TRAF is changing the tax landscape. This presents an opportunity for innovative SMEs.
Because it does away with existing tax privileges and introduces new instruments, such as the patent box, the corporate tax reform will have a major tax impact on many SMEs in Switzerland. Companies that take a smart approach will be able to use the changes resulting from the Swiss tax reform (TRAF) to their advantage.
TRAF has changed the tax environment for SMEs significantly
With the entry into force of the Federal Act on Tax Reform and AHV Financing (TRAF) on January 1, 2020, the tax landscape for Swiss companies changed dramatically. First, the act abolished the privileged taxation of special status companies so the tax system continues to remain compliant with international rules. Second, the cantons have introduced new instruments that reduce the tax burden, such as the patent box and deductions for research and development expenses.
But what do these changes mean for Swiss SMEs? How can they respond to the reform and best take advantage of the opportunities presented by it? André Bieri, Tax Partner and Markets Leader Switzerland & Liechtenstein at Ernst & Young, provided some answers during a breakout session at Credit Suisse's third annual Entrepreneur Conference held in 2020.
Following the corporate tax reform, holding companies must determine the best location
With the abolition of the special taxation of holding companies as part of the TRAF corporate tax reform, these companies must now be taxed at the ordinary rate instead of at the reduced rate of 8.5 percent, as was the case previously. In response, most cantons have reduced the ordinary tax rates for companies, which has led to shifts in the competition among cantons.
As a result, moving the location of a holding company or even dissolving it may make sense from a tax perspective. "Affected SMEs need to consider carefully whether the current holding location is the right one. Or whether the holding company is even needed any more," explained André Bieri.
Patent box provides opportunities for innovative SMEs
Particularly for companies with their own research and development departments, TRAF provides additional instruments for tax optimization. For example, companies can apply for a patent box to reduce the tax assessment on the income resulting from their own patents by up to 90 percent. However, the amount of the deduction varies from canton to canton. Furthermore, the patents must meet certain conditions to qualify.
For example, the relevant research and development expenses must be incurred in Switzerland. The patents must be novel, useful, and non-obvious, pursuant to OECD requirements. So not all companies will benefit equally. As a result, companies should first determine whether the expenses incurred for the documentation and application make sense.
Use R&D deductions to gain additional benefits from the corporate tax reform
The second instrument that SMEs can use to obtain tax relief are deductions for research and development expenses that are actually incurred. Depending on the canton, companies may be able to request a tax deduction on these expenses of up to 50 percent. In the case of an R&D expenditure of CHF 200,000, a company could reduce its taxable profit by up to CHF 100,000.
Because the cantons have implemented tax deductions for R&D expenses in different ways, SMEs may in some cases save on taxes by reorganizing. "At many family firms, research and development is distributed across different parts of the company," says André Bieri. Centralizing these activities in a canton where the company generates significant income could result in substantial tax advantages.
SMEs should review the corporate tax reform measures without delay
The changes implemented as part of the tax reform are a concern for many companies in Switzerland, but only some of them have implemented measures so far. In a survey of participants at the Entrepreneur Conference, 88 percent of respondents said that their company is affected by the reform. However, only 48 percent said that measures had already been implemented or planned.
"The topic is on people's minds," says André Bieri. However, many companies are not sure if the expense involved is worth it. He advises companies to do one thing when it comes to the topic of corporate tax reform: "Give some thought to it." This is because SMEs that set a course early on and took the corresponding measures may already have benefited from the tax measures and optimizations.