tax proposal 17 - assets.kpmg · 2 tax proposal 17: elements 3 snapshot of the proposed cantonal...

Tax Proposal 17

28 March 2018

Dispatch of Federal Council –

Overview of elements, implementation and impact

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Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Document Classification: KPMG Public

Speakers

Peter

Uebelhart

Partner

Head of Tax

+41 58 249 42 24

[email protected]

Stefan

Kuhn

Partner

Head of Corporate Tax

+41 58 249 54 14

[email protected]

Olivier

Eichenberger

Director

Corporate Tax

+41 58 249 41 67

[email protected]



Agenda

1 Main reason of the reform: Tax privileges to be abolished

2 Tax Proposal 17: elements

3 Snapshot of the proposed cantonal implementation

4 International competitive tax rates today and tomorrow

5 Overall conclusion

6 Q&A

Conclusion

Tax privileges to be abolished

Main reason of the reform:



Current tax privileges and effective tax rates

1 2 3

Holding

company

regime:

7.83%

Dominant player in the

professional services

space confident in ability

to generate sustainable

long term growth

Strong and seamless

presence in our clients

over the long term

12 3 4Mixed /

Auxiliary

Company

regime:

8.3 – 12%

Principal

Company

practice:

5 – 9%

Finance

branch

practice:

1 – 2%

Tax Proposal 17: elements



Goals of the reform

Public tax

revenuesAttractiveness

International

acceptance



Timeline

1st chamber

29 May - 15 JuneConsultation

procedure

2018 2020

1 January 2020*:

Earliest date for

entry into force of

main part of the

reform (e.g.

abolishment of

status companies)

2017

12 February 2017:

Public vote

rejects CTR III

Timeline (future data according to current estimates)

2019

Cu

rre

nt

Sta

tus

21 March 2018:

Publication of

dispatch by Federal

Council

June 2017

Adoption of

parameters

2nd chamber

10-28 Sept.

Referendum

period (100 days)

1 January 2019*:

First measures

could come into

force (in particular

financial

equalization

measures)

*provided that no referendum is called



Timeline (potential public vote)

1st chamber

29 May - 15 June

Consultation

procedure

2018 20212017

12 February 2017:

Public vote

rejects CTR III

Timeline (future data according to current estimates)

2019

Cu

rre

nt

Sta

tus

21 March 2018:

Publication of

dispatch by Federal

Council

June 2017

Adoption of

parameters

2nd chamber

10-28 Sept.

Referendum

period (100 days)

Public vote?

2020

1 January 2021*:

Entry into force of main part of the reform

(e.g. abolishment of status companies)

1 January 2020*:

First measures could come

into force (in particular

financial equalization

measures)

*current assumption



Overview of measures

Abolishment of privileged tax regimes with transitional measures

Increase of canton’s share of direct federal tax and consideration of the cities and municipalities

Patent box

Additional R&D deductions

Overall limitation

Step-up upon relocation to Switzerland

Relief on capital taxes

Lump-sum tax credit for Swiss branches of foreign companies

Increase of dividend taxation for individuals for qualifying investments

Increase of child and education allowance

Adjustment of rules regarding transposition for Swiss individuals

Transitionalmeasures(change from privileged to ordinary tax status)



Change in tax status

General

information

Current law

step-up

(premature

change in tax

status)

— Ensure that hidden reserves are taxed under the tax regime in which such reserves have been created

— Only relevant for cantonal and communal taxes

— Current law step-up (old regulation) and transitional step-up (new regulation; special tax rate)

— Effective (tax neutral) disclosure (in tax balance sheet) of hidden reserves created under the tax

privilege

— Revaluated assets are to be depreciated by reducing taxable income

Transitional

step-up

(special tax

rate)

— The fiscal shock of the tax rate change shall be absorbed over a period of 5 years

— A similar tax rate as under the privilege shall be applied during this transitional period

— During the transitional period a special reduced tax rate is applied

— Proceeding is systematically justified

— After the transitional period: new ordinary tax rates are applied

— Such special tax rate varies between the cantons

Transitional measures



Transitional Step-up Implementation of transitional step-up is mandatory for cantons

For tax payers the transitional step-up is voluntary

Over a period of max. 5 years the profit based on the realization of hidden

reserves in place at the time of the change of status and to extent not taxable

under the privileged tax status (max. determined step-up potential) will be taxed

at a “special” reduced tax rate. The profit will be divided in Basket A (ordinary

cantonal tax rate) and Basket B (“special” reduced tax rate)

No DTA needs to be accounted for!

This measure may be introduced by the cantons even before the entry into force of

the TP 17 - immediately after a potential positive public vote or the day when it is

certain that no referendum is called



Transitional Step-up

“Basket B”

will be taxed at

“special” reduced

tax rate (e.g. 2%)

Annual pro

fit

0

“Basket A”

Will be taxed at

ordinary

cantonal/communal

tax rate (e.g. 9%)

Example:

Hidden reserves of Company

A amount to 500

(can be allocated over 5

years)

Annual profit year 2020: 250

100 will be taxed at ordinary

cantonal/communal tax rate

(Basket A)

And 150 could be allocated to

«special» tax rate (Basket B)

150

100

250



Reduction of the taxable

income

(Effect on cantonal income tax)

1,000

taxa

ble

pro

fit

depre

cia

tion

ste

p-u

p

0

Step-up amount 2500

./. Year 1 - 250

./. Year 2 - 250

(…) (…)

./. Year 10 - 250

Remaining amount 0

Current law Step-upA

nn

ua

l p

rofit

250

750

1,000

Patent box regime



Patent box regime – OverviewApplication of the patent box

Applicable at cantonal level only (mandatory for all cantons), up to 90% relief

Consideration of modified nexus approach based on R&D expenses incurred

Qualifying IP

Patents (Swiss and – if comparable – foreign patents)

IP similar to patents, i.e.:

- Supplementary protection certificates

- Topographies

- Protected varieties of plants

- Protected documents according to the Therapeutic Products Act

- Reports protected by the Ordinance on Plant Protection Products

- Comparable foreign rights



Patent box regime – Software Copyrighted software

Copyrighted software is not covered by the definition of qualifying IP – hence

shall not benefit from the patent box

Cases in which software can qualify for the patent box

If the software is patented abroad (e.g. US)

Software which is a part of an invention (so called “computerimplemented

invention”) which itself – as a whole – is patented



Patent box regime – first application Taxation of entry into the patent box (capitalization of expensed R&D costs

/ IP amortization of last 10 years) – can be delayed up to 5 years

- Relevant for ordinary taxed companies – amortization within the patent

box

- Companies currently benefitting from a tax privilege: only to the extent

the R&D expense has been deducted from Swiss taxable income



Patent box regime – 4 steps of calculation

Step 1:

Determination of

qualifying IP

income

Step 3:

Determination of

the scaling factor

(depending on

canton) and

calculation of

exempted

income

Step 2:

Determination of

nexus factor

Step 4:

Consideration of

overall limitation

rule (depending

on canton)



Patent box regime – Step 1Determination of qualifying income

Direct determination (e.g. external royalty/license income)

Indirect determination (due to embedded royalties in various products)

- Net method (based on Transfer Pricing study) not applicable

- Residual method applicable for Switzerland due to simpler

administrative handling

Residual profit computation from qualifying IP (based on total corporate profit) - simplified example

Total profit

./. Profit from financial activity

./. Other profit not based on IP / products with IP

= Profit from patented products

./. Embeded trademark fees

./. 6% of product costs (for routine functions)

= residual qualifying IP income

ordinary taxation

privileged taxation

ordinary taxation



30

Patent box regime – Step 2 (mod. Nexus app.)

Patent-

box

1.

Patent Income

2.

3.

4.

5.

GC

T

GC

T

Foreign Group Company

10

30

80

10 + 60 + 20 + + 36

+ 80

«Uplift» of 30% of the

qualifying R&D expenses

156

200

R&D

expenses

Swiss Group Company

Swiss Third Party

Foreign Third Party

78%

Qualifying R&D expenditure

Overall expenditure

20

60

10 + 60 + 20 +

To be confirmed by

ordinance of the

government

GC

T

= Group Company

= Third party

30

Only 78% of qualifying residual IP income (box income) is to be tax privileged

(i.e. only 78% may be tax exempted by up to 90%).

Additional R&D deduction



Additional R&D Deduction – overview

Own domestic R&D

An additional deduction of 50%

of R&D expenses (domestic

personnel expenses plus

markup of 35%) may be granted

in each tax year.

Domestic contract R&D

An additional deduction of 50%

of 80% of invoiced R&D

expenses may be granted in

each tax year.

Broad Definition of R&D:

Basic research

Applied research

Science-based Innovation



Additional R&D Deduction – calculation example

* Assumption: there are at least other R&D

expenses in the amount of 35 (in addition to

personnel expenses); hence overall R&D

expenses in the example amount to (at

least) 235.

R&D

personnel

expenses

35%35*

100 (domestic)

Contract R&D

80%

20% 20

100

Basis

50%

Additional

R&D deduction

215

107.5

135 80

Own R&D Contract R&D

Overall limitationof measures



Overall limitation of measures

R&

D s

up

er

de

du

cti

on

Cu

rren

tla

wste

p-u

p d

ep

r.

Pa

ten

t b

ox

Minimum profit of 20% of taxable profits

before set off losses carried forwardMinimum income of 30% of taxable income before loss carry forwards

(approach per entity)

Maximum

deduction of

70% of taxable

income before

loss carry

forwards and

excluding

participation

income

Step-up uponRelocation toSwitzerland



Step-up – Relocation to SwitzerlandUpon relocation to Switzerland, a foreign company can disclose hidden reserves including

goodwill in a tax free manner. Hence, in the first few (up to 10) years the company may benefit

from additional depreciations on such disclosed hidden reserves.

Abroad Switzerland Abroad

Revaluation of assets to

FMV in the tax balance

sheet (even if not

accounted for in the

statutory balance sheet)

Exit taxation

(as already today)

Taxed hidden reserves in the

tax balance sheet

Depreciation over maximum

10 years

Relief on capital taxes



Relief on capital taxes With the abolishment of the privileged tax regimes, privileged capital tax rates will

also be abolished

Therefore, a relief on capital taxes will be introduced

The cantons are entitled to grant a reduction for equity related to participations,

patents and similar rights (intercompany loan assets are not included anymore).

Assets Liabilities

100 cash 200 debt

100 receivables

200 patents 300 equity

100 participations

500 total 500 total

Assets for deduction Quota (of total assets)

200 patents 40%

100 participations 20%

Total deduction from

capital tax amount

60%

Alternative procedure by the cantons:

General (capital) tax rate reduction

Credit of income tax towards capital tax

Not in the proposal:

Notional Interest deduction (NID)



Notional Interest Deduction – Overview NID is not included in the TP 17 (as it is understood as a main reason for the

failure of the CTR III and hence the non-inclusion shall facilitate acceptance

of the TP 17)

The missing NID will be a disadvantage in particular for the canton of Zurich

Further discussions are expected during the treatment in the parliament

The NID may be a part of the Withholding Tax Reform (still to come)

Snapshot of theproposed cantonalimplementation



Cantonal measures – Overview

CantonPatent Box regime

(reduction)

Additional R&D

Deduction

Overall Limitation

of measures

BS 90% No 40%

GE 10% 50% 9%

LU 10% No 20% / 70%*

SH 90% No 70%

TI 90% 50% 30%

ZG 90% 50% 70%

ZH 90% 50% 70%

*20% overall limitation excluding Step-up / 70% including Step-up (current law)

International competitive tax ratestoday and tomorrow



Headline tax rates today/tomorrow

Zug

2018

* Overall ETR – including federal tax

** Only federal tax

USGermany

29

.79

%

UK

19

%

17

%

2018

2020

2018

NL

33

.33

%

25

%

2018

14

.5%

*

33

.99

%

Belgium

20182018

France

21

%**

25

%

2021

2018

12

.0%

*

2020

18

.2%

*

21

.2%

*

Zurich

2018

2020

12

.3%

*

12

.3%

*

Lucerne

2018 2020

12

.5%

2018

Ireland



Planned cantonal income tax rates2018

* Gradually reduction within up to 5 years

Remark: maximum effective pre-tax rate for federal government / canton / municipality for the respective principal town in percent. Sources: TaxWare, KPMG Schweiz.

TP17

*

*

*

Overall conclusion



Conclusion on TP 17

In particular from a holistic point of view: new measures as an attractive solution

in combination with

low ordinary tax rates

consideration of substance approach (i.e. other income)

IP driven reform as a clear sign of commitment to Switzerland as a location for

research and industry

Effective tax rate as low as 12% without tax planning!



Know where you are headed: impact analysis

What would be the

effect of the

abolishment of

privileged tax

regimes?

What would the

introduction of a

patent box imply?

What would the

impact of additional

R&D reductions be?

How can I benefit

from transitional

measures?

TP17 could already be a reality as of 2020. Do you know how this would affect your company?

Provide your company with the data necessary for predictive business decisions.



Your regional contacts

Central-Switzerland Region

Markus Vogel

Landis + Gyr-Strasse 1

CH-6301 Zug

T: +41 58 249 49 64

Zurich and Ticino Region

Stefan Kuhn

Badenerstrasse 172

CH-8036 Zürich

T: +41 58 249 54 14

Eastern-Switzerland Region

Peter Michael

Bogenstrasse 7

CH-9001 St. Gallen

T: +41 58 249 25 54

Basel Region

Reiner Denner

Viaduktstrasse 42

CH-4002 Basel

T: +41 58 249 42 40

Bern-Mittelland Region

Hans Jürg Steiner

Hofgut

CH-3073 Gümligen-Bern

T: +41 58 249 20 57

Western-Switzerland Region

Janick Pochon

Avenue du Théâtre 1

CH-1002 Lausanne

T: +41 58 249 46 45

Thank you!



Content of the new proposalCTR III TP 17

— Abolishment of cantonal privileged tax regimes

with transitional measures (special tax rate)

— Abolishment of cantonal privileged tax regimes

with transitional measures (special tax rate)

— Increase of the canton‘s share of direct federal tax

revenues from 17% to 21.2%

— Increase of the canton‘s share of direct federal tax

revenues from 17% to 21.2%

— Lump sum tax credit for Swiss branches of foreign companies — Lump sum tax credit for Swiss branches of foreign companies

— Step-up upon relocation to Switzerland — Step-up upon relocation to Switzerland

— Patent box (output incentive) – potential inclusion of software — Patent box (output incentive) up to 90% – exclusion of software

— R&D super deduction (max. 50%) — Additional R&D deduction (max. 50% on defined basis)

— Overall limitation at 80% — Overall limitation at 70%

— Relief on capital taxes for equity relating to investments,

patents and similar rights and intercompany loan assets

— Relief on capital taxes for equity relating to investments and

patents and similar rights (without intercompany loan assets)

— Increase of dividend taxation for individuals

– direct federal tax: 70%

– cantonal tax: at least 70%

— Consideration of the cities and municipalities regarding financial

support by the confederation (cantons stay autonomous)

— Increase of child and education allowance by CHF 30

— Strengthening of the rules regarding the transposition for Swiss

resident individuals

— Notional Interest Deduction (NID) — No “NID”

Legende

Adopted parameters Adjusted parameters Not adopted / new parameters

Source: Swiss Federal Tax Administration



Indicative impact of TP 17 per company typeAbolishment

tax status

Reduction

income taxPatent box

R&D super

deduction

Relief on

capital taxConclusion

SME

Holding company (pure)

Holding company

(incl. other income)

Industrial company

(domestic production)

R&D company

Financial institution

International trader

Group financing

Trademark

administration

tax reducing, compensation

tax increasing

Legend

1) potentially regarding capital tax

2) If patent available

3) without / with tax status

1)

2)

3)

neutral

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© 2018 KPMG AG is a subsidiary of KPMG Holding AG, which is a member of the KPMG network of

independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss

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