Principal Companies and Swiss Finance Branches

Tax Reform, Corporate Tax, Rulings, Tax Planning

Press release of FTA as of 15. November 2018

In the context of the bill on tax reform and AHV financing (TRAF), the Federal Tax Administration (FTA) will no longer apply the federal practices concerning principal companies and Swiss finance branches to new companies from 2019.

TRAF introduces legislative measures in order to bring Swiss corporate tax law in line with international requirements. As announced in the Federal Council dispatch on tax proposal 17 (now: TRAF), the federal practices on tax allocation for principal companies and Swiss finance branches will also be abolished in parallel to the abolition of the rules concerning cantonal status companies.   Unlike the rules concerning cantonal status companies, the abolition of federal practices does not require any legislative amendment. As a first step, the FTA will therefore ensure that federal practices are no longer applied to new companies from 2019. With the entry into force of TRAF at the beginning of 2020, the federal practices for existing principal companies and Swiss finance branches will also be abolished.

Principal Companies

Companies operating internationally often group their structures into larger units and centralise functions, responsibilities and risks within the group in so-called principal companies. If this principal company is located in Switzerland, some of the net profit is exempt from taxation in Switzerland (international tax allocation).

Swiss Finance Branches

Swiss finance branches are Swiss financial permanent establishments of foreign companies and as such are responsible for lending within foreign groups. The calculation of a usage fee for the capital made available to the Swiss permanent establishment reduces the taxable net profit of the Swiss finance branch in Switzerland.

MME Comment

Globalisation and the penetration of new markets lead to the relocation of business activities and functions to Switzerland (inbound) and to other countries (outbound). Although operational considerations are the primary concerns, the profitability of such undertakings can be increased by a properly aligned tax strategy. It is equally important to ensure that cross-border transfers of business activities do not trigger adverse tax consequences, reducing both profitability and competitiveness. In addition, given the current international tax environment, investments must be underpinned by sufficient operational substance. To meet these complex requirements, projects involving multiple jurisdictions need to be managedby multidisciplinary teams which are coordinated by experienced project managers.

With the abolishment of the practices with regard to Principal Companies and Swiss Finance Branches, the era of legal certainty in international tax planning ends in Switzerland. On the other side, there is more flexibility and room for creativity for a certain set of facts. In addition, Switzerland wants to strenghten its comeptitiveness with the introduction of new measures as part of the planned tax refrom: The patent box will allow a portion of the profits from inventions to be taxed at a reduced rate in the cantons in the future. The cantons will additionally have the opportunity to make provision for an additional deduction of no more than 50% for R&D expenditure. Moreover, cantons with an effective profit tax burden of at least 18.03% can introduce a deduction for self-Financing (notional interest deduction).

We would be happy to analyse opportunities and risks in this regard with you! Please do not hesitate to contact us.

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