Locational quality 2025: Outlook for rankings after the tax reform

Locational quality outlook 2025: Tax reform leads to changes

The locational quality of the Swiss cantons and regions was virtually unchanged in 2018. Due to the tax reform, however, some movement in the rankings is expected in the next few years. The Credit Suisse locational quality indicator takes a look forward to 2025.

Front-runners and rising stars of locational quality in 2018

The economic potential of Switzerland's cantons and regions is primarily determined by the overall conditions for businesses. Attractive locations lure new companies that create jobs and consequently generate value and prosperity. But which Swiss cantons and regions are appealing to entrepreneurs? The Credit Suisse locational quality indicator (LQI) has provided a fact-based analysis of the locational appeal of Switzerland's cantons and regions since 1997.

No changes occurred at the top of the cantonal league table in 2018. Zug, Zurich, and Aargau remain the most attractive locations for companies. These three cantons show the best combination of seven influential attractiveness factors, such as the tax burden, employee accessibility, and proximity and access to an airport. The cantons of Ticino, Neuchâtel, and Thurgau gained ground. Within the regions, urban centers such as Zurich, Zug, Baden, Lucerne, Basel, Bern, and their agglomerations are characterized by greater locational appeal than the respective periphery.


Swiss economic regions: locational quality in 2018

Locational quality indicator (LQI), synthetic index, CH = 0

Source: Credit Suisse, Geostat

Tax reform is accompanied by changes to corporate taxes

More movement is expected in the locational quality rankings in the future. First, the fiscal package "Tax reform and AHV financing” will have a fundamental impact on the corporate tax system. The new tax proposal aims to eliminate tax privileges for holding and management companies that generate most of their sales and costs outside Switzerland. Instead, new privileges are to be introduced at cantonal level, such as the “patent box” and deductions for R&D, that are also recognized abroad. On balance, however, many companies will not be able to profit from the proposed new tax instruments and the cantons will have less scope to reduce the assessment basis. For this reason, a majority of the cantons plan to reduce corporate tax rates.

The referendum will be held on May 19, 2019, and if the Swiss voters approve it, implementation of the main parts would be expected in January 2020. The changes proposed by the cantonal governments are also likely to be implemented gradually by around 2025 – although in most cases they will still have to be approved by voters. The tax reform would result in major changes to corporate taxes in many instances.


Changes to corporate tax after implementation of tax reform

Average effective corporate income tax and tax on capital for a company with capital of CHF 2 million and net income between CHF 80,000 and CHF 1,040,000, as % of net income, 2018, and taking into account the adjustments to corporate tax rates already announced by cantonal government (as at October 19, 2018)

Source: TaxWare, cantons, Credit Suisse

Tax reform will have major influence on locational quality in Switzerland by 2025

Some cantons will be significantly more attractively positioned in tax terms due to the reform. According to the hypothetical Credit Suisse locational quality indicator for 2025, the Canton of Geneva, for example, is likely to move up nine places in the rankings with a planned tax charge of 13.79%.

Beneficiaries also include the cantons of Basel-Stadt, Basel-Land, and Solothurn, which will have corporate income tax rates of between 13.0% and 14.0%. By contrast, the changes in corporate taxes mean the current front-runners would lose some of their relative advantage owing to a narrowing of the gap between cantons. These include Obwalden, Appenzell Ausserrhoden, and Lucerne.

Ceneri base tunnel will improve accessibility of Ticino

Along with the tax reform, the Monte Ceneri base tunnel will shape the locational quality of the cantons over the next few years. The opening of the Ceneri base tunnel planned for 2020 will mean completion of the New Rail Link through the Alps (NEAT). This further improves the accessibility of regions in Ticino and Uri. Their catchment areas will expand, and they will be somewhat "closer" to the major cities.

This will result in changes to the indicators of transport accessibility. Compared with the tax cuts, however, the NEAT completion will have only a minor impact. All things considered, significant shifts are visible in the provisional rankings for 2025. Although the Canton of Zug would remain in first place, the cantons of Basel-Stadt and Geneva would advance toward the top of the rankings. Meanwhile, Zurich and Aargau would lose some of their appeal.


Locational quality of the Swiss cantons in 2018 and 2025 – a comparison

Locational quality indicator (LQI), synthetic index, CH = 0, 2018 and after recalculation of sub-indicators for accessibility and tax burden for legal entities

Source: Credit Suisse