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Corporate Tax Reform III: Advantages of being domiciled in Switzerland

The tax dispute between Switzerland and the EU was not far from reaching its tenth anniversary. It did not quite come to that, however, since the long-running tax debate regarding unfair Swiss tax models, euphemistically called “tax dialogue”, came to an end a few weeks ago when the two parties initialed a mutual understanding on corporate taxation. The Eidg. Finanzdepartment (Swiss Federal Finance Department) is working on a draft bill until Fall of 2014. In addition to innovative, highly technical taxation concepts that will be of particular interest to tax planning experts, discussion points will include the possible introduction of capital gains taxes on stocks for individual investors, as well as the hiring of additional tax inspectors. These reforms are to take effect in 2019.


What is it all about?

Since 2005, the EU has contended that certain tax regimes adopted by a number of Swiss cantons (such as privileged taxation of holding, domiciled, and mixed companies) constitute illegal state aid and has pressured Switzerland with the threat of serious counter measures. As a result, federal and cantonal governments have been working for years to establish alternative taxation models that can replace the criticized tax regulations (key word: IP-intellectual property-box). Formally, we are dealing with a restructure of the Swiss tax code (Corporate Tax Reform III) while in dialogue with the EU.

This is a herculean task for Switzerland under orders from the EU: to lose as little as possible or no tax substrate; to do away with tax privileges and only moderately raise taxes in order to avoid a rash of corporate relocations; and, all the while, to maintain the historical advantages of being domiciled in Switzerland.

Corporate tax reform III is thus tantamount to trying to put a square peg into a round hole. It is really mission impossible, especially when trying to meet the demands of all parties involved, particularly the EU.


New capital gains taxes on stocks and tax inspectors

With the announcement of the introduction of capital gains taxes on stocks for individuals investors and the addition of 75 new tax inspectors — the combined measures are estimated to generate more than 1 billion Swiss Francs in tax revenue —  our government has stepped into a hornets nest: in a world increasingly regulated by international tax laws, it is not only the effective tax liability that is important. Qualitative factors also play a role in determining the attractiveness of any given country in terms of corporate location, as supported by a recently published study by Ernst & Young Switzerland (press release by Ernst & Young dated May 22, 2014).

Switzerland is entitled to testing the limits of innovative tax models, even with regard to the EU. The planned introduction of new taxes or the strengthening of the Swiss tax climate is not to be underestimated. Especially not during a time in which reforms increasingly criminalize tax offenses.


Protection of original advantages of being domiciled in Switzerland

In my interaction with international clients, I am always met with admiration for the existing trust in Switzerland between taxpayers and tax authorities and the resulting legal security this relationship provides. We need to preserve these achievements of the Swiss tax system, and add another requirement to the difficult task, presented by the EU, of maintaining a competitive tax liability: to protect the legal security and the trust corporations have in being domiciled in Switzerland.


This new tax reform should be equated laudably with all tax reforms that have ever been or will ever be. It is modern, just, unburdening, and artful. Modern, because every old tax has a new name. –
Just, because every citizen is equally disadvantaged. Unburdening because it relieves all taxpayers of a heavy purse. And artful, because the fancy terminology hides the true meaning of the words: give the emperor what belongs to the emperor, and take from the citizen what belongs to the citizen.

Casparius, Roman senator to Scaeferius, Finance Senator under Emperor Hadrian, 282 A.D.