As reported in a recent article by Marnin Michaels in Zurich, Switzerland, which article was recently published in the Journal of International Taxation, the Swiss government recently published a draft bill last Fall, as well as an explanatory report, concerning tax measures for strengthening the competitiveness of Switzerland as a business location. The reforms proposed to the corporate tax rules in Switzerland are broad and will have a profound inpact. It will abolish certain current preferential tax regimes which will be replaced with them new competitive measures which conform with international standards.

The draft of “Corporate Tax Reform III” comes as a result of long-standing criticism and pressure from various countries, including the countries comprising the EU, for Switzerland to modify if not repeal preferential tax regimes and practices currently applied in Switzerland (for example, the mixed company regime at the cantonal level, and the Swiss finance branch and principal company regime at the federal level). Michaels reports that “[t]he Swiss government aims to abolish those regimes and to introduce new measures that conform to international standards to secure and even enhance Switzerland’s attractiveness as a business location.

The new measures proposed by the Swiss government include: (i) a new patent box regime that would allow preferential treatment of income arising from patents. The Swiss patent box would permit privileged tax treatment of “embedded IP” income and provide for a maximum tax base reduction of 80%, resulting in an effective total tax rate of 9%-10% for qualifying IP income. So “earnings stripping” through using Switzerland as a base to warehouse intangibles is going to be part of the “reform”; (ii) a new notional interest deduction (NID) on equity to establish equal tax treatment of debt and equity. However, the NID would apply only to “excessive equity,” i.e., the part exceeding the equity required for carrying out the respective company’s business; (iii) a new tax-neutral step-up (including on self-generated goodwill) for companies transitioning from a former preferential tax regime to ordinary tax status, as well as for companies relocating to Switzerland. This measure would allow companies that currently benefit from a preferential tax regime that might be abolished under the tax reform to maintain their beneficial tax rate for a transitional period; (iv) the transition from an indirect to a direct participation exemption regime regarding dividends and capital gains, including abolition of the minimum participation threshold and minimum holding period requirement; (v) the extension of NOL term from 7 years under current law to unlimited period but the loss offsetting per year will be limited to 80% of taxable profit (before offsetting it with the loss); and (vi) Swiss parent companies will be allowed to assume final tax losses from their Swiss and foreign subsidiaries. Other changes are noted.

It is anticipated that the enactment of Corporate Tax Reform will reduce tax revenues sharply. In response the Swiss government suggests additional financing measures, which include introduction of a capital gains tax on shares and other securities held as private assets by individuals; 70% of the respective capital gains (as well as of dividend income) would be subject to income taxes. Currently, capital gains on movable private assets are generally tax free in Switzerland. Perhaps a more transparent Switzerland as well as a more neutral climate for conducting business within and outside of Switzerland will be favorably received by multi-national companies as well as the taxing agencies of the U.S., EU and G-20.

It is anticipated that the legislation will be passed by the Parliament in Switzerland sometime next year with applicable grandfather rules and transitional rules over a term certain.