The draft Bill provides for the abolishment of the cantonal tax privileges as agreed with the European Union. The Council of States has only added the notional interest deduction to the compensation measures proposed by the Federal Council. However, on the other hand, it has introduced a 50:50 distribution rule for distributions of reserves from capital contributions (RCC) by listed companies and a higher taxation of dividends from qualifying participations and has combined the tax reform with the reform of the social security system by increasing the social security contributions on salaries by 0.3%.

Abolition of cantonal tax privileges

The Bill abolishes the legal basis for the cantonal tax privileges of holding, domicile and mixed companies. It provides for a five-year transition period during which the realization of hidden reserves, which were created during the time of the tax privilege, are taxed separately. Alternatively, the hid-den reserves of a tax privileged company may also be released tax-neutrally in the course of giving up the privileged tax status before the new rules come into force, and such released hidden reserves may then be amortized over the following years. Further, the special practices regarding the tax allocation of principal companies and finance branches will be abolished by the Swiss Federal Tax Administration.

In addition, it should be noted that information on tax rulings regarding privileged tax regimes, which are still applicable on January 1, 2018, may be spontaneously exchanged with other jurisdictions in the course of the spontaneous exchange of information. Even if the respective rulings are retracted before January 1, 2018, the privileged taxation may still be claimed by the taxpayer until the cantonal tax laws are changed or until the tax privileged status is given up by the taxpayer, provided that the requirements for the privileged tax status are still fulfilled. In such case, no spontaneous in-formation will occur.

Cantonal tax rate reductions

The reduction of cantonal corporate income tax rates is not directly part of the tax reform. With regard to the CTR III, most cantons, which had not already had a very low tax rate, planned such tax rate reductions. The cantons have thereby developed different strategies based on their individual situations (cf. the overview in the annex): cantons like Vaud or Geneva would have implemented the compensation measures only to a limited extent and would have instead substantially reduced the general tax rates. Other cantons like Zurich wanted to reduce the tax rate only to a relatively small extent and instead make more extensive use of the possibilities of compensation measures. It is assumed that this will not be fundamentally different in the course of the Implementation of the tax reform. With the increase of the cantonal share in the income from the direct federal tax as well as the changes in the inter-cantonal financial equalization, the cantons receive the relevant flexibility to be able to proceed with such tax rate reductions in a more or less fiscally neutral way.

The reduction of the cantonal corporate income taxes, which is possible by this measure of the Bill as well as the revision of the inter-cantonal financial equalization, is by far the most important part of the tax reform.

Introduction of a notional interest deduction

The Federal Council had dropped the notional interest deduction in the draft bill. The Parliament has reintroduced it for so-called «high-tax cantons». It is expected that only the canton of Zurich will be classified as such high-tax canton. The draft Bill of the canton of Zurich thus introduces such a deduction.

Patent box

A patent box shall be introduced with the tax reform, which is mandatory for the cantons. This patent box provides that the taxable income derived from patents and comparable rights are taxed with a reduction of up to 90% upon request. The canton of Zurich indeed proposes a reduction of 90%. At the federal level such profits are taxed without a reduction. The patent box fulfills the requirements provided by the Organization for Economic Cooperation and Development OECD (so-called «modified nexus approach»). Pursuant to this modified nexus approach, income from qualifying rights may only be subject to the tax privilege in proportion of the research and development expenses (R&D-expenses) allocable to the taxpayer to the overall R&D-expenses. The allocable R&D-expenses consist of the expenses for R&D performed by the tax-payer in Switzerland, the expenses for R&D per-formed by third parties as well as the expenses for R&D performed by group companies in Switzerland.

Additional R&D-deductions

In the tax reform, the cantons are authorized to provide an additional deduction from the tax base of the cantonal corporate income tax for R&D, which is performed in Switzerland. This additional deduction must not exceed 50% of the qualifying R&D-expense. The canton of Zurich intends to introduce such a deduction in the amount of 50%.

Limitation on tax relief

As it was the case in the CTR III, the SV17 also proposes the introduction of a limitation on tax relief. The limitation on tax relief provides that a company must always subject at least 30% of its taxable profit before the application of any special regimes (patent box, additional R&D-deductions) to tax, and that no losses must result from the applications of the special regimes. The canton of Zurich intends to apply such a maximum deduction of 70%.

Relief for capital taxes

Companies with a tax privilege currently pay capital tax at a reduced rate. In the course of the tax reform, it is proposed that the cantons may provide for appropriate compensation measures to keep their local attractiveness. The canton of Zurich intents to grant a deduction of 90% on equity for participations, loans to subsidiaries and patents.

Realization of hidden reserves

The tax reform provides for a tax-neutral realization of hidden reserves before an immigration to Switzerland, and a tax-effective amortization in the following years. This creates a symmetry to an exit from Switzerland, which triggers the taxation of hidden reserves. The hidden reserves are not released in the tax balance sheet but are instead determined by the tax administration by way of decree. Alternatively, it is possible to submit such reserves to a special rate.

Introduction of a 50:50 distribution rule for reserves from capital contributions

Dividends distributions made out of reserves from capital contributions (RCC) are subject to neither dividend withholding tax nor income tax for Swiss resident individuals. The Council of States introduces a 50:50 distribution rule according to which distributions of RCC made by companies listed in Switzerland shall only benefit from the tax free treatment if and to the extent that the company distributes a taxable dividend in the same amount (provided that the company has distributable profit and retained earnings). This 50:50 distribution rule does not apply to RCC which have been created by way of a transfer of assets from abroad after February 24, 2008 or if the company has relocated to Switzerland. This rule does not apply to companies that are not listed at a stock exchange in Switzerland.

Increase of dividend taxation

The Parliament has decided that the dividend taxation for individuals with qualifying participations shall be increased to at least 70% at the federal and amount to at least 50% at the cantonal level. The Federal Council intended to introduce an increase to 70% also at cantonal level. Currently, such dividends are only taxed to the extent of 60% on the federal level and in most cantons only to the extent of 50% (in some cantons such as Aargau it is only to the extent of 40%).

Transposition

In the course of the changes of the tax laws, the tax reform further provides to subject all sales of participation rights to a company in which the seller holds an interest of at least 50%, to the extent the consideration for such transfer exceeds the sum of share capital and capital contribution reserves. This also applies if several people act in concert with regard to the transfer and fulfill the 50% requirement together. A tax-free private capital gain is therefore no longer possible with regard to transfers of participation rights to a controlled company compared with the current provision, which only subjects transfers of at least 5% to a controlled company to taxation.