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Number of partner states 80 with which Switzerland JURISDICTIONS: has agreed to theAutomatic Exchange of Information SWITZERLAND

Almost out of the woods

Switzerland has undergone and is still undergoing rapid and profound changes in order to safeguard and improve the country’s competitive tax and business environment. Dimitri M. Rotter and Catherine Morf report Shutterstock.com

This article surveys the key develop- Exchange of Information (AEOI). On dard (CRS). As of June 2017, 101 ments affecting the tax laws relevant 1 January 2017, the Administrative jurisdictions have committed to for wealth management structures Assistance Convention, the Multilat- implement the CRS in their domestic with an exposure to Switzerland. eral Competent Authority Agreement, law (so-called “participating jurisdic- The highlighted changes relate to the Federal Act on the AEOI, the Ordi- tions”) by signing the Multilateral the introduction of the automatic nance on the International Automatic Competent Authority Agreement on exchange of information for 2017 Exchange of Information in Tax Mat- the Automatic Exchange of Financial with a first exchange in autumn 2018, ters as well as the final version of the Account Information (MCAA). Aside the introduction of the spontaneous AEOI Guideline entered into force. from Switzerland, almost 100 states, exchanges of rulings in tax mat- The Interest Savings Agreement including all major financial centres, ters with actual exchange as from 1 between Switzerland and the EU have declared their intention to adopt January 2018 and the initiation of is replaced with the new global the standard. the consultation of the so called tax AEOI standard. The withholding tax Unlike in most jurisdictions, in proposal 17, the tax reform package exemption on dividends, interest Switzerland the AEOI is not already replacing the corporate tax reform and royalty payments for group activated with the signing of the III that was rejected in a public ref- companies located in the EU, which MCAA but it is activated separately erendum by the Swiss voters in Feb- was included in the Interest Savings with each individual participating ruary 2017. Agreement, is however still appli- jurisdiction on a bilateral basis. Tax Proposal 17 aims to implement Dimitri M. Rotter cable. To date, Switzerland has agreed to (top) is a partner appropriate measures to replace the with Froriep Legal The purpose of the AEOI is to the AEOI with 80 partner states privileged tax regimes that have to AG, heading its tax reduce the possibility of tax evasion (including the 28 EU member states). be abolished. The introduction of practice and is a by holding assets abroad – either Thereby, with the EU and nine other the spontaneous exchange of tax certified Swiss tax directly in the name of an individual partner states (Australia, Canada, expert and attorney rulings together with the abolition at law. or indirectly in the name of a com- Guernsey, Isle of Man, Iceland, Japan, of harmful tax regimes, Switzerland pany, partnership, trust or founda- Jersey, Norway and South Korea) implements the BEPS minimum Catherine Morf is a tion. Switzerland starts to collect informa- Counsel with Froriep standard on Action 5. Legal AG, a certified To achieve that goal, the Organisa- tion in 2017 with a first exchange of Swiss tax expert and tion for Economic Co-operation and information in September 2018 (wave AUTOMATIC EXCHANGE attorney at law. Development (OECD) has developed 1), with all the other jurisdictions one OF INFORMATION a single global AEOI standard for year later (wave 2) (for a complete Switzerland implemented the financial account information – the list of countries please see the fol- domestic legal base for the Automatic so called Common Reporting Stan- lowing link: www.sif.admin.ch/sif/ www.offshoreinvestment.com Offshore Investment November 2017 30 JURISDICTIONS: “Until the new corporate tax SWITZERLAND reform legislation enters into force, the current tax privileges should generally remain available”

en/home/themen/internationale- other persons qualifying as Financial 4. Permanent establishment rul- steuerpolitik/automatischer-infor- Institutions (e.g. discretionary asset ings concerning the existence or mationsaustausch.html). managers or a trustee service pro- absence of and the attribution of CRS requires Swiss Financial Insti- vider company). Further, the persons profits to a permanent establish- tutions (i.e. banks, brokerage firms, to be reported should ensure that ment in the country issuing the specified insurance companies and they are fully tax compliant in their ruling; investment entities) to report infor- residence jurisdictions. If necessary, 5. Related party conduit rulings. mation on accounts held by persons appropriate actions should be taken The scope of rulings to be (individuals or companies domiciled immediately. exchanged as defined in the appli- in an AEOI partner state) or by pas- cable ordinance on administrative sive non-financial institution (such as EXCHANGE OF assistance in tax matters is quite domiciliary companies, partnerships, TAX RULINGS generic and thus potentially broader trusts and foundations to which a Switzerland implemented the than the above list according to BEPS look-through approach applies) to domestic legal base for the sponta- action 5. Accordingly, it cannot be the Swiss Federal Tax Administration. neous exchange of rulings in tax mat- excluded that further types of rul- For passive ters and of other ings are being included during the non-financial relevant informa- implementation phase. For example institutions, the THE SCOPE OF tion based on the rulings about tax treatment of financial institu- Multilateral Con- individuals are outside the scope tion is required to RULINGS TO BE vention on Mutual of action 5, but are not explicitly not only report the EXCHANGED Administrative excluded by the Swiss ordinance.. information about AS DEFINED IN Assistance in Tax What is being exchanged is an the company, Matters (MAC). It OECD-designed template with partnership, trust THE APPLICABLE entered into force relevant information but not the or foundation but ORDINANCE ON on 1 January 2017. actual tax ruling. The model form also information The spontaneous contains, among others the ruling about its Control- ADMINISTRATIVE exchange of tax reference number, the identification ling Person(s). Pure ASSISTANCE IN TAX rulings takes place of the taxpayer, the date of issuance, wealth manage- as from 1 January the accounting period / tax years ment structures MATTERS IS QUITE 2018. covered in the ruling, an indication are most likely to GENERIC The wording in of the type of ruling and additional either qualify as the MAC is very information and short description of passive non-finan- broad and leaves the ruling’s content. cial entities or as financial institutions open a wide space for interpreta- Clearly in scope are all tax rulings (professionally managed investment tion. The spontaneous exchange of issued after 1 January 2018 but also entity). information is also the instrument to all tax rulings issued since 2010 and Controlling Persons must hence be exchange tax rulings as required by which are still in force in 2018. Not in identified and reported by the Finan- the OECD’s so-called BEPS Action 5, scope are therefore tax rulings issued cial Institutions. addressing certain harmful tax prac- since 2010 but which are terminated Provided that the residence country tices of companies. BEPS Action 5 before 1 January 2018 either based is a partner state of Switzerland, the foresees the following five categories on the wording of the ruling or Federal Tax Administration then of tax rulings to be in scope of the based on a specific request by the tax transmits the information to the spontaneous information exchange: payer. account holders’ and Controlling 1. Taxpayer-specific rulings Clearly in the scope of exchange Persons’ countries of residence on an regarding privileged tax regimes are all tax rulings for the privileged annual basis. (for Switzerland these are holding, tax regimes of holding, mixed or It is important that all persons domicile and mixed and prin- domiciliary companies as well as involved in wealth management cipal company regimes, finance finance branches and principal structures are aware of who has to branches); companies. Since holding, mixed be reported and of who has which 2. Cross-border unilateral advance and domiciliary regimes are clearly reporting obligations. It should also pricing agreements (“APAs”) cov- defined in the law, in standard situ- be evaluated whether it would be ering transfer pricing; ations it is possible to withdraw the beneficial if a wealth management 3. Downward adjustment rul- ruling by the end of 2017 and never- structure itself were to report as a ings concerning a downward theless be taxed according to these financial institution (as a profession- adjustment to the taxpayer’s tax- special regimes (as long as they are ally managed investment entity) able profits that is not directly in force, see below Tax Proposal 17). rather than to leave the reporting to reflected in the taxpayer’s financial Finance branches and principal the account-keeping banks and/or to accounts; structures though, are mostly more

Offshore Investment November 2017 www.offshoreinvestment.com 31

Proportion of Swiss voters who 59.1% rejected the draft legislation of JURISDICTIONS: Corporate Tax Reform III in a February 2017 referendum SWITZERLAND

complex and it will be difficult to ally, a large number of cantons offer in proportion to the equity repre- handle them without specific ruling. the possibility for a step-up of hidden sented by participations and patents reserves and goodwill upon the vol- and similar rights qualifying for the TAX PROPOSAL 17 untary transition from a privileged patent box, a limitation of the quali- The EU and the OECD have put pres- tax regime to ordinary taxation fying dividend relief for individuals sure on Switzerland to give up privi- already under their current tax laws. to 30% and an increase of the min- leged tax regimes for holding, mixed 2. Significant decrease of cantonal cor- imal family allowances by CHF30m. and domiciliary companies as well porate income taxes. Furthermore, the share of the can- as for finance branches and principal Although not directly part of the tons of the direct federal income tax companies. TP17 draft legislation, many cantons deriving from their territory shall be It was the aim of the so called draft have announced to reduce their can- increased from 17% to 20.5%. legislative proposal of Corporate Tax tonal/communal corporate tax rates Not part anymore of new pro- Reform III (CTRIII) to implement in order to maintain their interna- posal TP17 is the notational interest those changes and to replace the cur- tional fiscal attractiveness. In various deduction. rent tax privileges with privileges that cantons that effective combined After the end of the consultation are in line with OECD practice. On 12 federal/cantonal/communal tax rate procedure on 6 of December 2017, February 2017 in a public referendum might become as low as 12%. the Federal Department of Finance Swiss voters clearly rejected the draft 3. Introduction of a new patent box and submits its proposal to the Swiss par- legislation of CTRIII by 59.1%. of a super-deduction for R&D. liament in spring 2018. According to The Federal Council and cantons Profits from patents and similar the Department, in the best case the have launched a new effort to reform rights shall be segregated from other new law will enter into force in 2020. the corporate tax system under the profits and shall be subject to a lower It is uncontentious that the tax privi- title Tax Proposal 17 (TP17). On 9 cantonal/communal tax rate. The leges have to be abolished in order to June 2017 the Swiss Government cantons can generally determine not face repressions from the OECD presented the outline of the new pro- the amount of the patent box relief or the EU or unilaterally by single posal and on 6 September 2017 it dis- however the ceiling of the relief is countries. patched the draft legislation TP17 and at 90%. The implementation of the Until the new corporate tax reform started the consultation procedure. Swiss patent box will be compliant legislation enters into force, the cur- It was already the aim of CTRIII with the patent box as defined by rent tax privileges should generally and it is the aim of TP17 to abolish OECD (nexus approach). Further, the remain available. We recommend all the privileged tax regimes while cantons have the option to introduce companies affected to continue their maintaining the fiscal attractiveness a deduction increased by 50% on the ongoing adoption process. Inbound of Switzerland as an important busi- effective costs for research and devel- restructurings and tax-neutral step- ness location and at the same opment. up transactions remain a high pri- time to ensure sufficient tax 4. Step up for foreign ority for 2017 and 2018. revenues to finance public WITH ITS companies relocating to functions. WIDESPREAD Switzerland. FURTHER The new proposal shows Foreign companies relo- DEVELOPMENTS the following major key ele- AND FLAWLESS cating to Switzerland shall Of less importance for the wealth ments: INTRODUCTION OF be allowed to disclose their management sector is the introduc- 1. Abolition of the privileged hidden reserves including tion of the domestic legal base for the tax regimes for holding, THE AUTOMATIC goodwill accumulated abroad country by country reporting in con- mixed and domiciliary com- EXCHANGE OF (step-up) and to depreciate nection with the implementation of panies, for finance branches INFORMATION them tax-effectively over the the BEPS minimum standard, a par- and principal companies. first few years. tial revision of the Swiss VAT Act and In order to mitigate the SWITZERLAND HAS This measure may be espe- changes to the notification procedure transition for affected compa- ALMOST BECOME cially interesting for compa- applicable on intra-group dividend nies, TP17 foresees a special nies that are domiciled in low payments. taxation for hidden reserves A PIONEER IN tax jurisdictions and consider With its widespread and flaw- and goodwill accumulated THE FIELD OF relocating to Switzerland as less introduction of the automatic under these privileged tax an on-shore country. exchange of information Switzerland regimes but without cre- INTERNATIONAL 5. Further measures. has almost become a pioneer in the ating a deferred tax asset TRANSPARENCY A limitation of the overall field of international transparency for multinationals subject tax relief of certain of the and with the initiated replacement to a fair view accounting above mentioned measures of the so-called harmful tax regimes standard such as IFRS or US GAAP, to 70% was introduced in June 2017. with OECD-compliant measures, which would have been detrimental Further measures include option Switzerland will soon be out of the for them (TP17 step-up). Addition- to reduce the annual tax on equity woods. ■ www.offshoreinvestment.com Offshore Investment November 2017