TRAF should have the effect of overhauling Switzerland's tax system
Unlike the "Corporate Tax Reform III" bill of 2017, which was emphatically rejected by the electorate, the Swiss people gave the thumbs up to the modified "Tax Reform and AHV Financing" (TRAF) reform package in the referendum of May 19, 2019. The new version of the original Tax Proposal 17 is made up of two parts:
- Reform of corporate taxation
- Compensatory additional funding for the AHV
With the changes entailed by the proposal, the Confederation aims to deliver a competitive tax system that complies with international regulations. It is meant to uphold Switzerland's attractiveness as a business location. With the current tax system, holding and trust companies located in Switzerland that generate their sales revenue and costs abroad benefit from reduced tax rates or even tax exemptions. This is set to change with the new reform. The "Tax Reform and AHV Financing" (TRAF) package eliminates the tax privileges that apply to such status companies. In other words, parity is being introduced between the special status companies and local SMEs.
New Tax Proposal 17 affects shareholders too
In the future, all legal entities will be subject to the same tax rules. Specifically, this means that companies previously taxed in the ordinary way will pay less tax, while status companies will pay more tax. In addition, flat-rate tax credits are being extended. Operating entities of foreign companies in Switzerland should also no longer be subject to double taxation internationally.
Furthermore, there will be an increase in dividend taxation for shareholders at the federal level, as well as in most cantons. At the federal level alone, the tax reform in Switzerland will result in further adjustments for shareholders:
- Restrictions to the capital contribution principle
- New rules regarding transposition
By way of a transitional measure, special rate solutions for the disclosure of hidden reserves are to apply for companies that relinquish their special status. Moreover, companies that transfer their domicile to Switzerland can benefit from additional write-downs in the first few years.
Cantons want to cut corporate tax rates
At the same time, the tax reform will give the cantons leeway to establish new tax privileges at the cantonal level: These will facilitate the promotion of innovative activities in Switzerland, the aim being to uphold Switzerland's attractiveness as a business location.
For example, the cantons offer the companies tax relief options through obligatory patent boxes. Profits from patents must in this case be separated from other profits, and taxed at privileged rates. Optional deductions for expenses in the area of research and development will be introduced, and interest deductions on self-financing will be possible. Overall, the reform will reduce the options for lowering the tax assessment basis. That is why numerous cantons are planning to reduce corporate tax rates as a balancing measure. The extent of this reduction varies significantly from canton to canton.
Act in advance of implementation of the tax package
While the tax reform may open up numerous opportunities for SMEs in Switzerland, at the same time it also means they face new challenges. For example, the reform will have a direct impact on the assets of a company. If they are to exploit any optimization potential before the TRAF enters into force, Swiss companies need to act – and now. Because the existing tax privileges will be abolished as per January 1, 2020.
What companies need to do now is analyze their current corporate structure. Where optimization with respect to the new tax regime is possible, it is advisable to do this at an early stage. Planning for the upward revaluation of hidden reserves can begin now. Both SMEs and status companies should also review the existing relationship between salary and dividend. A revision of the withdrawal strategy and management of funds not needed for operational purposes will almost certainly be required. In addition, every business should be clarifying the extent to which it can benefit from tax relief elements such as the patent box.