As many EU member states are at the same time implementing ATAD I a holistic cross-border view is required:

  • Step-up: TP 17 contains a step-up mechanism upon abolishing of Swiss tax regimes. As the rules and impact of the step-up under existing rules will be altered, MNE are well advised to review the available options – based on our experience the implementation of step-ups can take several months to complete.

  • Relocation of activities/functions: Focus on substance and value drivers are a key component in the post BEPS era – prompting heavy focus on aspects such as sourcing and procurement, group financing and R&D. Switzerland is one of the prime locations due to its strong position for innovation and expertise knowledge. The revised rules on step-up upon immigration combined with the future low tax rates in Switzerland provide a competitive edge over other European locations and have already prompted cross-border relocations further strengthening Swiss operations.

  • Covering ATAD I: Mandatory CFC rules in all EU member states are expected to impact Swiss operations - especially if previously benefitting from a Swiss tax regime. Draft legislation has been issued in key member states already setting the stage for reorganizations of Swiss MNE. As CFC rules will apply as of 1 January 2019 any action related to TP 17 also requires to cover aspects of ATAD I in order to be compliant.

We recommend clients to consider all elements of TP 17 and push forward with the implementation process by focusing on the above topics for their Swiss operations.

Loyens & Loeff provides tailor-made multi-jurisdictional solutions to clients in order to ensure a smooth and efficient transition from the current Swiss tax environment to a post-2019/2020 world, both in Switzerland and the European market. The new complex world of international tax can no longer be properly dealt with on a country-per-country basis. We have already helped many clients to adapt to the new environment by simultaneously taking care of cross-border legal, tax and regulatory aspects of the transition process.



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