Tax Proposal 17 – Smooth debate in the Council of States

The Council of States follows the recommendations of its Committee. Authors: Dominik Bürgy, Karin Steimer Benz
swiss tax
On 7 June 2018 the Council of States concluded the discussion on Tax Proposal 17. The key features of the tax reform are the abolition of the so-called privileged tax status, the introduction of the patent box and R&D super deduction and the federal support for lowering corporate income tax rates at cantonal level. Following the recommendation of its Economic Affairs and Taxation Committee, the Council of States supports an approach with 5 key adjustments compared to the proposal by the Swiss Federal Council.

Adjustment of the capital contribution principle
The Council of States decided to restrict the capital contribution principle with a repayment scheme. Listed companies may only pay tax-free capital contribution reserves if they pay taxable dividends in the same amount. Not affected by this scheme are intra-group dividends and capital contribution reserves from assets transferred from abroad after 31 December 2010. In order to prevent capital contribution reserves from being converted into nominal capital tax free and subsequently repaid tax free, the above rules shall also apply to the issue of bonus shares and nominal value increases from capital contribution reserves.

Notional interest deduction
The notional interest deduction offers a tax efficient alternative to increase competiveness and was requested especially by cantons without much scope for a tax rate reduction. According to the Council of States, high-tax cantons should have the possibility of introducing a notional interest deduction at cantonal level. A high-tax canton would be a canton with a cumulative tax rate (canton, municipality and other self-governing bodies) of at least 13.5% over the entire tax regime. According to the current intentions of the cantonal governments, only the canton of Zurich would meet this minimum tax rate.

The notional interest deduction (together with the patent box, super deduction of R&D costs as well as possible depreciations from the early transition from privileged to ordinary taxation) should be subject to restrictions on overall tax relief.

At federal level, no notional interest deduction is planned.

The cantons of Aargau, Schaffhausen and Zug have already stated that this special rule is not acceptable under constitutional principles and conflicts with the principle of equal treatment of the cantons. All cantons with high tax rates should therefore be able to benefit from this regulation.

Dividend taxation
Dividend income of individuals from qualifying participations is currently partially exempt from taxation. Under the current law, the cantons can choose whether they wish to grant the relief on the measurement base or on the tax rate. In future, cantons will only be able to correct economic double taxation on the measurement base.

At federal level, the Council of States follows the proposal of the Swiss Federal Council with taxation of 70%.

At cantonal level, however, the Committee is requesting taxation of at least 50% versus 70% as proposed by the Swiss Federal Council. This gives the cantons more flexibility to structure their tax reform.

Capital gains tax relief
The Council of States has accepted the request by the cantons to grant capital gains tax relief also on net equity related to intercompany loans (besides qualifying participations and intangible assets as already proposed by the Swiss Federal Council).

Social compensation of the financial impact of the tax reform
With the adjustments proposed by the Council of States, the loss of tax receipts from Tax Proposal 17 will increase to a total of CHF 2 million. The Swiss Federal Council has proposed to compensate this shortfall by increasing the monthly minimum amount of child benefits and education allowances. The Council of States, on the other hand, wants to compensate this shortfall through the Old-Age and Survivors Insurance (OASI):
• 0.3% increase in salary/wage contributions (0.15% by employers and 0.15% by employees)
• allocation of the federal share of the demographic percentage of VAT to the OASI
• increase in the federal contribution to the OASI from the current 19.55% to 20.2%

Tax Proposal 17 will be discussed by the Economic Affairs and Taxation Committee of the National Council commencing 26 June 2018. The National Council will address the tax reform in the fall session in September 2018 during which also any potential differences with the Council of States should ideally be settled. The subsequent period for a referendum would then run until the beginning of January 2019.

It is generally expected that the National Council will try to link the debate on Tax Proposal 17 to an increase in the pension age. Furthermore, the Young Socialists (JUSO) have threatened to file a referendum if the Tax Proposal 17 is passed in this form.

We will, of course, keep you posted.