Corporate - Income determinationLast reviewed - 19 January 2023
The statutory accounts of a Swiss company (or in the case of a non-resident company, the branch accounts) serve as the basis for determining taxable income. There are generally very few differences between statutory profit and taxable profit apart from the participation relief for dividend income and capital gains (see below), adjustments required by the tax law, and the usage of existing tax loss carry forwards (see Net operating losses in the Deductions section).
Swiss CIT treatment does, in principle, follow underlying Swiss statutory accounting treatment. Inventory valuation is therefore determined according to the accounting rules of the Swiss code of obligations. As the Swiss code of obligations and hence the Swiss accounting rules favour the prudence principle, a valuation allowance is allowed to be recorded on the inventory in excess of the actual devaluation of the inventory due to a lower market value (see Obsolete inventory provision in the Deductions section). Such valuation allowance is accepted for tax purposes in an amount up to a maximum of one-third of the inventory’s acquisition costs or its production costs, respectively its lower market value.
Accordingly, the maximum inventory value represents the inventory’s acquisition costs or its production costs. In case these costs exceed the inventory’s market value at the balance sheet date, the latter lower market value must be applied. In order to determine the inventory’s acquisition or production costs, various methods exist.
It is at the corporate taxpayer’s discretion to determine which method shall apply (e.g. weighted average method, first in first out [FIFO], last in first out [LIFO], highest in first out [HIFO]).
Participation relief is the term generally used for the tax relief on qualifying dividend income and capital gains from the disposal of a subsidiary. Participation relief is not an outright tax exemption, but rather a tax abatement mechanism. It is therefore also commonly referred to as 'participation deduction' or ‘participation exemption’.
Participation relief is a percentage deduction from CIT that is equal to net participation income divided by taxable income. Net participation income consists of the gross participation income from qualifying dividends and (usually) qualifying capital gains less related administration and financing costs and any depreciation of the participation that is linked to the dividend distribution. In most cases, the participation relief results in a full exemption of participation income from CIT, or to an exemption close thereto. Note that the participation relief may be diluted in certain cases (e.g. if tax loss carry forwards are offset).
The participation relief on dividend income is mandatory at the federal CIT as well as at the cantonal/communal levels. The participation relief on capital gains is voluntary for cantonal/communal tax purposes, but nonetheless implemented by all cantons.
Dividends qualifying for participation relief are those from participations representing at least 10% of the share capital or 10% of profits and reserves of another company and/or those having a market value of at least CHF 1 million. Note that there is neither a minimum holding period nor a requirement that the dividend paying subsidiary is liable to CIT in its jurisdiction of residence.
Capital gains derived from the disposal of a qualifying participation are generally entitled to participation relief if the following conditions are cumulatively met:
- The participation sold was owned by the company for a period of at least one year.
- The participation sold consists of an investment of at least 10% of the share capital or entitles to at least 10% of the profits and reserves of the underlying subsidiary. If a residual participation is less than 10% due to a previously qualifying partial sale, further participation relief on a capital gain is only possible if the residual participation’s market value at the beginning of the year amounted to at least CHF 1 million.
It is noteworthy that capital gains are only entitled to participation relief to the extent the sales price exceeds the original investment costs (commonly also referred to as 'acquisition costs') of the participation, whereas the so-called 'recaptured depreciation' (i.e. the amount of former depreciations) is taxable.
Interest income earned is taxable income. It is of no relevance whether the payment of the interest was made by a related party (affiliated company or shareholder) or by a third party (see Interest expense in the Deductions section).
Royalty income represents taxable income. It is generally subject to ordinary CIT at federal, cantonal, and communal levels.
With the Swiss tax reform, a patent box was introduced at cantonal and communal levels on 1 January 2020. It reduces CIT on license income from qualifying patents (i.e. reduced taxation of income realised from patents) upon request. There is further the option for cantons to introduce an R&D super deduction.
Foreign exchange gains
Realised foreign exchange gains in relation to a transaction (transaction gains) are included in the tax basis of a corporation as taxable. Realised and, as a result of the prudence principle of the Swiss accounting rules, unrealised transactional foreign exchange losses are tax deductible. Based on a federal court decision in 2009, foreign gains (or losses) resulting from the translation of financial statements in a foreign (functional) currency to Swiss franc (presentation currency) are not taxable (respectively tax deductible).
Swiss tax resident corporations are basically taxed on their worldwide income. However, income attributable to a foreign PE (i.e. a PE outside of Switzerland) is not taxed in Switzerland. Such income may only be taken into account to determine the applicable tax rate, in case progressive tax rates apply. The same rule applies for income from real estate property situated abroad.
Dividends, interest, and royalties from Swiss or foreign sources are included in taxable income. However, in certain cantons, special methods of assessment may apply for dividend and other income originating outside Switzerland. For dividend income, a relief generally is available for CIT purposes at the federal, cantonal, and communal levels (see Participation relief above). The irrecoverable portion of foreign WHT of most treaty countries can be credited against the related Swiss CIT on the same income. Foreign WHT of non-treaty countries generally is not creditable but is deductible for CIT purposes.
There are no controlled foreign company (CFC) rules in Switzerland. Consequently, undistributed income of foreign subsidiaries is usually not taxed in Switzerland (see Controlled foreign companies [CFCs] in the Group taxation section).