Generally, cantons offer competitive CIT rates for cantonal and communal tax purposes. Depending on the specific cantonal and communal tax location in Switzerland, the ordinary overall (federal, cantonal, and communal) CIT rates applicable on profit before tax may vary between 11.4% and 24.2% (as of 1 January 2020: between 11.9% and 21.6%) (see the Overall tax rates in the Taxes on corporate income section). The cantons continually try to improve their attractiveness as business locations. It is at the sole discretion of the cantons to credit CIT against the capital tax to reduce the overall tax burden (see Capital tax in the Other taxes section). With the Swiss tax reform, a patent box will be introduced at cantonal and communal levels as of 1 January 2020 reducing CIT on license income from qualifying patents. There is further the option for cantons to introduce an R&D super deduction (see Federal Act on Tax Reform and AHV Financing (TRAF) in the Significant developments section).
In addition, many cantons offer tax incentives for newly established companies or for expansion investments, such as tax holidays or significant tax relief for cantonal and communal tax purposes for up to ten years. In some specific economic development regions and regional centres, a tax holiday may even be granted for federal CIT purposes if certain conditions are met.
Privileged cantonal tax regimes
Many cantons offered privileged corporate tax regimes (holding companies, domicile companies, mixed trading companies) until the end of 2019. With the entering into effect of Swiss tax reform as of 1 January 2020, the privileged cantonal tax regimes will be abolished, replacing them with other measures (see Federal Act on Tax Reform and AHV Financing (TRAF) in the Significant developments section). The cantons provide for specific transition rules for companies that have to change from a privileged tax regime to an ordinary taxation (old law 'step-up' and/or new law 'step-up' depending on the company’s location of corporate residence in Switzerland).
Holding company tax regime (abolished as of 1 January 2020)
A qualifying holding company is exempt from all cantonal/communal CIT (with the exception of income from Swiss real estate, which is subject to tax after deduction of typical mortgage expenditures on such real estate).
Consequently, a holding company is, in principle, only subject to an effective CIT rate of 7.83% (i.e. federal CIT rate) prior to participation relief for qualifying dividends and capital gains. Further, usually a reduced capital tax rate at the cantonal/communal levels applies.
Companies that meet the following conditions are eligible for the holding company tax status:
- The primary purpose of the company must be to hold and to manage long-term equity investments in subsidiaries, and this purpose must be stated in the by-laws.
- The company must not be engaged in a commercial activity in Switzerland.
- The company must pass an alternative asset or income test, whereby either two-thirds of the company’s assets must consist of substantial shareholdings or participations or two-thirds of total income of the company must consist of participation income (dividend income or capital gains) from such shareholdings and participations.
An advance confirmation is obtainable from the cantonal tax authorities clarifying that a specific company will qualify for the criteria of the holding company status as foreseen by the relevant cantonal tax laws prior to forming such holding company.
Domicile company tax regime (abolished as of 1 January 2020)
Companies that only carry out administrative functions in Switzerland but have no commercial activities are typically eligible for the domicile company tax status.
Insofar as a company fulfils the above-mentioned criteria, it may benefit from the domicile company tax regime, which, if applicable, has the following implications at the cantonal/communal CIT levels:
- A modest portion of foreign-source income (i.e. from 0% to 15%) is subject to tax in accordance with the importance of the administrative function in Switzerland.
- Income from qualifying participations (including dividends, capital gains, and re-evaluation gains) is usually tax exempt (whereas losses deriving from qualifying participations usually are not tax deductible).
- All income from Swiss sources is taxed at ordinary rates.
- Expenditures that are justified for business purposes are deductible from the income to which they have a business correlation.
- Reduced capital tax rates usually are applicable.
The conditions to qualify as a domicile company vary from canton to canton. This is particularly the case with regard to determining the percentage of income from foreign sources subject to tax in Switzerland and to the definition of exactly what type of income is considered foreign-source income.
A domicile company can expect to be subject to an effective tax rate of 8% to 11% on its foreign-source income.
Mixed trading company tax regime (abolished as of 1 January 2020)
The mixed trading company tax status, which is very similar to the domicile company tax status, was given different names by the cantons. Internationally, it is most often referred to as the 'mixed trading company' tax status.
Contrary to a company benefiting from the classical domicile company tax status, a company benefiting from the mixed trading company tax status is allowed to undertake limited commercial activities in Switzerland. As a general rule, at least 80% of the income from commercial activities of a mixed trading company must derive from non-Swiss sources (i.e. a maximum of 20% of income may be linked to Swiss sources). Many cantons additionally require that at least 80% of the costs must be related to activities undertaken abroad.
Insofar as a company fulfils the above-mentioned criteria, it may benefit from the mixed trading company tax regime. Depending on the concrete Swiss activity and infrastructure, the portion subject to cantonal and communal income taxes generally varies between 5% and 25% of the foreign-source income and is normally higher than it is for domicile companies. The exact portion, based on the specific business activities of a company, may need to be clarified with the responsible cantonal tax authorities if the general guidelines would not cover a specific case.
With the Swiss tax reform, a patent box will be introduced at cantonal and communal levels as of 1 January 2020 reducing CIT on income from qualifying patents. The proportion of income from patents and similar rights to the extent it is based on qualifying R&D expenses in Switzerland is exempt from CIT up to a maximum of 90% (depending on the cantonal implementation). To enter the patent box, previously incurred R&D expenses that arose to develop the respective patents will have to be taxed at the applicable CIT rate based on a company’s location of corporate residence in Switzerland.
Foreign tax credit
Swiss tax resident corporations and branches may suffer foreign non-recoverable WHTs on dividend, interest, and royalty income derived from foreign sources. As such foreign-source income is generally subject to corporate income taxation in Switzerland, a double taxation occurs. In case a DTT exists and in order to reduce or to eliminate double taxation, Switzerland usually applies the credit method (for branches as of 1 January 2020). Specific conditions and formalities will need to be met to benefit from foreign tax credits.