Introduction of a license box regime

The first element of the compensation measures is the introduction of the license box regime at can- tonal level. The regime shall not only apply to cor- porations but also to individuals and partnerships. A company benefiting from this regime can tax certain income from patents and other IP rights separately at reduced rates. The cantons have certain flexibility and can grant an exemption of up to 90%. Qualifying IP rights include patents and certain similar rights. The Corporate Tax Reform Act III follows certain ideas of the OECD BEPS project, in particular with regard to the modified nexus approach. This means that the privilege applies only to the extent of the Swiss R&D ex- penses in relation to the worldwide R&D expenses.

The privileged income needs to be determined based on the residual method (top-down ap- proach). This means that financing income and income with no relationship to patents and income from products with such patents are separated. Then, the privileged income is determined by tak- ing 100% of royalty income plus the remaining profit after deduction of the profit from routine func- tions and brand income.

R&D deductions

The cantons will have the right to introduce addi- tional tax deductions for R&D expenses of up to 150%. These additional deductions shall only be granted for R&D activities in Switzerland for its own research and development or for contract R&D. It is up to the cantons to define the term R&D and the details of the deductions.

Introduction of a notional interest deduction

The Corporate Tax Reform Act III introduces at Federal level a notional interest deduction on a certain portion of the equity. The portion of the equity benefiting from the notional interest deduc- tion is defined as the equity exceeding the mini- mum equity as determined for each category of assets under the Swiss tax rules. The applicable interest rate is based on long-term interest rates of Swiss Confederation bonds and can in certain cases be increased to arm's length interest rates. In particular, group finance companies will benefit because they can determine the notional interest deduction based on a margin from their interest income.

The cantons shall also have the possibility to intro- duce this concept. However, they will be required to increase the taxable portion of dividend income in the hands of individuals to at least 60% if they intend to do so. Currently, several cantons provide for lower thresholds, for example Zurich.

Step-up

The Corporate Tax Reform Act III provides for a legal basis for introducing a step-up for companies relocating to Switzerland and for companies that lose their cantonal tax privilege and become sub- ject to standard taxation. The step-up is granted on the built-in gain up to the fair market value on as- sets including goodwill but excluding equity in- vestments. The term of the depreciation depends on the type of asset. The maximum period is 10 years.

The new rule applies not only to companies relo- cating to Switzerland but also to companies mov- ing assets and functions from abroad to Switzer- land and for companies losing a tax holiday. A special rule applies for the cantonal and municipal corporate income tax to companies losing their holding, domiciliary and mixed privileges. They can determine the built-in gain at the time when they lose the tax privilege and can apply a separate lower corporate income tax rate if they realize a gain on such assets within a period of five years.