Switzerland: Holding Taxation May Have A Comeback In Switzerland

In February 2017, Switzerland voters rejected a comprehensive corporate tax reform which had lowered corporate income taxes in general. Further parts of the proposed corporate tax reform were to introduce so-called patent boxes, whereby income generated from patents and other intellectual property rights would have been tax-exempted, a 150-percent super deduction for research and developments costs (all this mainly to accomodate the pharmaceutical industry in the Greater Basel Area), whilst the financial industry predominantly at home in the regions of Zürich and Geneva would have received a so-called notional interest payment regime calculated on the corporate taxpayers' equity.

In October 2014, Switzerland had committed itself towards the European Union to abolish its almost legendary preferential tax treatments of holding companies and so-called domicile and administrative companies whose corporate tax income realized on foreign-foreign sales was not or only partially taxed.

Amongst the various attempts to reshape this corporate tax reform still necessary, KPMG in Switzerland has circulated amongst leading federal parliamentarians in Switzerland's capital Berne a position paper which proposes to keep the preferential tax treatments of holding companies in Switzerland. For the holding tax privilege to be accepted internationally, only a small change is needed: today holding companies benefit from an income and capital tax exemption if they do not have any business operations in the country, whilst business operations abroad are permitTed. This unequal treatment of foreign companies called "ring fencing" is not accepted in the international tax arena, so KPMG proposes that allowing business activities both at home and abroad or forbidding them altogether would make the Swiss tax holding regime acceptable again to OECD and the European Union.

Switzerland had already proposed to the EU-Commission in 2009 to adjust its tax holding principles by prohibiting business activities both at home and abroad, and whilst the EU-Commission considered such a change acceptable, some EU member countries such as Italy continued to resist Switzerland's proposal until it failed.

"The maintenance of the holding priority must be discussed and carefully examined," says the Zurich State Councilor Ruedi Noser (fdp.). And Thomas Matter, SVP National Councilor of Zurich, considers the proposal to be absolutely worthwhile: "If the holding privilege is accepted internationally, we would a good replacement for the notional interest payment regime".

The proposed notional interest payment regime was quite controversial and therefore considered to be one reason why the corporate tax reform failed in February 2017. Cantons with many holding and financial companies (in particular the Cantons of Vaud, Zurich or Zug) were therefore fierce advocates of the notional interest payment regime. If the tax holding privilege continues to exist, "the notional interest payment regime could be waived in an elegant way", says Zug's SVP National Councilor Thomas Aeschi.

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