Why should you relocate your business to Switzerland?
Switzerland is a safe country, it is one of the most stable democracies in the world, it ranks regularly in the top five of countries in terms of quality of life and for the human development index. Switzerland has a central location in Europe and it is possible to reach most of the important cities in Europe by a two-hour flight departing from Swiss airports.
In addition, Switzerland has an advantageous tax system, in particular for corporate entities. We have summarized its main features below.
Competition between cantons
Switzerland is divided in cantons. Federal laws apply to all of Switzerland but cantons retain a significant legislative autonomy. For taxation purposes, this means that every canton has its own specificities and that this creates a healthy competition between cantons which is very advantageous to taxpayers. Moreover, as cantonal authorities are responsible for corporate income tax, it is often possible to secure any potential tax consequences by meeting with them or by filing ruling requests.
Furthermore, the legislative and constitutional process allows citizens to request a referendum and most laws are the result of compromise and lengthy discussions between political parties. This leads to a significant legal stability compared to other countries. From a tax perspective, this allows business leaders to plan for the future and avoid negative surprises.
Recent Swiss Corporate tax reform
An important corporate tax reform was accepted by referendum and entered into effect in 2020. The main goal of this reform was for Switzerland to adapt its legislation to international tax requirements. This reform introduced various new measures and abolished privileged tax regimes. In parallel, most cantons reduced their corporate tax rates.
Attractive corporate tax rates
Depending on the canton, Switzerland has a variety of effective corporate income tax rates with a lowest rate of approx. 12% (canton of Zug) up to the highest rate of approx. 21% (canton of Bern). Most cantons fall within a range of 12-14%.
These effective tax rates may be further reduced through the various measures described below.
If a company migrating to Switzerland has goodwill or assets with a higher market value than their book value, it will be possible to request an immigration step-up on the tax balance sheet upon arrival in Switzerland in the first tax return.
The stepped-up amount will not be subject to income taxation and can be amortized over a period of 10 years reducing taxable income.
In our experience, most cantonal tax authorities accept to value the business using the DCF method (discounted cash flow) based on projections.
When a new company is incorporated or when an existing company starts a new business, it is possible in certain cases to request a tax holiday at cantonal level.
The main conditions examined by the cantonal tax authorities before granting a tax holiday are
- whether a sufficient number of jobs are created (at least 10 in general);
- whether the new activities will lead to important investments in the canton;
- whether the business has a particular significance for the cantonal economy.
Tax holidays are temporary (between 5 and 10 years) and can be in some cases partial. These measures are in general linked to a claw-back clause meaning that the company will have to remain in Switzerland and satisfy certain conditions during a period following the end of the tax holiday.
Cantonal tax holidays can lead in practice to a single digit taxation during a 10 year period (only federal tax of approx. 8% due).
In some regions, it is also possible to request a federal tax holiday. For some companies this can lead to no income and capital taxes paid for the first 10 years of existence.
Net income from patents and similar rights may benefit from a reduced taxation at cantonal and communal level (up to 90% but limited to an overall deduction of 70% of the taxable profit).
The Swiss patent box follows the OECD nexus approach. The net income from patents is multiplied by the nexus ratio (see below) to determine the income benefiting from the reduced patent box taxation.
|Nexus ratio =||(Swiss R&D expenses of the taxpayer and group companies + third party R&D expenses) x 130%|
|R&D expenses of the taxpayer and group companies + third party R&D expenses + IP acquisition costs|
When a company enters into the patent box, the tax-deductible R&D expenses related to the last 10 fiscal years will be recaptured. In practice, there are three methods used by cantonal tax authorities for this recapture:
- an entry tax on the recaptured amount using the ordinary tax rate;
- an entry tax on the recaptured amount with a lower tax rate (e.g. canton of Basel-Stadt);
- the recaptured amount will reduce the benefits from the patent box during five years (e.g. canton of Vaud).
For companies that were not taxed in Switzerland, there is no entry taxation as these expenses were not deducted from Swiss taxes.
The patent box is subject to the limitation of benefits (which includes also other tax reform measures) and may reduce cantonal and communal taxable profit to a maximum of 70% (cantons are free to use a lower percentage in their tax law).
Additional R&D deduction
Companies can claim an additional deduction for R&D expenses at cantonal level.
R&D expenses are defined based on the Swiss innovation law and the OECD Frascati and Oslo Manuals. In practice, it can be quite complicated to determine exactly what is related to R&D but certain cantonal tax authorities are open to discussions.
The relevant R&D expenses are calculated based on the following amounts:
- Expenses related to R&D employees with a 35% uplift (135% in total);
- Third-party R&D expenses based on 80% of invoiced costs.
Then, an additional 50% is applied on this amount, reducing taxation at cantonal and communal level. Cantons are free to introduce a lower percentage of additional R&D deduction in their tax law).
This R&D deduction is subject to the limitation of benefits (which includes also other tax reform measures) and may reduce cantonal and communal taxable profit to a maximum of 70% (cantons are free to use a lower percentage in their tax law).
We are a team of experienced tax specialists working closely with business lawyers. We have an extensive knowledge in the areas of corporate taxation and in tax advice to high-net-worth individuals. Our goal is to find tailor made tax solutions for our clients and to provide high quality advisory services.
Yury Kudryavtsev and Pawel Golebiowski
COVID-19: Possibilities of tax optimization
The article describes tax measures taken by the french-speaking cantons of Switzerland in relation to COVID-19 and provides a brief summary of other measures allowing to improve the tax position of companies.
You can download the article (in French) by following [custom_pdf file=”Solutions-fiscales-Bilan.pdf” text=”this link”].
Corporate tax reform in Switzerland: review of the reform and of the introduced measures
The article (published in [polylang language=”ru_RU” text=”russian”]) provides a review of changes in taxation of Swiss companies further to the Corporate tax reform III.
Swiss withholding tax reform moves forward
Further to the success of the popular vote on the Corporate tax reform on 19 May 2019, the Swiss Federal Council has reopened the discussion of a project to modify the withholding tax on interest that could significantly improve the access of Swiss-based companies to local and international financial markets.
Swiss withholding tax on interest is one of the main factors contributing to the general reluctance of international groups to rely on their Swiss entities for financing purposes. While a tax of 35% is levied on Swiss bonds, bank deposits and other comparable instruments in accordance with the practice of the Federal tax administration, foreign investors tend to acquire financial instruments with low or no withholding tax. Depending on the case, the reimbursement of withholding tax can be a long and a complicated process, or even be impossible.
The project under development is expected to improve the position of Swiss companies by completely abolishing withholding tax on interest paid to foreign investors, Swiss corporations and collective investment schemes.
In accordance with the Swiss tax laws, withholding tax of 35% is due on bonds, bank deposits and loans guaranteed by real estate located in Switzerland. As a general rule, withholding tax is not levied on individual loan arrangements.
This being said, the practice developed by the Federal tax authorities can result in the qualification of individual loan agreements as bond-like instruments or bank deposits that are subject to withholding tax.
More specifically, withholding tax may arise in the following cases:
- Issuance of bond-like instruments (such as promissory notes) to more than 10 non-bank lenders on similar conditions or more than 20 non-bank lenders on different conditions;
- In case the number of creditors exceeds 100 and the amount of the borrowed funds is of at least CHF 5M;
- In case of payment of interest on upstream loans received from foreign group affiliates, provided that their obligations to third parties are guaranteed by the Swiss company. This can be the case if a direct / indirect subsidiary of a Swiss company issues bonds guaranteed by the latter and lends the raised funds to the Swiss company.
Even though the Federal tax administration has recently levied most restrictions related to the intragroup financing and increased the authorized amount of “upstream” loans that can be granted by foreign affiliates, the access of Swiss companies to third-party financing remains limited and has to be revised.
Abolishment of withholding tax on interest
In order to improve the position of Switzerland in the financial sector, the Federal Council has just adopted the general guidelines related to a new project of law that is expected to be presented for the public consultation in autumn 2019.
More specifically, the Federal Council intends to completely abolish withholding tax on interest paid to foreign investors, to collective investments schemes and to swiss legal entities.
The payment of interest to individuals residing in Switzerland will be subject to Swiss withholding tax irrespective of place of residence of the debtor. In this respect, it is expected to introduce the principle of paying agent, a third-party (usually, a bank) that will be responsible for levying withholding tax on taxable payments. The purpose of this change would be to encourage the individuals to declare their worldwide income and thereby reduce the tax evasion.
New responsibilities of Swiss banks
Swiss banks are expected to become paying agents that will have to comply with the new regulations. In particular, the banks will have to identify the payee of interest and levy withholding tax, if necessary. The Federal Council is currently examining the possibility to temporarily compensate the costs of the banks related to the implementation of the new legislation.
It is expected that the banks will have the possibility to outsource the tasks related to their withholding tax obligations in order to reduce their administrative charge. This would not however result in the transfer of their responsibilities.
A transitional regime is expected to be introduced for certain financial instruments issued by systematically important banks (“Too big to fail”) such as Coco bonds, bail-bonds and write-off bonds.
The withholding tax treatment of structured products and compensatory payments remains under discussion and is expected to be outlined in the project of law.
Some other measures such as the cancellation of the Stamp duty tax on the transfer of Swiss bonds or modification of the mechanism of participation relief are currently being examined and may also be included into the project of the law.
The complete abolishment of the Transfer stamp duty tax and the decrease of the Withholding tax rate on dividend payments have been withdrawn from the current reform due to their significant cost for the Confederation. It is not excluded that these measures will be reintroduced in the following tax reforms.
The cancellation of withholding tax on interest payments to foreign investors, swiss corporate entities and collective investment schemes should reinforce the position of Switzerland on international level and improve the access of Swiss entities to the financial markets.
At the same time, Swiss banks should already start analyzing the practical aspects of the implementation of the reform as the upcoming changes are expected to create significant administrative burden.