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Switzerland Gearing Up For Corporate Tax Changes

Friday, November 16, 2018

The Swiss Government has announced that, in preparation for a major overhaul of the tax system, existing practices on the taxation of principal companies and finance branches will not be applied to new companies as of 2019.

The Government's Tax Reform and AHV Financing (TRAF) legislation is due to enter into force on January 1, 2020. It will abolish the special arrangements for cantonal status companies, along with the federal practices on tax allocation for principal companies and Swiss finance branches. The legislation will also introduce a mandatory patent box regime for all cantons, provide a relief restriction, and reform the taxation of dividends from qualified participations.

The Swiss Federal Council has announced that, from 2019, the Federal Tax Administration (FTA) will no longer apply the federal practices concerning principal companies and Swiss finance branches to new companies.

Companies operating internationally often group their structures into larger units and centralize functions, responsibilities, and risks within the group in so-called principal companies. Under the current Swiss rules, if a principal company is located in Switzerland, some of the net profit is exempt from taxation in the country.

Swiss finance branches are Swiss financial permanent establishments of foreign companies and are responsible for lending within foreign groups. Currently, the calculation of a usage fee for the capital made available to the Swiss permanent establishment reduces the taxable net profit of the Swiss finance branch in Switzerland.

Unlike the rules on cantonal status companies, the abolition of the federal practices does not require any legislative amendment. As a first step, the FTA will ensure that the federal practices are from 2019 no longer applied to new companies. Then, with the entry into force of TRAF in 2020, the federal practices for existing principal companies and finance branches will be abolished.