PLEASE NOTE: THIS ARTICLE WAS ORIGINALLY SUBMITTED BY REVISUISSE PRICE WATERHOUSE, SWITZERLAND

1.1 Corporate income and capital tax rates

Annual capital tax of 0.08% will be abolished

The income tax rate will be changed from progressive rates (3.63 to 9.8%) to a flat rate of 8.5%

1.2 Capital gains on the sale of major investments for Federal tax purposes

Capital gains on the sale of investments will basically be relieved from income tax. This relief requires a holding period of the investment of at least one year and the investment must be at least 20% of the share capital of the other corporate entity (substantial investments). However, any recaptured depreciation upon a sale of substantial investments remains subject to income tax.

Capital losses on the sale of substantial investments will remain deductible for tax purposes.

Depreciation of all investments will remain tax deductible. However, any depreciation of substantial investments (being potentially tax exempt on a future sale) will not be final. If it happens that, at a later stage, the depreciation is no longer justified (e.g. because of a subsequent appreciation in value) it will or may be added back to taxable income.

Transactions between related parties which result in unjustified tax savings may trigger an adjustment of taxable income or a reduction of the tax relief for dividend income or capital gains upon a sale of a substantial investment. Tax savings may, in this connection, be considered as unjustified if capital gains and capital losses or depreciation of substantial investments are in a causal connection.

1.3 Transitional rules on intra-group transfers of investments held prior to January 1, 1997

Any capital gains on a sale of substantial investments as well as proceeds from the sale of subscription rights appertaining to such investments, remain subject to income tax provided the investments have been held prior to January 1, 1997 and the related gains will be realised prior to January 1, 2007.

If a corporate entity transfers a substantial investment held prior to January 1, 1997 to a foreign group company, the related capital gain (being the difference between the fair market of the investment and its book value for tax purposes at the time of the transfer), is considered to be taxable income of the Swiss transferor. The investment transferred is still deemed to be held by the transferor for tax purposes. However, the Swiss entity is entitled to set up an untaxed reserve in the amount of the realised capital gain. This reserve must be released, triggering a corresponding tax impact, if the investment transferred abroad

  • is ultimately sold to a third party or
  • if major assets and liabilities of the transferred investment itself will be sold or
  • if the investment will be liquidated.

Such reserves, if any, may be released on December 31, 2006 without any tax impact.

The content of this article is intended to provide a general guideline to the subject matter. Specialist advice should be sought about your specific circumstances.