According to Switzerland law, all companies are required to pay federal income taxes on their global income. The Swiss state runs two main types of tax system at two levels: the Federal and cantonal level. But the rate differs per canton.
The combined tax average is between 12 and 25% based on the company location. For example, companies located in Canton of Luzern pay about 12% while those in Canton of Zug pay 14.6%.
The tax privileges of cantonal status companies
- Holding companies tax regime is granted only to companies with targeting to hold shares. However, they are not active in trading in Switzerland. In such cases, the company is exempted from cantonal and communal income tax. At the federal level, these companies are exempted from dividends and capital gains.
- The mixed companies tax regime is provided to companies that have limited activities in Switzerland. This implies that these companies run over 80% of operations outside Switzerland. The tax for these companies ranges from 8 to 11%.
- Finance branches tax regime applies to companies offering financial services with total assets of about CHF 100 million. The income tax for these companies is between 1% and 2%.
- Principle companies’ income tax regime is between 5% and 8%. These are companies that have centralized their functions and risks within various groups and, therefore, perform operations via contract manufacturing, commissionaires and limited risk distributors (LRDs). Note that principle companies are also required to prove tax substance in Switzerland.
A closer look at the Switzerland tax reform
The present Swiss system outlined above was considered by the Swiss administration to be out of sync with international standards. To avoid being classified as a tax haven, Switzerland has opted to do away with the tax privileges.
On 12th February 2017, Swiss residents voted to reject the 3rd series of corporate tax reforms that targeted to remove international criticized regimes. Now, Switzerland had to do something to remain competitive.
The Swiss Federal Council introduced Tax Proposal 17 (TP17) through the collaboration of cities, political parties, and representatives of Confederation. The primary goal of 17(TP17) was:
- Boosting the country’s appeal as a business destination.
- Enhancing international acceptance.
- Assessing the productivity of the tax regime.
The consultations resulted in recommendations that were adopted starting from 1st June 2017 by the steering body. Following high-level discussion at the Federal Council, the Council of States, and the Swiss Parliament, the TRAF was adopted by the parliament, and a referendum is expected to be held in May 2019.
A glance at the key points in the TRAF
The primary goal of TRAF is abolishing the tax privileges in the Swiss law. Here are some of the suggested new tax regimes.
- Patent box: Under TRAF, an OECD compliant company shall be added at the cantonal level. The patent boxes will require that part of the profit from inventions get taxes at reduced rates.
- R&D Expenditure: Cantons will have the possibility of instituting more deduction for research and development expenditure to a maximum of 50% over the company’s cost.
- Tax relief limitation: The R&D expenditure, patent box and NID, will have tax relief restrictions. The tax burden relief can only be up to 70%.
- Notional interest deduction: For high tax cantons such as Zurich, there is a possibility of introducing a notional interest.
- Optional capital tax relief: The cantons will be allowed to reduce the taxable capital on patents and even those on intra group loans.