How worldwide tax reforms have reworked the Swiss tax panorama

0
103
How international tax reforms have transformed the Swiss tax landscape

In the past years, the development of the
international tax landscape has significantly accelerated its pace and
undergone important changes influenced by specific national
developments, such as the US tax reform, or multilateral measures aiming
at coordinating certain projects shared among countries.

A main process which is in the focus of corporate taxpayers is the
BEPS Action Plan of the OECD, which started to be implemented in 2019
and has not yet been completed (e.g. pillar two and global minimum
taxation). A part of the implementation efforts of the BEPS action plan
has been coordinated by the members of the EU through the adaption of
their Anti-Tax Avoidance Directive (ATAD).

The purpose of this article is to analyse the impact of some of the
measures decided by the OECD for the BEPS project, and by the EU for
their ATAD, on corporate taxation in Switzerland. The country’s tax
authorities recently put into force a milestone corporate tax reform
along with a range of other tax-related reforms, some of which are still
pending. Although not all Swiss tax reforms have exclusively originated
from BEPS or ATAD, the influence of BEPS and ATAD has been significant.

BEPS and ATAD

OECD’s BEPS Action Plan

The BEPS Action Plan decided by the OECD consists of 15 action
points, where three are related to transfer pricing (TP). The focus of
this article is on the action points underlined below:

  • Action 1: Tax challenges arising from digitalisation;
  • Action 2: Neutralising the effects of hybrid mismatch arrangements;
  • Action 3: Controlled foreign company;
  • Action 4: Limitation on interest deductions;
  • Action 5: Harmful tax practices (minimum standard);
  • Action 6: Prevention of tax treaty abuse (minimum standard);
  • Action 7: Permanent establishment status;
  • Action 8-10: Transfer pricing;
  • Action 11: BEPS data analysis;
  • Action 12: Mandatory disclosure rules;
  • Action 13: Country-by-country reporting (minimum standard);
  • Action 14: Mutual agreement procedure (minimum standard); and
  • Action 15: Multilateral instrument

EU’s Anti-Tax Avoidance Directive

The purpose of the ATAD is to achieve a harmonised and coordinated
approach of EU member states for the implementation of some of the
recommendations under the OECD BEPS project, which can tackle the profit
shifting to low- or no-tax jurisdictions more effectively in the common
market of the EU. The regulations are not applicable to EEA member
states.

ATAD provides for a minimum level of harmonisation rules for
anti-tax avoidance measures in five different areas, with two of them
not being part of the BEPS Action Plan. Most of the new provisions
entered into force in 2019. ATAD grants EU member states certain
flexibility in implementing the directive into domestic law.

Impact on Swiss tax landscape

Based on the introductions above, the focus of the analysis is on the following aspects:

  • BEPS: Controlled foreign company (CFC) rules, harmful tax practices, prevention of tax treaty abuse
  • ATAD: CFC rules

Action 3/ATAD: Controlled foreign company rules

Characteristics of CFC legislation

While Switzerland has not introduced any CFC legislation, and so
far has no plans to do so, Swiss resident subsidiaries of foreign parent
companies may indirectly be influenced by the CFC legislation of the
jurisdictions of the parent companies, due to the attractive tax rates
and corporate tax legislation of Switzerland. CFC legislation has
already existed in several countries for many years (e.g. Germany,
France, US).

The 2015 BEPS Action 3 report worked out recommended approaches to
the development of CFC rules, to ensure the taxation of certain
categories of income of multinational enterprises (MNEs) in the
jurisdiction of the parent company, and to disincentivise offshore or
similar privileged structures with no taxation or allowing for a
long-term deferral of taxation. Hence, CFC rules have the purpose of
reducing the incentive to shift profits to low- or no-tax jurisdictions.

Jurisdictions apply a variety of different criteria to determine
the term as a ‘controlled foreign company’, which would trigger the
applicability of CFC taxation rules:

  • Voting rights or shareholder value owned by resident taxpayers;
  • Operations in a no- or low-tax jurisdiction;
  • Quality of income earned by CFC (e.g. only passive income like
    interest, rental property income, dividends, royalties or capital
    gains), and;
  • The application of substantial activity tests.

Switzerland has regularly been considered by various countries as a
low-tax jurisdiction, to which profitable business had been shifted. As
a result, special favourable tax regimes have been abolished as of
January 1 2020.

Simultaneously, most Swiss cantons decided to reduce corporate
income taxes for all corporate taxpayers to set an incentive for
existing and new enterprises to conduct business out of Switzerland.

The new effective corporate income tax rates are in the range of
roughly 12% to 20% depending on the canton of tax residence, with tax
rates below 15% being generally more exposed to CFC taxation than higher
rates. Apart from the CFC legislations, it should also be noted that
there is a plan of the OECD to introduce a minimum taxation for
corporations through the global anti-base erosion proposal (GloBE) under
pillar two.

ATAD is supposed to lead to a common and harmonised application of
BEPS Action 3 by EU member states. The following special aspects of ATAD
(Article 7 and 8) can be highlighted:

  • CFC means direct or indirect shareholding of more than 50%;
  • Low taxation of CFC: Tax rate is lower than 50% of parent company’s tax rate;
  • CFC does not carry on a substantive economic activity; and
  • Obligation to tax certain, predominantly passive, low-taxed
    revenues of a foreign CFC, in particular (i) interest, (ii) license
    fees, (iii) dividends, capital gains on shares, (iv) income from
    financial leasing, (v) income from banking and insurance activities (vi)
    income of invoicing companies.

It has to be noted that EU member countries can choose to not
implement the substantive economic activity test in their domestic law
for CFCs located in non-EU/EEA countries.

Possible protection measures for Swiss tax legislation

For an MNE, there are different ways to mitigate the effects of CFC
legislation of the jurisdiction of the parent company on Swiss based
subsidiaries. The calculation of corporate tax burden of the Swiss based
subsidiary includes direct federal tax as well as cantonal and communal
direct taxes.

Whereas the Swiss Direct Federal Tax Act does not contain any
specific provisions which could help MNEs to reduce their CFC risks,
MNEs should carefully look at the subsidiary’s concrete tax situation
and aim at reducing CFC risks based on cantonal tax laws.

With respect to cantonal and communal direct taxation in
Switzerland, there are three different types of cantons for CFC
purposes:

  • High-tax cantons (‘high’ tax rate, including direct federal tax);
  • Low-tax cantons with fix tax rates only; and
  • Low-tax cantons with specific rules for CFCs and flexible tax rates.

The definition of a high-tax canton depends on the taxation rules
of the country of the parent company, i.e. the Swiss income tax rate may
be high enough to be out of scope, however, the CFC taxation might be
triggered in cases where the tax base is calculated less favourably in
the country of the parent company leading to a lower effective tax rate
for CFC purposes. Furthermore, it must be assessed whether net equity
taxes are also relevant for the tax comparison. For highly capitalised
companies, this may have a significant impact.

There are some low-tax cantons which anticipated the CFC problem by
providing for a correction mechanism which applies higher tax rates
automatically or on application, if the country of residence of the
parent company treats all or part of Swiss income as CFC income.

Examples:

  • Lucerne: Increase of tax rate to required minimum tax rate in a CFC case;
  • Zug: The tax rate can be increased in special cases in connection with international relations; and
  • Thurgau: The cantonal tax authorities can apply a higher tax rate
    in cases where an entity of an international group is at risk of being
    subjected to CFC legislation abroad.

Cantons and their tax authorities that take foreign CFC rules into
account for determining the applicable tax rate are in quite a
challenging situation. Practice will show to what extent such rules
effectively prevent CFC taxation abroad and how they can be applied in a
legally consistent and practicable way.

Action 5: Harmful tax practices

The OECD released a report of the 2020 reviews by the OECD Forum on
Harmful Tax Practices regarding preferential tax regimes. Switzerland
was found to be in line with the BEPS 5 minimum standard, due to its
abolition of the special tax regimes as of January 1 2020.

At the same time, the Swiss tax legislation allows cantons to
introduce a patent box, as well as research and development (R&D)
super-deductions, all in line with the minimum standard defined under
BEPS Action Plan 5 (including the nexus approach). In addition, cantons
applying a minimum corporate income tax rate (cantonal or communal of at
least 13.5%) may introduce a notional deduction on excess equity
defined by law, thus favouring highly capitalised companies. Only the
canton of Zurich has introduced such a notional interest deduction on
equity as a result of its high tax rates. The new instruments are in
line with the substantial activities standard test.

An important side effect of the minimum standard regarding
preferential tax regimes is the introduction of the spontaneous exchange
of information on tax rulings, including the Exchange on Tax Rulings
XML Schema and User Guide. The exchange of tax rulings for certain
cross-border tax matters was introduced in Switzerland in 2018. An
adverse, non-tax impact has been seen by MNEs in the increasing risk of
disclosure of sensitive information to competitors.

Action 6: Prevention of tax treaty abuse

Bilateral double taxation agreements have the purpose to prevent
international double taxation and play a very important role in
connection with cross-border business activities. The respective network
of double taxation agreements has also led to treaty abuse and
so-called ‘treaty-shopping’ arrangements. Treaty shopping typically
means the intention of a person to indirectly access the benefits of a
tax treaty between two jurisdictions without being a resident of one of
those jurisdictions.

The 2017 OECD Model Tax Convention has the following preamble (The Express Statement):

Intending to conclude a Convention for the elimination of double
taxation with respect to taxes on income and on capital without creating
opportunities for non-taxation or reduced taxation through tax evasion
or avoidance (including through treaty-shopping arrangements aimed at
obtaining reliefs provided in this Convention for the indirect benefit
of residents of third States).

According to Action 6 minimum standard, the principal purpose test
(PPT) shall be introduced to double taxation agreements, either alone or
along with a detailed version of the limitation on benefits clause
(LOB). A third version would be a detailed LOB rule along with domestic
conduit arrangements not dealt with in tax treaties.

Switzerland opted for the minimum standard of Action 6 when signing
the multilateral instrument (MLI) in 2019. It has already amended
several double taxation agreements implementing the PPT accordingly. In
cases where a double tax treaty (DTT) containing a PPT provision is
applicable, the PPT supersedes the applicability of the Swiss domestic
Anti-Treaty Abuse Act (Missbrauchsbeschluss). It appears that the
Anti-Treaty Abuse Act is subject to increasingly limited applicability
and is therefore likely to be abolished soon.

The question arises as to what extent the implementation of the PPT
in double taxation agreements has a material impact on international
structures involving Swiss entities. As of today, it is still premature
to draw any final conclusions, though it can be noted that the PPT is
largely seen as being in line with the long-standing practice of
Switzerland in connection with treaty abuse.

Summary

BEPS and ATAD had, and still have, a substantial impact on Swiss taxation, in particular in concern of:

  • Swiss corporate tax and the Social Security Financing Act (STAF):
    The abolition of special cantonal tax regimes, along with other special
    tax regimes (finance branch, principal companies);
  • Optional introduction of patent box, R&D super-deduction,
    notional interest deduction at cantonal level, and reduction of
    corporate income tax rates for all legal entities;
  • Corporate income tax rate adjustment (increase) provisions in
    some cantons to prevent measures of existing and new CFC legislations;
  • Spontaneous exchange of information: The disclosure of tax rulings dealing with certain cross-border arrangements; and
  • Tax avoidance provisions introduced in bilateral DTTs replacing
    the Swiss domestic Anti-Treaty Abuse Act with a principal purpose test.

Click here to read the 2021 Switzerland Special Focus guide

Daniel U Lehmann

Senior counsel
Bär & Karrer
T: +41 58 261 54 30
E: daniel.lehmann@baerkarrer.ch

Daniel U Lehmann is a senior counsel at Bär & Karrer. He joined the firm in 1999, before becoming a partner in 2001.

Daniel has broad experience in corporate taxation, in particular in
mergers and acquisitions (M&A), corporate reorganisations and
restructurings, and corporate finance. He is also highly experienced in
collective investment schemes, international tax planning, tax
litigation, and real estate transactions. He often advises entrepreneurs
and private clients on complex national and international tax planning.

Daniel holds a doctor of law degree from the University of St.
Gallen, and is a regular speaker at national and international
conferences.

Anke Stumm

Associate
Bär & Karrer
T: +41 58 261 53 19
E: anke.stumm@baerkarrer.ch

Anke Stumm is an associate at Bär & Karrer. She has previously
worked in the tax teams of professional services firms and investment
banks.

Anke focuses on all aspects of national and international corporate
tax law and tax planning for Swiss and foreign private clients. She
advises clients on tax matters relating to inter-cantonal and
international set-ups as well as in the area of M&A transactions and
restructurings. She has broad experience regarding the taxation of
trusts, foundations as well as funds structures. Her area of expertise
includes Swiss tax compliance.

Anke holds a bachelor’s and a master’s degree in law and economics from the University of St. Gallen.

The material on this site is for financial institutions, professional investors and their professional advisers.
It is for information only. Please read our Terms and Conditions and Privacy Policy before using the site. All
material subject to strictly enforced copyright laws.

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQ.