Tax Proposal 17 – Council of States launches further measures for the corporate tax reform
After the Swiss Federal Council has published its dispatch on the Tax Proposal 17 on 21 March 2018, the legislative proposal has been discussed in the first chamber of the Parliament (Council of States) on 7 June 2018. The Council of States has approved the application of its economic commission and has amended the proposal of the Federal Council with additional measures (including counter financing measures as well as social compensation measures) in order to find a compromise in the whole parliament and – if necessary – in the Swiss public.
The amendments resolved by the Council of States
Not only has the Council of States renamed the Tax Proposal 17 into „Swiss Federal Act on the tax reform and the financing of the AHV“, but he has also resolved five measures which differ contentwise compared to the measures proposed by the Federal Council:
- Instead of the increase of the child and education allowance proposed by the Federal Council, the Council of States has now determined that the old age and survivors insurance (AHV) should additionally be funded by each tax franc missing due to the corporate tax reform on all three state levels. The Council of States expects – based on a static point of view – that approximately 2 billion francs will be flowing into the AHV due to this reform. This amount will be financed by some more than half through an increase of the wage contributions by 0.3 percent and the remaining part through already existing federal funds.
- This social compensation leads not only to additional costs on the level of employers (compensating a part of the benefit deriving from the expected decrease of the corporate income tax rates), but also affects the net wages of the employees. Furthermore, the increase of federal contributions to the AHV will lead to an additional burden of the federal budget. However, this measure is seen as an important compromise in order to make the tax reform acceptable on a broad basis.
- The higher taxation of dividends for qualifying shareholding of individuals proposed by the Federal Council has been approved by the Council of States in principal. The Federal Council has originally suggested that 70% (federal tax) or at least 70% (cantonal tax) of individuals’ dividend income shall be taxable in future. The Council of State agrees with the proposed taxation rate on the federal level, but decided such dividends to be taxable at least 50% on the cantonal level. This leads to a higher flexibility for the cantons when implementing the corporate tax reform considering in particular the cantonal deviating positions with regard to the current dividend taxation rates and the targeted decrease of the corporate income tax rates
- The capital contribution principle shall be amended which the Federal Council refused to do in its original dispatch. In future, corporations as well as cooperatives quoted on a Swiss Stock Exchange may pay out capital contribution reserves tax free solely under the condition that taxable dividends are distributed in an equal amount (principle of proportionality). Otherwise, the repayment of capital contribution reserves should be taxable in the relevant amount. However, the repayment of capital contribution reserves can maximally be taxable to the amount of the distributable other reserves under commercial law. The mentioned rules shall be applicable analogously also for the issuance of bonus shares and bonus share capital increases out of capital contribution reserves (in order that the provision cannot be circumvented through a routing through share capital). Excluded from this provision are:
- Repayments of capital contribution reserves within a corporate group (10% shareholding quota)
- Capital contribution reserves that have been created within a relocation to Switzerland after 31 December 2010 (date of the implementation of the capital contribution principle)
Subsequently, when a company quoted on a Swiss Stock Exchange is distributing liquidation dividends within share buy-back transactions, at least 50% of the liquidation dividend is to be set off against capital contribution reserves. Otherwise, the capital contribution reserves must be corrected in the corresponding amount, but maximum to the amount of existing capital contribution reserves.
The tightening of the meanwhile established capital contribution principle is critical for reasons of legal certainty. However, it should be anyhow welcomed that the limitation of tax free repayment of capital contribution reserves will be restricted to certain constellations (aiming at the Swiss income tax in the end) in order to maintain the attractiveness of Switzerland as a business location and (partially) the trust of companies relocated to Switzerland. Furthermore, in the implementation process there will be open issues to be resolved. One for example will be the consequences of the breach of the principle of proportionality. In such a case, to the extent a taxation happens – for tax purposes – distributable other reserves under commercial law have to be transferred to capital contribution reserves. This would lead to a deviation for tax purposes from the commercial law balance sheet. It is important to mention in this connection that the federal act is still stipulating that the capital contribution reserves must be disclosed on a separate account in the commercial law balance sheet.
- The Federal Council has rejected to implement a notional interest deduction in its dispatch on the tax proposal 17 despite respective claims of the Canton of Zurich. However, the Council of States takes a different point of view and supports the implementation of a deduction on equity financing, i.e. a notional interest on excessive equity on cantonal level. However, this measure shall only be implemented by cantons with high income tax rates applying a cumulated and consistent tax rate of minimum 13.5% in the capital city of the canton. According to the announced tax rates of the cantons that will be implemented under the tax proposal 17, only the canton of Zurich would fulfill this condition. If the city of Zurich would resolve a decrease of the income tax rate (or tax multiplier, respectively ) to the respective extent in the future, it would be necessary for the canton of Zurich to waive the notional interest deduction (again) combined with the risk of companies leaving the canton and the consequent loss of tax substrate. Also, this restriction to cantons with a high tax rate may likely lead to discussions triggered by other cantons. The linking to a certain income tax rate should generally be rejected as it is creating a prejudice in Swiss tax law for a material tax harmonization.
- Another measure resolved by the Council of States is that intragroup loan receivables should be considered when calculating the relief of the capital tax for corporations while the Federal Council had rejected to take into account such intragroup loan receivables in this calculation. This is a welcomed measure considering the aspired relief of group financing activities.
Debates to be held at the National Council
After the debate of the legislative proposal in the Council of States, the National Council will discuss and deal with the new Federal Act during its autumn session (10 – 28 September 2018). Until then, the legislative proposal will be discussed by the economic commission of the National Council in advance. The final decision of the parliament shall be reached in autumn 2018. If no referendum is called, the measures relevant for the companies could come into force as from the beginning of 2020.
The timetable is still ambitious but outlines that the corporate tax reform is seen as highly urgent due to the ongoing and recent international pressure as well as the changes in the international landscape.