Tax competition: Cantons are cutting corporate taxes due to TRAF

Things heating up in tax competition. Cantons are lowering tax rates.

As a result of the Tax Reform and AHV Financing package, many cantons are planning on lowering corporate taxes in order to maintain their locational appeal. This is creating a fresh start for tax competition among the cantons. There is still a tight race to become the most attractive location for companies.

Standard taxation meant to preserve Switzerland's locational appeal

Corporate taxes have undergone a complete overhaul in Switzerland. This came as a result of legal changes under the Tax Reform and AHV Financing (TRAF) package adopted in 2019. The focus of this tax reform is on eliminating preferential taxation for status companies. In the future, all companies in Switzerland will be subject to the same tax regulations.

The aim of TRAF is to establish a globally compliant and competitive tax system for companies. In addition to the cantonal cuts to standard tax rates for all companies, the planned measures will help encourage innovative activities at the cantonal level. These new tax instruments include the mandatory patent boxes that allow for tax relief on profits from patents. Deductions will also be possible for research and development. It is up to the cantons to design these and other principles themselves within the statutory guidelines.

Varied implementation of tax reform by the cantons

New tax instruments used differently by cantons

*Implementation confirmed by January 1, 2020
As of September 5, 2019

Source: BDO, Credit Suisse

TRAF stirring up tax competition

The cantons are thus able to come up with their own optimal tax strategy. This is important for them to retain the status companies they currently have and thus maintain their locational appeal. The fact is, the new TRAF legislation places considerable limits on the options for reducing the assessment basis. In order to continue to have attractive taxes, many cantons are thus planning on lowering their standard tax rates. This is stirring up tax competition among the cantons.

Some cantons like Vaud or Basel-Stadt already lowered their tax rates in early 2019. In other cantons, residents still need to vote on how to implement the tax initiative. Some of the announced tax rate reductions vary considerably, and they are changing the dynamics of tax competition in Switzerland. Cantons that currently have less attractive taxes can close in on the frontrunners or even surpass them.

Many cantons are planning on lowering corporate taxes

Many cantons are planning on lowering corporate taxes

Overall burden of corporate tax on income and capital (for a corporation with CHF 2 million in capital and CHF 80,000–1,040,000 in net profit) as a % of net profit, after factoring in the adjustments to corporate tax rates already communicated by the cantonal governments, as of September 5, 2019

Source: TaxWare, BDO, Credit Suisse

New ranking of locational appeal among cantons

The cantonal competition over companies is getting a fresh start thanks to the implementation of TRAF and the fight for the most attractive tax strategy. This is because individual cantons can drastically improve their locational appeal by lowering corporate taxes. Credit Suisse's locational quality indicator gives an annual assessment of locational appeal.

Zug and Basel-Stadt are currently neck-and-neck, although Zug is likely to move back into first place next year given the tax cut it decided to introduce in early 2020. With a standard cut to corporate taxes, the cantons of Geneva and Basel-Land could also jump far ahead. The competition over the most attractive locations will be up in the air for the next few years, however.