The reform of the current corporate tax system is critical if Switzerland wants to remain an attractive business location. How will the Canton of Basel-Landschaft implement “Tax Proposal 17”? Authors: Andrea Bätscher, Thomas Püntener, Janine Dumont
In order to comply with the requirement to abolish the cantonal tax status of companies and preferential tax regimes, the Federal Council introduced “Tax Proposal 17”, which will not be implemented until January 2019 at the very earliest – provided there is no referendum. On April 24, 2018, the Canton of Basel-Landschaft published its draft bill for consultation.
It is a major objective for the cantonal Government of Basel-Landschaft, to secure long-term tax attractiveness in order to remain an important business location in Switzerland. The Canton of Basel-Landschaft aims to introduce tax relief measures such as a patent box and a super deduction for research and development (R&D) expenses. As a general rule, the envisaged measures will reflect the federal proposal. Most striking, however, is the gradual reduction of the effective corporate income tax rate to 13.45% (including federal tax) over a five year-period.
Below you will find a summary of the core measures which the Canton of Basel-Landschaft plans to implement:
Tax rate reduction
The cantonal corporate income tax rate is to be gradually reduced over a five-year period from the current effective rate of 20.7% for the ordinary company tax rate to approximately 13.45% for all companies (including federal tax). This will lead to a welcome reduction for small and medium sized companies that are currently subject to ordinary taxation. Moreover the Canton of Basel-Landschaft intends to reduce the capital tax rate to 1.6‰ (the current capital tax rate for companies that are subject to the ordinary tax rate is 3.8‰). While companies that are subject to the ordinary tax rate will benefit from the reduction in the capital tax rate, companies that currently benefit from a special tax status will see their capital tax rate rise from 0.2‰ (holding companies) and 1‰ (domicile and mixed companies) to the aforementioned 1.6‰. We trust, however, that the additional capital tax reduction on net equity in the form of participations, patents and similar intangibles will provide appropriate relief.
Patent box and R&D super deduction
Another core element of the Tax Proposal 17 is the mandatory introduction of the patent box at cantonal level. The Canton of Basel-Landschaft plans a 90% reduction of the profit from patents.
The Canton of Basel-Landschaft will implement a “super deduction” for R&D expenses amounting to 20%, i.e. 120% of R&D costs may be deducted from the taxable profit. “R&D costs” is defined as personnel expenses (i.e. mainly salary and social security payments) for R&D plus 35%. This means that R&D activities performed by third parties may also be subject to the R&D super deduction. For this purpose, 80% of the respective expenses may count as “R&D costs”, which will subsequently be subject to the R&D super deduction. This also applies to intra-group R&D activities provided the costs comply with the at arm’s length principle.
We welcome both measures particularly as the Canton of Basel-Landschaft is hosting a lot of companies that should be able to benefit from the measures.
Notional interest deduction
Contrary to the Corporate Tax Reform III (CTR III), Tax Proposal 17 does not envisage the introduction of a notional interest deduction.
Limitation of cantonal tax relief
According to Tax Proposal 17, the total reduction of taxable income on the basis of the patent box and the R&D super deduction may not exceed 70% of the taxable profit (before offsetting tax loss carry-forwards and without considering the net income from investments). The Government of the Canton of Basel-Landschaft decided that the total reduction relating to the patent box and the R&D super deduction shall be limited to 50% of the taxable profit.
Further measures and financing
The cantonal draft bill increases the partial taxation of dividend income for individuals from the current quota of 50% to 70%.
The draft implementation presented by the Government of the Canton of Basel-Landschaft on April 25, 2018 will be discussed in the cantonal parliament in fall 2018, after the parliamentary discussions (federal level) on the federal proposal. Consideration will therefore have to be given to federal developments.
The cantonal draft may be considered a balanced proposal and certainly shows that the Canton of Basel-Landschaft addresses the concerns that have been raised as a result of the rejection of the previous CTR III. For businesses operating in the Canton of Basel-Landschaft in particular, the tax rate reduction is most welcome and it is to be hoped that Tax Proposal 17 will enter into effect on the earliest possible date, namely January 1, 2019.