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Switzerland Introduces New Tax Rule For Systemically Important Banks

Thursday, March 14, 2019

The Swiss Federal Council has announced that legislation setting the rules for a participation deduction for systemically important banks will enter into force retroactively, with effect from January 1.

Switzerland's Too Big To Fail (TBTF) regime requires systemically important banks to have sufficient capital so that taxpayers do not have to bail them out in the event of a crisis. This obligation can result in them issuing TBTF instruments such as bail-in bonds, write-off bonds, and contingent convertible bonds.

The participation deduction is a profit tax instrument that prevents double or multiple taxation within the same group. Companies can deduct financial interest revenue for tax purposes. If a bank issues TBTF instruments, two factors influence the participation deduction. On the one hand, the bank pays interest on TBTF instruments to the capital providers, which increases financing expenses. On the other, the bank transfers the debt capital raised in this way to subsidiaries, which increases the group parent company's statement of financial position.

The Federal Act on the Calculation of the Participation Deduction for Systemically Important Banks was passed on December 14, 2018. At a meeting on March 8, 2019, the Federal Council decided that, providing no referendum is held on the issue, the Act will apply as of January 1.

The Federal Council said the legislation "corrects the calculation of the participation deduction so that the profit tax burden of the group parent company of a systemically important bank remains unchanged if it issues too-big-to-fail instruments."

The Federal Council has previously warned that, without these changes, the supervisory law requirements for TBTF instruments would lead to a higher tax burden, which would curb the accumulation of capital and ultimately be contrary to the objectives of the TBTF legislation.