Implementation of TRAF in the Canton of Zug Implementation of TRAF in the Canton of Zug

With the adoption of the Federal Act on Tax Reform and AHV Financing (TRAF, cf. blog article) the Swiss voters approved the basis for a cantonal implementation of the tax reform. Based on this, on 19 May 2019 the Parliament of the Canton of Zug enacted the Tax Reform 2020. The Canton of Zug will once again be in a position to offer the most competitive tax rates.

The new corporate tax law will enter into force on 1 January 2020 and will look as follows in the Canton of Zug:

• The effective corporate income tax rate will drop to 11.91% (used to be 14.35%) across all levels (federal taxes, cantonal taxes, municipal taxes of Zug).
• The ordinary capital tax rate will remain at 0.0717% (municipality of Zug). Taxable equity, originating from qualifying equity interests, group receivables as well as qualifying patents, will only be included at 2% when calculating the taxes.
• With the introduction of the patent box, the net profit from patents and similar rights will be included in the calculation of the taxable net profit with a maximum reduction of 90%.
• The Canton of Zug now allows a deduction for research and development costs of 50%.
• Tax privileges for holding companies, domiciliary companies and mixed companies have been abolished.
• The Canton of Zug has foreseen a transitional solution, as follows:
  (a) the tax-neutral disclosure and subsequent amortization of hidden reserves (the so-called step-up under previous law) or
  (b) the application of the special tax rate of 1.15% up to 2.30% (cantonal and municipal taxes of Zug) over a period of five years to tax hidden reserves and goodwill realized in the next 5 years (the so-called special rate solution).
• The relief restriction was set to 70% (if using the step-up) of taxable net profit (excluding income from participations and offsetting of losses).
• The partial taxation of natural persons’ dividends from qualifying equity interests remains at 50% in the Canton of Zug – for federal tax there will be an increase to 70% (previously 60%).

As it is a comprehensive revision of the tax law, companies in the Canton of Zug should prepare for the changes mentioned above as soon as possible. Specifically, the following questions should be addressed:

• How will my business be affected by the reform?
• How will the transition from privileged tax status to normal taxation take place?
• How can my business benefit from the transitional rules?
• How can my business benefit from a fiscal privilege relating to R&D activities or the patent box?
• How will the increase of the capital tax effect the total tax burden and what optimizations can be taken?
• When should my business take which measures?
• Does the dividend strategy still make sense?

Companies should take timely action in order to be ready for the impact the tax reform will have on them. This includes thorough planning in time as well as a simulation of the impacts of the different aspects of the tax reform.