International hybrid tax structures are being challenged. Preferred mobile income jurisdictions as Switzerland are in the spotlight of discussion. Switzerland welcomes these changes and has taken actions to further develop its corporate tax law framework to maintain and improve its attractiveness for international business. A new Swiss corporate tax law is underway, which in particular enhances the tax treatment of corporate mobile income functions. The coming rules are likely to enter into force around 2020, until when the existing tax incentives can still be applied including grandfathering clauses.
The financial and economic crisis has increased cross-border tax regulations to limit base erosion and profit shifting. Initiatives such as the OECD BEPS action plan and investigations by the EU commission against some member states have gained momentum. These and similar initiatives will gradually erase tax schemes construed on the concept of double dips, double non taxation and ring fencing.
As a consequence, jurisdictions with non-sustainable hybrid structures and a comparatively high ordinary corporate tax rate will become less attractive. The competition for international business will persist, but the number of attractive jurisdictions will likely diminish. Countries with a competitive tax environment, controlled government spending, low public debt, high quality of living and a maximum degree of financial and personal security will gain significance.
Impact on Switzerland
Switzerland is actively contributing to the changes in the field of international taxation and has implemented certain initiatives such as the unilateral OECD standard information exchange for tax treaty purposes. On the other hand, international initiatives like the fight against hybrid instruments and double non taxation structures should not affect Switzerland as these concepts were not in the focus of historic Swiss tax planning techniques.
The Swiss domestic discussion process about the new corporate tax framework is advanced and a political consensus has been reached on maintaining and strengthening Switzerland as a preferred place for international business, in particular with regard to on-shoring corporate mobile income functions.
New Swiss Corporate Tax Law
The proposed changes foresee modifications of existing and introduction of new corporate tax concepts. The holding company status will be modified and the mixed company status will disappear; however, likely not before 2020 and with protection for a period of transition. Once effective, the tax payer may opt for a tax free step up in basis of assets, also on self-developed intellectual property or goodwill, with subsequent tax deductible depreciations on such assets.
In addition, the combined federal/cantonal headline ordinary income tax rate will be reduced to around 14%. For mobile types of income, effective tax rates should stay in the current ranges: dividends 0%, interest 2-3%, license 5-8% and trading income 10-12%. These low tax rates for mobile income can be achieved through the modification of existing and the introduction of new tax concepts, e.g. the license box and the notional interest deduction.
Other provisions historically applied based on Swiss domestic law will remain applicable under the law changes, i.e. the unilateral foreign branch exemption and the flexible debt financing possibilities. Moreover, Switzerland does not have a controlled foreign company legislation and generally applies the OECD transfer pricing guidelines without having an own formal transfer pricing law.
State of Implementation
The new tax law is in a mature draft state and in the public consultation procedure. The parliamentary debate and likely a public vote are to follow. With certainty the concepts of the future tax framework will stay in line with the guidelines of significant international institutions like the OECD and the EU, by that providing for robustness and stability to possible future developments and further changes of the international consensus on the taxation of multinational companies.
Switzerland will only introduce specific tax concepts if introduced in at least one EU member state and not challenged by the EU commission. In consequence, the new law will likely not enter into force as long as the EU commission investigates against specific tax concepts introduced in any EU member state (e.g. against the national variety of license boxes). Based on this it is a fair expectation that the new Swiss corporate tax law will not enter into force before 2020.
International tax planning becomes more complex. Still, tax planning of mobile income streams is a must for any multinational company. It ensures a low effective corporate tax rate for the benefit of the stakeholders. BEPS and similar international initiatives will result in a boost of on-shoring significant people functions connected to mobile income streams in attractive tax and business locations.