Switzerland: Domestic Corporate Taxation
Due to the federal structure of Switzerland, there is no centralized tax system. Some taxes are 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, cantonal taxes vary considerably. Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in tax planning.
The current federal rate of corporation tax is 8.5% of after-tax profits. Cantonal corporation tax rates vary greatly; the lowest is currently Lucerne (Luzern) with 12.43%, followed by Nidwalden and Obwalden on 12.66%, Appenzell Ausserhoden on 13.04% and Appenzell Interrhoden on 14.16%. The highest corporation tax rates are found in Geneva, with 24.16% and Basel-Stadt (Basle City) with 22.18%.
There has 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.
In February 2008, voters in Switzerland narrowly approved a package of tax measures which aim to ease the amount of tax dividend-paying companies pay. 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 1 January 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.