From DELOITTE TX blog 7 Sept.2017

On 6 September 2017 the Swiss Federal Council issued the draft legislation for the so-called Swiss Tax Reform Proposal 17 (STR 17, formerly known as Swiss Corporate Tax Reform III or CTR III). This proposal is basically in line with the recommendations of the respective Steering Committee issued in June of this year. The issued proposed legislation including the proposed regulations for patent boxes and the Explanatory Report to the STR 17 provide various details as to the application and mechanism of the proposed replacement measures.

This renewed version of the Swiss corporate tax reform was put together with the extensive inclusion of all stakeholders and is expected to have the buy-in of such stakeholders, such as political parties, business associations, the labour unions and the cantons, as it addresses the concerns which existed in particular in regard to the loss of tax revenue in relation to the previous version of the reform.

While the final version of the legislation may still differ from the proposed version, depending on the outcome of the legislative process, it is reasonable to expect that the final legislation will be introduced more or less along those lines.

The proposal represents a well-balanced and internationally competitive solution that would ensure that Switzerland stays an attractive location for multinationals and domestic companies alike, while at the same time providing an internationally aligned tax system that is in conformity with international standards, such as OECD BEPS and others.

Main proposed changes compared to CTR III

• The Notional Interest Deduction (NID) on federal and cantonal level is no longer part of the package;
• The partial taxation for individual shareholders holding at least 10% would be increased to 70% from 60% on a federal level and mandatorily at least to 70% for all cantons, whereas the cantons can opt for a higher percentage of taxation.
• The combined tax relief for the Patent box, the R&D super deduction and the amortization from the step-up of hidden reserves due to a status change prior to STR 17 shall be limited to a maximum of 70% (previously 80%) on a cantonal and communal level.
• (Important to know is that there is no limitation for the tax-privileged release of hidden reserves on a status change due to CTR III on cantonal level and for step-up in case of migration into Switzerland on cantonal and federal level).

Main proposed elements of STR 17

The STR 17 contains the following main elements:

• The sunset of all special corporate tax regimes, such as the mixed, domiciliary, holding and principal company regimes, as well as the Swiss finance branch regime;
• The tax-privileged release of “hidden reserves” for cantonal/communal tax purposes for companies transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation, with the intent to mitigate such effect by providing companies with a lower tax rate during a transition period of five years;
• A reduction of the general cantonal/communal tax rates at the discretion of the individual cantons; various cantons can be expected to be in the 12 – 14 % ETR bracket (effective combined federal/cantonal/communal tax rates);
• The introduction of a mandatory cantonal-level patent box regime applicable to all patented intellectual property (IP) for which the research and development (R&D) spend occurred in Switzerland, based on the OECD modified nexus approach, with a reduction of qualifying patent income on a cantonal level of 90%;
• The introduction of cantonal R&D incentives in the form of deductions of up to 150% of qualifying R&D expenditure at the discretion of the individual cantons;
• A step-up of asset basis (including for self-created goodwill) for direct federal and cantonal/communal tax purposes upon the migration of a company or additional activities and functions into Switzerland; the same mechanism will be applied upon an exit from Switzerland.

Expected Timeline

The proposed legislation will now enter the so-called Consultation Procedure, which lasts for three months until 6 December 2017, under which the various stakeholders can weigh in on the legislation, so that the final version can be introduced into and voted on by the Swiss Parliament in its spring session of 2018.  Since this is a well-balanced solution that was brought about with the inclusion of all stakeholders, it seems currently unlikely that there would be a referendum (public vote) on the legislation, so that STR 17 could enter into force as soon as 1 January 2020, but no later than 1 January 2021, as the cantons will require sufficient time to introduce this federal framework law into their cantonal laws.

 

from DELOITTE TAX:

On June 7, 2017 Switzerland signed the Multilateral Agreement (MLI) on the implementation of tax related measures against Base Erosion and Profit Shifting (BEPS). The Agreement will allow Switzerland to adapt double taxation agreements (DTAs) to the minimum standards as agreed under the OECD BEPS project.

The Swiss position as outlined below may still be subject to change as the BEPS Agreement will now go through the regular legislative process, whereby the Swiss Federal Government will initiate the legislative consultation process by the end of 2017. Based on this, it seems unlikely that the changes will start applying before mid-2019.

Historic context

The OECD formally agreed upon the final results of the BEPS project in November 2016. Some measures require the adjustment of DTAs. A group of more than 100 states and territories, including Switzerland, have developed a MLI. The Agreement allows existing DTA’s to be adapted to the provisions of the OECD BEPS project.

What is the content of the Agreement?

The Agreement deals with the implementation of minimum standards and other optional changes in the respective DTAs. While articles dealing with minimum standards must be applied in any case, other articles are optional and jurisdictions can decide not to apply them or apply only part of them. Some articles include several options which jurisdictions can chose from.

The minimum standards basically include the following: the addition of a preamble as to the purpose of the DTA, the introduction of an anti-abuse clause into the DTA and the amendment of the provisions in regard to dispute settlements in mutual agreement procedures.

What is the position of Switzerland regarding optional provisions?

As far as articles relating to BEPS Action 2 (Hybrid Mismatches) are concerned, Switzerland has made reservations in order not to apply article 3 (fiscally transparent entities) and article 4 (dual resident entities). However, Switzerland has decided to apply article 5 (option A) and accordingly will apply the credit method in case of a foreign Permanent Establishment (PE) to avoid double non-taxation where the treaty country will not treat the respective activity as a PE. It however remains to be seen whether and how this will be implemented in practice.

As for articles relating to BEPS Action 6 (Treaty abuse), Switzerland has made reservations for all optional articles, so it will only apply article 6, which requires a new preamble and article 7 which introduces a principal purpose test (PPT).

With regards to articles on BEPS Action 7 (PE), Switzerland has decided to make reservations and not to apply the articles updating the dependent agent PE (article 12), dealing with artificial avoidance of PE status (article 13) and splitting of contracts (article 14).

Last, Switzerland has accepted the adoption of the arbitration clauses as proposed in the part VI of the Agreement.

Which Swiss DTAs will be amended?

For the time being, the BEPS Agreement will be used to adapt the Swiss DTAs with Argentina, Austria, Chile, the Czech Republic, India, Iceland, Italy, Liechtenstein, Lithuania, Luxembourg, Poland, Portugal, South Africa, and Turkey. These countries are ready to agree with Switzerland on the exact wording on how to implement the BEPS provisions in the respective DTAs. If a respective agreement can be achieved with further countries, the DTAs of such countries will also be adapted to the BEPS provisions. Alternatively, the BEPS minimum standards can be agreed upon by a bilateral amendment to the respective DTA.

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In a referendum held on 12 February 2017, the Swiss electorate voted to reject the Corporate Tax Reform III (CTR III), which had been approved by the parliament. The main objectives of this comprehensive corporate tax reform, which was scheduled to become effective on 1 January 2019, were to align domestic tax law with international standards and enhance Switzerland’s attractiveness as a location for multinational companies.

The CTR III contained a number of measures to compensate for the elimination of the beneficial tax regimes, such as the following:

• A reduction of the general cantonal/communal tax rates at the discretion of the individual cantons;
• The introduction of a mandatory cantonal-level patent box regime applicable to all patented intellectual property (IP) for which the research and development (R&D) spend occurred in Switzerland, based on the OECD modified nexus approach;
• The introduction of cantonal R&D incentives in the form of deductions of up to 150% of qualifying R&D expenditure at the discretion of the individual cantons;
• A step-up of asset basis (including for self-created goodwill) for direct federal and cantonal/communal tax purposes upon the migration of a company or additional activities and functions into Switzerland;
• The tax-privileged release of “hidden reserves” for cantonal/communal tax purposes for companies transitioning out of tax-privileged cantonal tax regimes (such as mixed or holding companies) into ordinary taxation;
• The introduction of a notional interest deduction (NID) regime at the federal level and at the discretion of the individual cantons (however, a canton would have been required to introduce a revenue-raising measure to partially compensate for introducing an NID); and
• A reduction of the cantonal/communal annual net wealth tax in relation to the holding of participations and of patented IP, at the discretion of the individual cantons.

Since only a few aspects of CTR III were disputed and as pressure from the EU for abolishing the tax-privileged regimes continues, the Federal Counsel is expected to quickly reintroduce the legislation, which likely would include the elements of the previous measures but without the controversial items, most notably the NID. In addition, as a revenue-raising measure, the revised version of the legislation is expected to include a provision that dividend income received by individuals from qualifying participations of at least 10%, under the partial taxation regime for dividends may be mandatorily increased to 70% at both a cantonal and a federal level.

Although it still may be possible for revised legislation to meet the original 1 January 2019 introduction timetable at the federal level (assuming that a referendum on the legislation would not be initiated), since the cantons need adequate time to introduce the law into cantonal legislation, the introduction of the law may be postponed by one year to 1 January 2020.

 

 

PwC Review on Swiss corporate taxes.

pwc_ch_tax_system_corp_taxpayers_e

 

OCDE report on analysis of TP simplifications

OCDE report on TP

Deloitte blog on Swiss Safe Harbor for TP

The Swiss Federal Tax Administration (“FTA”) issued a circular on 19 February 2016 that contains new safe harbor interest rates for intragroup loans. These rates are used by the FTA to determine the arm’s length nature of interest on intragroup loans receivable or payable. The circular prescribes the minimum interest rates for loans granted by a Swiss company to its shareholders or related parties, as well as the maximum interest rates for loans granted by the shareholders or related parties to a Swiss company in Swiss francs or a foreign currency.

The safe harbor interest rates for 2016, which apply retroactively as from 1 January 2016, remain unchanged compared to 2015.

2016 Safe harbor rates for Swiss franc (CHF) loans

The 2016 minimum interest rates on CHF-denominated loans granted by a Swiss resident company to a shareholder or related party generally are as follows:

• Equity-financed loans: 0.25%;
• Debt-financed loans: Actual interest incurred, plus 0.5% and for debt-financed loans exceeding CHF 10 million a mark-up of plus 0.25% has to be applied on the actual interest rates.

The new maximum interest rate on a CHF-denominated loan granted by a shareholder or related party to a Swiss trading or production company is 1%, although loans of up to CHF 1 million received by a Swiss trading or production company may bear interest of up to 3%.

Different interest rates apply to real estate loans and loans relating to holding and financing companies.

2016 Safe harbor rates for foreign currency loans

The circular also contains updated safe harbor rates for loans denominated in a foreign currency. The safe harbor rates for loans denominated in US dollars and Euros are, for example, as follows:

• EUR-denominated loans: 1%;
• USD-denominated loans: 2.25%.

The safe harbor rates for loans denominated in a currency other than CHF generally are the same for both loans granted and loans received. If the safe harbor rate for a foreign currency-denominated loan is lower than the CHF safe harbor rate for the same year, the CHF safe harbor rate is considered the maximum allowable rate on loans payable by a Swiss entity.

Withholding tax

In principle, a taxpayer can apply an interest rate that deviates from the published safe harbor rate, but in the event of a tax audit, the taxpayer would have to demonstrate that the interest rate applied meets the arm’s length standard, and theburden of proof is set quite high. Interest expense that exceeds an arm’s length amount or interest income that is less than arm’s length interest may be recharacterized as a deemed dividend subject to Swiss dividend withholding tax at a rate of 35% (grossed up to 53.8% if not borne by the recipient) and included in taxable income. Thus, applying the safe harbor interest rates should provide certainty to taxpayersand should not lead to any adverse Swiss tax consequences.

Relief from Swiss withholding tax may be possible under domestic law in the case of intercompany loans between Swiss entities, or under an applicable tax treaty or the savings agreement between Switzerland and the EU in cross-border situations.

Comments

Affected taxpayers may wish to consider one or more of the following options:

• Adjust the interest rate to the safe harbor rate, although this could create transfer pricing issues in the country of the lender.
• Convert a EUR or CHF-denominated loan into a USD loan, where the safe harbor rate remains at 2.25%, although this could give rise to forex issues and exposure. In addition, as noted above, the circular requires taxpayers that borrow in a foreign currency at higher interest rates to justify why they did not borrow in Swiss francs.
• Prepare a transfer pricing benchmarking analysis to support the interest rate applied as being at arm’s length. In addition, taxpayers may request a ruling from the Swiss tax authorities to confirm that the interest rate applied will be considered as at arm’s length.

 

2/6/2016 DELOITTE Tax BLOG:

On 18 May 2016, the Swiss Federal Council initiated the consultation on the CRS Ordinance, which will last until 9 September 2016. The Ordinance supplements the CRS Act by providing two key elements for the implementation of CRS in Switzerland:

• Additional clarification where the CRS Act delegated certain decisions to the Federal Council; and

• Supplemental provisions further specifying the implementation of CRS in Switzerland.

Aiming to ensure that Swiss Financial Institutions (FIs) do not suffer disadvantages compared to competitors in other financial centers, many provisions are based on (or at least inspired by) the implementing legislation of other jurisdictions.

Amongst a series of relevant provisions, the below stand out as most notable:

The Swiss “white list” (Art. 1)

The draft CRS Ordinance specifies that all jurisdictions committed to implement CRS plus the U.S. will be treated as Participating Jurisdictions and, thus, no look-through is required for Professionally Managed Investment Entities type FI Account Holders resident in such jurisdictions. While several “white lists” include all committed jurisdictions (e.g. the ones from the UK and certain UK territories), the Swiss inclusion of the U.S. stands apart. Presently, only Luxembourg joins Switzerland in treating the U.S. as a Participating Jurisdiction. See our previous post for more information on the question of the U.S. treatment under CRS.

Additional Non-Reporting FI and Excluded Account types (Art. 2 to 11)

While several Non-Reporting FI and Excluded Accounts types have already been defined in the Swiss CRS Act, the draft CRS Ordinance adds additional exceptions. The wish to further reduce the burden for the financial industry is clearly understandable and most exceptions indeed present a low risk of being used to evade tax (e.g. for co-ownerships or investment advisors and manager, or with respect to accounts for capital deposits, low-value dormant accounts or account held by Swiss associations). However, it seems some new Non-Reporting FI and Excluded Account types do not meet the strict requirements set out in the OECD Commentary. Thus, it will be interesting to see whether the OECD Global Forum will agree to the additional exceptions during its peer reviews.

Clarification regarding CRS reporting (Art. 16 and 20)

The draft CRS Ordinance provides some high-level information regarding the characterization of certain payments. Of great interest from an operational standpoint, the draft CRS Ordinance allows Swiss FIs not only to report the account balance and relevant payments in the currency of the account, or in U.S. Dollars or Swiss Francs, but also in the reference currency chosen for a specific client relationship.

Due diligence and reporting relief with respect to certain closed accounts (Art. 22)

The draft CRS Ordinance provides additional clarification regarding the treatment of accounts that were closed prior to the completion of all required CRS due diligence steps (e.g. during remediation, upon account opening or following a change in circumstances). In general, where the necessary documentation has not been obtained and the applicable due diligence deadline (e.g. 1 or 2 years for Pre-existing Accounts or 90 days following a change in circumstances) has not expired at the time of closure, a Reporting Swiss FI is released from any additional CRS due diligence reporting obligations with respect to such accounts.

Conclusion

The draft Ordinance provides welcome direction on key parts of the implementation of CRS in Switzerland and, in conjunction with the anticipated Guidance Notes, will ensure that Swiss FIs will not suffer from the same lack of guidance that currently afflicts FIs in many jurisdictions where CRS is already underway.