Tax Proposal 17 (TP17) - Completion of Consultation Procedure by the Federal Council and Next Steps
On 12 February 2017 the Swiss electorate rejected the Corporate Tax Reform III (CTR III). The Swiss Federal Council then responded by initiating the consultation procedure of the Tax Proposal 17 (TP17) at their meeting on 6 September 2017, and this consultation procedure ended on 6 December 2017.
For Switzerland, the urgent need for action has been intensified due to the international trend of decreasing corporate taxes. At its meeting on 31 January 2018, the Federal Council determined the key points of the TP17 reform based on the consultation procedure. This newsletter briefly outlines the developments and key measures of this proposal.
The tax law privileges of cantonal status companies (holding companies, domiciliary companies and mixed enterprises) are not in conformity with current international demands. Pressure from abroad has had negative effects on Switzerland’s attractiveness as a business location and therefore a reform in corporate tax law is urgently needed to maintain its competitiveness. Switzerland made a commitment to the EU to put an end to cantonal status companies and as a countermeasure, the Federal Council suggested a mandatory introduction of the Patent Box on cantonal level, as well as an optional introduction of additional deductions for research and development (R&D reduction). With the introduction of the Patent Box, which meets international requirements, upon application, net profits incurred from patents and comparable rights will be taxed with a reduction of up to 90%. The additional R&D reduction shall not exceed 50% of the eligible R&D expenses, and can only be applied to those created in the country.
- In addition to the above two crucial measures, the following will also be put into place:
- Discharge limitation for the special arrangement Patent Box and additional R&D reduction. Subsequently, a company must tax at least 30% of its profit before applying the special provision and no loss may occur out of the application of it.
- Retention of the tax neutral appreciation of hidden reserves (Step-up), which were created under previous law or upon arrival to Switzerland.
- Increase in the minimal dividend taxation to 70% for individual persons on a national level, and at least to 70% on a cantonal level.
- Increase in the cantonal share of direct federal tax from 17% to 21.2%.
- Facultative discharge of capital tax. Cantons can take appropriate measures to maintain the appeal of their respective locations.
- Increase of CHF 30 in minimum standards of federal government family allowances to CHF 230 total. In canton Bern today these higher child benefits are already being paid out.
General cantonal tax rate reductions are not part of TP 17. With regard to this, cantons may decide themselves how they will set their tax rates. Canton Bern wants to lower taxes on income between 2019 and 2022, from 21.64% today down to 16.37%. It is anticipated that the cantonal parliament is going to advise on tax law revision in a second meeting of the March 2018 session.
The TP 17 includes moreover, a change in transference acts. New is that all sales of participatory rights to a company in which the contributor has at least 50% participation will be taxed insofar as the return received exceeds the sum of the face value and capital contribution reserves. This also applies when multiple persons make the transfer together and meet the 50% limit. Today’s law enables tax-free capital gains with a sale of less than 5% of self-controlled companies, and this will no longer possible.
Finally, the SV17 intends to extend flat-rate tax credits on Swiss production sites of foreign companies.
With this law the applicable ordinances concerning the reduced taxation of profits on patents and comparable rights, as well as those having to do with financial resources and burdens, will be determined in the consultation procedure.
The Federal Council would like to formulate an official message on TP 17 by the end of March so that the parliamentarian consultation on this matter can be completed in the fall 2018 session. The response to this then from the cantons, political parties and professional associations promises that an interesting debate is ahead of us. Numerous criticisms as well as proposed amendments exist. In our opinion, parliament is going to have a tough time finding an amicable resolution, and one that is capable of gaining majority support. In the absence of any referendum the first measures of TP17 could go into effect at the beginning of 2019, and the main part of the measures as of 2020. In view of the rapidly changing international pressure we are experiencing, the Federal Council considers completion of this reform quite urgent.
A more exact analysis of the known measures that companies are to apply will be made once the definitive version of TP17 is available.
Company Tax Reform III (CTR III)
The Swiss electorate rejected the Company Tax Reform III on 12. February 2017.
This reform would have been a solution for repealing special tax status for companies. This proposal did not convince voters, even though cantons had tailored solutions at their disposal that corresponded to their industrial networks and location promotion.
The rejection of this by Swiss voters at the polls is not the end of the debate. Many questions remain unanswered.
- What will cantons do that host many companies with special tax status?
- Will the Federal Council be able to quickly find a national solution?
- How will companies with special tax status react to the volatile situation caused by the voting result?
Tax competition between the cantons will most likely intensify because of the rejection of USR III. The development of tax legislation abroad will lead to increasing pressure on Switzerland’s competitive position.
Canton Bern has announced on March 30, 2017 that it will implement its tax strategy that was presented on 17 September 2015, independent of the results of the USR III. This proposal will lead to a marked reduction in profit tax rates. Municipalities that receive large amounts of tax revenues from legal persons, for example Biel community, will be faced with difficult decisions. During the November session of Berne cantonal parliament the new tax law 2019 will be discussed.
Federal Council has mandated Federal Finance Department to present a new draft for an amended Company Tax Reform by End of June 2017. First hearings with involved parties have already taken place.
Omnitax would be pleased to assist you in the assessment of measures to be taken as a result of this new situation.
Revised act about the Value Added Tax (VAT)
On 30 September 2016 both chambers of the Swiss Parliament approved the partially revised VAT Act. It will go into effect on 1 January 2018. Here is a short overview of the new applicable rules:
- New is that exemption from tax liability is granted to those whose total annual revenue, both Swiss and global revenue, amounts to less than CHF 100,000 per year. The determination of the registration threshold of CHF 100,000 therefore not only considers domestic revenue, but all revenue taken in annually worldwide. This new rule shall reduce the competitive advantage foreign companies have had when doing business in Switzerland from a foreign base. In principle, these new requirements mean that all who provide goods and services domestically in return for payment are taxable. From now on a company will be deemed subject to VAT, unless it can prove with its books, that globally the threshold of CHF 100,000 is not exceeded. This revision is also important for Swiss companies that up to now have not attained any or very little revenue in Switzerland, but have earned high amounts of taxable revenue abroad. These companies will also now be taxable for low revenues attained in Switzerland.
- New is obligatory subordination for domiciled companies abroad that attain CHF 100,000 revenue from non-taxable imports sent to recipients in Switzerland. Vendors benefitting from the import tax exemption for business to customer sales of products of minor value from outside Switzerland into Swiss territory, have to register and pay Swiss VAT if they derive an annual turnover of more than CHF 100'000 from these sales. The "international vendor" therefore becomes a Swiss VAT subject and will have to charge Swiss VAT on sales to Swiss customers.
- It will be possible to opt for voluntary payment of VAT on exempt turnover by way of declaration with Federal Tax Authorities. So far this option has had to be shown on bills issued to clients. With the new act this disclosure will no longer be mandatory.
- A new reduced VAT rate of 2.5% will also be applicable for newspapers, magazines and electronic books. Equal treatment of printed and online medias will be guaranteed.
There are a number of other articles that have been modified in the new VAT Act. It is worthwhile to examine these carefully to determine whether any changes or adjustments need to be made. We would be pleased to assist you with this process.
Deduction of Driving Expenses
On 9 February 2014, 62% of Swiss voters said yes to the bill for financing and expansion of the railway infrastructure FABI.
The Federal Council decided that the constitutional amendments and the connected decrees would become effective on 1 January 2016. This bill included a tax component that limits professional expense deductions with regard to travel costs. Since 1 January 2016 (thus for tax declaration 2016, which is to be handed in during 2017) the following regulations apply:
Employee without a company car
As of the tax year 2016, deduction of driving costs in connection with direct federal tax is limited to CHF 3'000, and in canton Bern in connection with the cantonal and community tax limited to CHF 6'700 (other cantons may have different limits). This limitation is automatically taken into account within the scope of tax assessment.
An employee has a SBB general travel pass that costs CHF 3'655 (GA in 2016). Up to now this entire amount could be claimed as driving costs on the professional expenses position. Now direct federal tax deduction of maximally CHF 3'000 and canton and community tax of maximally CHF 6'700 is possible. On the level of federal taxes an additional income of CHF 655 results for the employee. On level of cantonal and community tax the entire costs for the general travel pass can still be claimed.
An employee commutes with by car from his or her residence to the place of work. The distance amounts to 46 kilometres (both ways). Up until now the deduction for travel costs was calculated like this:
46 kilometres x 220 workdays x CHF 0.70 = CHF 7'084.
Now the deduction is calculated the same, except that only up to CHF 3'000 for direct federal tax and CHF 6'700 for cantonal and community taxes are deductible.
Employee with a company car
If your employer provides a company car, your salary statement will list a monetary value part as additional taxable income as per clause 2.2. This offset is compensation for the private usage of the company car but does not include commuting back and forth to work. Box F on the salary statement is ticked off to indicate that no deduction for travel costs from home to work and back can be made.
If you have been provided with a company car for your commute to work and back, this is a monetary value payment that constitutes wage income. As per the 2016 tax period this income (CHF 0.70 per commuted kilometre) is declared as income from dependent employment (in the Canton Bern tax declaration under clause 2.21: “compensation which is not included in net salary”). Full time employment as a rule is assumed to be 220 workdays. If you work full or part time externally (i.e. sales staff, customer service, mechanics, work force on building sites or external projects), you may only calculate the monetary amount for the days that you use the company car to drive from your place of residence to your usual, permanent place of work. Your employer will indicate the percentage of external work you do under clause 15 of your salary statement.
An employee commutes by company car from his place of residence to his place of work. The total distance amounts to 46 kilometres (back and forth). Under clause 2.21 of the Canton Bern tax declaration, the following compensation should be listed:
46 kilometres x 220 workdays x CHF 0.70= CHF 7,084.
New is that owners of company cars may now declare travel costs on Form 6. The deduction of these costs is a maximum of CHF 3,000 for direct federal taxes, and CHF 6,700 for cantonal and community taxes respectively. The following example results in an additional taxable income of CHF 4,084 on the direct federal tax level and an additional CHF 384 taxable income on the cantonal and community one.
An employee works externally for a company and commutes 50% of the time by company car from his place of residence to work and 50% of the time he travels directly from home to customers. The total distance to work is 46 kilometres (back and forth). Clause 15 of his salary statement lists “50% external work”. Under Clause 2.21 of the Bern tax declaration, the following compensation should be listed:
46 kilometres x 220 workdays x CHF 0.70 x 50% external work = CHF 3'542.
New is that owners of company cars may now declare travel costs on Form 6. The deduction of these costs is a maximum of CHF 3,000 for direct federal taxes, and CHF 6,700 for cantonal and community taxes respectively. The following example results in an additional taxable income of CHF 542 on the direct federal tax level for this part time external employee. There is no resulting additional taxable income on the cantonal and community level.
By way of an 18 December 2015 motion, Council of States member Erich Ettlin instructed the Federal Council to direct the national tax authorities not to implement the intended administrative practice, which leads to additional income taxation of employed persons who drive a company car. This motion was accepted by the Council of States at their meeting on 27 September 2016. The National Council accepted the motion on 27 February 2017 with the following amendments: The Federal Council is commissioned to propose the necessary legal changes, so that on the administrative level a portion of income for the use of a company car for commuting to work is compensated with 9.6% of the vehicle purchase price for the private use of a company car.
It is therefore an open question how long the current applicable regulation will be valid.