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Corporate tax reform III (CTR III) State of affairs after the referendum in the Canton of Vaud and the decision of the National Council

Referendum in the canton of Vaud

On March 20, 2016, the people of the canton of Vaud were called to vote on a historic corporate tax cut. The voters have overwhelmingly voted in favour of the cantonal bill worked out by the cantonal government on a reform of corporate taxes. Thereby the canton of Vaud is the first to adopt its cantonal measures in view of the abolishment of the special tax status and leads the way in that matter.

Why does the canton of Vaud want to lower its corporate tax rate?

The canton of Vaud as the largest of the French-speaking cantons, with the holding of this referendum evolves from corporate tax hell to heaven. The cause of this remarkable transformation is the federal corporate tax reform III (CTR III). Currently, holding companies or corporations that have the overwhelming part of their activities abroad can benefit from a special tax status that grants tax breaks on cantonal and communal level. The federal CTR III however will abolish this special treatment, leading to an increased taxation of companies in the communes and the cantons. Therefore, when the reform will take effect, presumably from 2019 onwards, all companies will be subject to the same tax rate, regardless of size and activity. However, for companies currently benefiting from a special tax status the taxes levied will be considerably higher, since some cantons and notably Vaud and Geneva currently apply rather high tax rates (between 20 and 24%).

In order to stay fiscally attractive and prevent the departure of those special-status companies, the government of Vaud has worked out a bill with the primary goal to reduce corporate income taxes, but that nonetheless comprises also measures to relieve households. This reform will be implemented regardless whether the CTR III at federal level comes into force or not.

With the entry into force of the cantonal reform the corporate income tax rate will decrease gradually to an average of 13.79% in 2019. That single tax rate will then apply to all companies, be they local small businesses of foreign-oriented companies. The new corporate taxation will be a very competitive one both for Swiss standards as well as in international comparison. However, the capital tax base rate will be raised from currently 0.3‰ to 0.6‰. We recall that it is still foreseen to offset capital tax against against income tax in Vaud, so that only the higher of the two is due.

It is noteworthy that the communes determine by themselves their multiplier, which is then applied on the basic rate. Some communes will feel tempted to raise their multiplier considering that this reform will lower their corporate tax revenue by two thirds.

Evolution of the corporate tax rate for companies in the canton of Vaud

Year(s)

2013

2014-2015

2016

2017-2018

From 2019 onwards

Global effective tax rate*

23.00%

 

22.33%

 

21.64%

 

20.94%

 

13.79%

 

Base rate

9.5%

9%

8.5%

8%

31/3 %

* the basic tax rate is multiplied with the multiplier of the canton (1.545) and the one of the concerned communes (average 0.705); to determine the global effective tax rate the federal rate of 8.5% needs to be added.

The referendum was supported by a vast majority of 87% of the voters, to the surprise of many, since the tax cuts did not directly concern the voter’s tax bill. In fact, the Vaud government had proposed a balanced package: In return for the tax cuts, extensive social measures were proposed: family allowances will be raised, a partial deductibility for health insurance premiums is introduced and more day-care centres will be opened.

Conclusion

By adopting this legislation, Vaud is applying a great pressure on the adjacent cantons, especially Geneva, which has the highest corporate tax rate in Switzerland. They are left with not much else than to also lower their taxes levied on corporations. With the adoption of this referendum, the canton of Vaud is becoming a very attractive place to do business both for local businesses as well as for international corporations.

The National Council’s decision

In the spring session of the Swiss parliament, the National Council (House of Representatives) had to vote on the federal bill of the company tax reform III. It’s clearly visible how the new right majority that gained the elections in October last year has left its mark. Indeed, the representatives voted very business-friendly, unlike the State Council (Senate), which was more cautious.

Deduction of notional interest

First of all, the deductibility of notional interest has been adopted, although the State Council rejected it. Its about a fictional deduction from income of interest on so-called security equity. Therefore, the first step is to determine the part of the shareholder’s equity that is considered security equity, i.e. the part of own funds that the company could also have raised by means of a loan or bond emission. This will be accomplished with a table that will subsequently be published by the authorities, showing the accepted security capital for each economic sector. Thereafter, the deductible notional interest is calculated as follows: 50 base points (0.5%) are added to the yield of 10-year Swiss Federal bonds. It is noteworthy to take into account that the Swiss bonds currently have the lowest yield of all countries worldwide. As of March 1, 2016, 10-year bonds offered a negative yield of -0.48%.

Tonnage tax

A second measure that has been adopted by the National Council is the tonnage tax for maritime shipping companies, contrary to the State Council’s decision. The tonnage tax is not a tax of its own but rather a method to determine income for companies active in the business of international maritime shipping. It is used by a number of countries worldwide, only within the EU 13 nations apply such a regime. The income is determined according to the net tonnage of the entire shipping capacity and the number of days that it is at the disposal of a company. A table with lump sum profit is provided in the law. For example, for a ship with a net tonnage of 1000 NT a profit of CHF 9 is calculated per day. This index could be adapted by the Federal Government in order to take into account the age of the ship, its environmental impact etc.

This system determines a lump sum income. Once it has been determined, the regular tax rates are applied. However, a company that opts to be subject to this tax has to do so for at least ten years (lock-in). Moreover, one has to take into account that the tonnage tax entails a stable tax to pay every year, including during loss years. The tonnage tax also renders the levy of taxes easier for the authorities, thus freeing some of their capacities.

According to a recent study, the tonnage tax could be applied to 44 companies in Switzerland that run 379 ships, including major global players like MSC in Geneva.

Abolition of the stamp tax

Furthermore, the National Council refused to abolish the federal issuance stamp tax, which generates about CHF 230 million of revenue for the Swiss Federation. Since the stamp tax has in principle nothing to do with the causes of the CTR III, it has been maintained. However, its abolition might be reconsidered as part of a reform of the withholding tax to come in the next years.

A referendum is likely

To sum up, the national council went quite far. During the summer session, the two chambers of the federal parliament will have to decide on a final text. Probably the result will be a compromise between the two positions. It is important to note that back in 2008 the company tax reform II, still arousing criticism, passed the referendum with the slight majority of 50.5%. The socialist party has already announced to collect 50'000 signatures in order to call a popular vote, but as of now this is simply a political instrument to apply pressure on the National Council for the summer negotiations.

We will keep you updated on this issue.

Meanwhile, if you have any questions, do not hesitate to contact Mr. Daniel Spitz, certified tax expert, 021 311 00 21 or by e-mail under [email protected].

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