Switzerland: Domestic Corporate Taxation
Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas other taxes are concurrently levied at cantonal, communal and federal levels. Although the rate of tax levied at a federal level is consistent, that levied at a cantonal level varies from canton to canton. Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in all tax planning.
Another round of fruitless discussions forming part of the ongoing battle between the European Union and Switzerland over the latter's corporate tax system took place in Bern in November 2007. But while the European Commission has the obvious weight advantage over its more nimble neighbour, at present Brussels simply doesn't have the legal reach to deliver the knock-out blow that would oblige the Swiss to capitulate to its demands.
Representatives from Switzerland and the European Commission met in Bern in April 2008 for a third round of dialogue on the EU's assessment of certain cantonal company taxation arrangements.
According to the Swiss Federal Department of Finance, this round of talks "further contributed to improving the mutual understanding of the respective positions" of both sides. However, it was agreed that no date would be set for a further round of meetings, suggesting that the impasse between Bern and Brussels on the vexed question of taxation remains.
The third round of discussions focused, much like the previous two rounds, on the question of whether the 1972 Free Trade Agreement between Switzerland and the European Community was applicable with regard to certain cantonal company taxation regulations.
The Swiss continued to argue that this "is by no means the case," and that the country has no obligation to adapt or even do away with these regulations. Following the discussion, the Finance Department confirmed, somewhat unsurprisingly, that: "Diverging positions remain in this regard." In his address during the 17th international 'Europe Forum', in November 2009, Federal president Hans-Rudolf Merz confirmed the governments' position on taxation and said that Switzerland and the EU were conducting a 'constructive dialog with reference to cantonal taxes'.
There has also been little sign that the cantonal governments are willing to relinquish their freedom with regards taxation, and past years have seen some cantons engage in fairly aggressive tax competition to attract holding companies and wealthy expats. Led by Obwalden, which cut corporate tax to 6.6% in January that year, the lowest rate in Switzerland, other cantons responded with tax cuts of their own: cantons Zurich, Valais, Fribourg, Uri and Schaffhausen all reduced tax rates in 2006. This prompted complaints from those on the left that some cantons were engaged in a 'race to the bottom' on taxation that would eventually endanger the viability of public finances. Obwalden also cut tax for individuals earning over CHF300,000 by 1% to 2.35% and reduced property tax.
According to a report by Swissinfo, in January 2007, officials from Swiss cantons put off a decision on whether to raise rates for wealthy foreign immigrants, instead deciding to examine the proposal more closely by comparing the Swiss cantonal tax system with preferential tax regimes in other low tax jurisdictions such as Luxembourg and Monaco.
While Switzerland's corporate taxes are low in comparison to most of its international competitors, the OECD recommended in November 2007, that the government reinforce entrepreneurial activity by easing the country's relatively high burden of dividend taxation.
In its latest economic review of the Swiss economy, the OECD had concluded that heavy taxation of dividends generates incentives for tax evasion through the creation of complicated corporate structures, and might distort financing decisions of firms that cannot raise equity on international capital markets. In addition, the tax-induced incentives to retain earnings are further increased by the absence of a capital gains tax, the OECD observed.
In January 2008, Swiss Finance Minister, Hans-Rudolf Merz drew attention to the need for corporate tax reform, in order to benefit the country's SMEs.
Merz argued that planned reforms to the taxation of such businesses when they restructure, and to the CGT regime, would be highly beneficial for Switzerland's small and medium-sized businesses - what he called "the backbone of the Swiss economy."
The previous month, it was announced that Switzerland was amongst the top three countries - alongside Cyprus and Ireland - in a league table of European tax systems compiled by KPMG International, in which major business organizations across Europe assessed the attractiveness of their domestic tax regimes.
All three countries were rated highly for their combination of consistency in interpreting tax legislation, stability in resisting frequent changes to tax laws, and comparatively low tax rate.
In February 2008, voters in Switzerland narrowly approved a package of tax measures which aim to ease the tax burden on dividend-paying companies.
The reforms sought to ease the burden of double taxation by reducing the taxable amount of dividends paid to companies and individuals to 50% and 60% respectively. The tax cuts came into force on January 1, 2011, and apply to shareholders who own at least 10% of a company's stock.
In the case of VAT, the Federal Council had already taken certain general decisions, after it emerged from a consultation procedure that the desire for a simplification of the VAT system met with broad approval.
In January 2008, the Federal Council instructed the Finance Department to draw up proposals for a revised VAT Act with a uniform tax rate of 6.1%, and tax liability removed from as many exemptions as possible.
In 2010, Switzerland decided to increase its standard VAT rate from 7.6% to 8% for all supplies of goods and services. The rate is set to remain at this level until 2017 after which the government plans to introduce a flat rate of 6.2%.
Switzerland was found to have improved its position by three places to 12th in a comparison of corporate tax rates across Europe published by tax and business advisory firm KPMG in September 2010. The study conceded, however, that by applying an arithmetic mean of all cantons for comparison Switzerland would have been placed eighth with a rate of 18.8%.
In 2007, the rates in the cantons ranged from 13.1% to 29.1%, but corporate tax rates have since shown a significant downward trend, sinking to between 12.2% and 24.17%, the canton of Lucerne boasting the lowest rate of 12.2%.
In December 2008, Switzerland's Federal Department of Finance (FDF) laid the foundation for the third major corporate tax reform, with proposals to simplify the federal and cantonal tax system in a bid to improve the country's international tax competitiveness.
Among the more significant proposals announced by the finance department are plans to modify cantonal tax laws governing holding companies and management companies, unify the treatment of domestic and foreign revenues, and the elimination of fiscal barriers to company financing.
"Switzerland is facing increasingly intense tax competition. Over the last few years a number of countries have taken steps to considerably improve the fiscal framework for companies. Against the backdrop of globalized flows of trade and services, corporate taxation must at the same time be better safeguarded internationally. The Federal Council is also thereby taking into account various requests for fiscal measures on behalf of companies in Switzerland, some of which have already been referred by parliament," the finance department stated.
At Federal Councillor Hans-Rudolf Merz's request, a working group consisting of representatives from the Confederation and the cantons has, as a result of these concerns, drafted detailed objectives for further company taxation reforms. The Federal Council instructed the finance department to draw up a draft consultation paper on the proposed corporate tax overhaul.
The main elements of the reforms involve the abolition of issue tax on equity and debt capital and the elimination of fiscal barriers to company financing.
"Issue tax on equity has a disincentive effect on investment," the finance department stated, adding:
"In international comparison it is increasingly proving to be a locational disadvantage for Switzerland. For its part, issue tax on debt capital constrains financing activities, particularly those of international companies. If transactions within the group are exempted from stamp duty and withholding tax, groups operating internationally will be more inclined to locate their financing activities in Switzerland. That in turn will increase tax revenues and support the creation of highly qualified employment.
"At the cantonal level, it should be made possible for the cantons to waive capital tax. In addition, the Federal Council has instructed the FDF to examine further measures that would strengthen Switzerland's competitiveness as a business location. These include adjustments to the system of investment deductions for corporate bodies."
It is estimated that the short-term revenue loss for the central government will equal about CHF500m. However, the cantons are predicted to experience revenue shortfalls only if they opt to waive capital tax.
The working group appointed by the FDF also closely examined the cantonal tax issues relating to holding companies and management companies and explored the idea of a shift to a uniform system of tax on profits, although this proposal was rejected.
"The in-depth analyses showed that in terms of growth, the existing system proved best placed to produce the desired results. Moreover, a shift to a uniform system of tax on profits would not be feasible in terms of financial policy and would have a serious impact on the cantons and on the reorganisation of financial equalisation and division of tasks between the Confederation and the cantons. The proposal of a shift to a uniform system of tax on profits was consequently rejected by the cantons consulted," the finance department explained.
However, the report concluded that Switzerland's position in terms of taxation could be further strengthened by modifying the cantonal tax structures.
"Targeted measures could ensure that domestic and foreign revenues from all these companies are handled equitably, which would reinforce their international standing. As possible measures the focus is on a general ban on the business activities of holding companies and modifications in the provisions governing 'joint enterprises' and the abolition of the status of 'foreign-based companies'. The latter should occur in line with the strategy of the Federal Council whereby the focus is on fiscally attractive frameworks specifically for companies which invest and create jobs in Switzerland," the department stated.
The Swiss government is "convinced" that these measures will strengthen Switzerland's position in international tax competition while nullifying long standing concerns raised by the European Union into the compatibility of the Swiss cantonal tax system with the 1972 Free Trade Agreement.
"[The Federal Council] continues to categorically reject negotiations with the EU on fiscal matters," the statement said.
The Swiss government said that it intended to "push for the swift implementation" of this package of reforms.