A global minimum tax will change the playing field in Switzerland and abroad – and shift the focus to other location factors.

Stefan Kuhn Partner, Head of Tax & Legal

BEPS 2.0 is top of mind for the tax community across the globe as experts thrash out the technical details of implementing the minimum tax required by Pillar Two.

Switzerland is no exception, with minimum tax high on the political agenda at both the federal and cantonal level. But what’s next?

Switzerland’s position as an attractive business location for multinational enterprises currently depends not least on its competitive tax rates, tax rules and tax incentives. 

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The planned introduction of global minimum tax will limit or in some cases eliminate international tax competition. As a low-tax location for international companies, Switzerland is particularly affected by this development.

In this new level playing field, other location factors take on a new significance. The availability of qualified workers, employer-friendly labor laws, competitive personal income taxes and a strong foreign trade framework are just some of the strengths Switzerland should focus on post Pillar Two. 

OECD/G20 project for a global minimum tax

As the introduction of a global minimum tax progresses, it will have an impact on international tax and location competition – and Switzerland’s strategy as a business location. 

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting agreed a two-pillar solution to address the tax challenges arising from the digitalization of the economy on 8 October 2021. This commitment by more than 130 countries worldwide – in connection with pillar 2 – has triggered legislative processes in many jurisdictions.

Some countries have already published draft amendments to their legislation or have even adopted them. Others have announced their intention to do so.

At the end of 2022, the EU also agreed on a directive to implement global minimum taxation. Then there are developments in countries which do not directly provide for the introduction of the GloBE Model Rules, but which are to be seen in connection with minimum taxation. 

Some announcements around the world so far (June 2023)

Some announcements around the world so far (June 2023)

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Top-up tax

Based on current international developments, a global minimum tax rate of 15% is expected to apply to large companies with consolidated revenues in excess of EUR 750 million from 2024 onwards. Switzerland is likely to ensure this tax burden for in-scope Swiss companies by means of a domestic top-up tax. 

GloBE Model Rules on top-up tax

  • If the tax burden or effective tax rate (ETR) – expressed as the ratio of covered taxes to the relevant profit (GloBE income) – of all group companies in a country is below 15%, the difference up to 15% is levied by means of a top-up tax. 
  • Routine profits are exempt from this top-up tax (substance-based income exclusion).
  • Primarily, the top-up tax is charged at the ultimate parent company or at an intermediate company (Income Inclusion Rule, IIR) and otherwise secondarily in the other jurisdictions in which the group operates (Undertaxed Profits Rule, UTPR).  
  • The respective country can already collect the difference in advance through a domestic top-up tax, so that no taxation abroad is necessary (Qualified Domestic Minimum Top-up Tax, QDMTT). 
Environmental tax revenues, 2010 – 2020

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From tax competition to subsidy competition

Due to the global minimum tax and introduction of a domestic top-up tax, the amount of tax affected companies pay will increase in some cantons. Other location measures can help maintain the attractiveness of the location. 

Measures to promote the Swiss business location

When developing new location promotion measures, it’s important to ensure that they have no – or at least only a minimal – negative effect on minimum taxation. At the same time, they must be accepted by the OECD and the EU. Developing potential location measures that meet these prerequisites is a challenge for the cantons with their different starting points, needs and ambitions. Keeping the following basic principles in mind will help them design effective measures that support the attractiveness of the cantons and Switzerland as a whole.

Measures should…

  1. …be compatible with GloBE Model Rules (generally accessible and independent of profit).
  2. …be compatible with (EU) state aid regulations, free trade agreements, WTO agreements, etc. (incl. non-selectivity).
  3. …benefit the affected companies as much as possible (effectiveness). 
  4. …be implementable in terms of domestic policy, in view of possible cantonal votes/referenda. It must also be considered whether existing laws need to be amended or even whether a new law is necessary.

Overall, the aim is to equip Switzerland and its cantons with other location benefits to compensate for any disadvantages compared to competitors abroad (especially the higher cost base, e.g. due to salary).

The international subsidy landscape

Developments in the US and the EU are also causing the focus to shift from tax competition to subsidy competition. Particularly in the EU, large economically strong member states, which can supplement the EU subsidies with national subsidy measures, have an advantage over smaller countries with fewer available funds.

  • European Green Deal
    The EU flagship program, the European Green Deal, aims to reduce greenhouse gas emissions by at least 55% by the end of 2030. A third of the EUR 1,800 billion pledged is to be used to finance projects that serve the goals of the Green Deal.
  • US Inflation Reduction Act (IRA)
    The IRA includes more than USD 350 billion in financial aid to incentivize the reduction of greenhouse gases and encourage investment in domestic manufacturing and support for the development and commercialization of new technologies. 
  • EU Temporary Crisis and Transition Framework (TCTF)
    The TCTF represents a relaxing of state aid rules and is designed to enable individual member states to provide targeted direct subsidies for companies operating in the field of renewable energies and components as well as the provision or recycling of raw materials for these products. 

An effective mix of old and new instruments

Regarding fiscal location factors, it is significant that the Qualified Refundable Tax Credits (QRTC) and direct subsidies have a much smaller (negative) impact under the new minimum taxation than the additional R&D deduction and the patent box. Accordingly, competition will tend to shift from taxes to subsidies/QRTC. 

Finally, let us not forget that corporate groups below the threshold of EUR 750 million can still benefit from the existing rules (e.g. location promotion through the patent box, additional R&D deduction, tax holidays). These instruments should not be abandoned without good cause

Personal and corporate income tax

Personal income tax

Switzerland remains an attractive location for private individuals.
Personal income tax rates have changed only minimally compared to the previous years and have remained stable with an average maximum tax rate of around 33.45%.

Compared with other European and non-European countries, Switzerland retains its midfield status – an important factor in the location’s overall attractiveness.

Income tax rates in the cantons in 2023

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Corporate income tax

Compared to Europe, the cantons of Central Switzerland remain competitive and can continue to hold their own against low-tax havens like Jersey and the Isle of Man.

Compared to other European countries, Scandinavian countries once again top the list in 2023. By contrast, many countries in Eastern Europe have drastically cut their tax rates over the past decade by introducing flat rate taxes.

Corporate tax rates in the cantons in 2023

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