New corporate taxation in the canton of Zurich
With the entry into force of the amendment to the cantonal Tax Act on 1 January 2020, corporate taxation in the canton of Zurich will be adjusted as follows:
- The effective income tax rate over all levels (federal, cantonal and municipal) will initially decrease to 19.70% as of 1 January 2021 (capital city, previously 21.15%). However, a further reduction of the effective income tax rate from 19.70% to 18.19% as of 1 January 2023 is planned within the framework of a new bill, which still has to go through the usual legislative process.
- Net profits from patents and similar rights will in future fall into the patent box and will thus be taxed at a maximum reduction of 90%.
- An additional deduction of 50% may be applied for expenses relating to research and development (R&D) carried out in Switzerland.
- Also introduced is the notional interest deduction (NID) which includes the granting of an imputed interest deduction on surplus equity. Surplus equity includes equity capital which, in the long term, exceeds the equity capital required for business operations. This measure is expected to be introduced only in the canton of Zurich.
- Tax privileges for holding, domiciliary and mixed companies will be abolished and will therefore no longer be granted as of 1 January 2020.
- For companies affected by abolition of a cantonal tax privilege, the canton of Zurich offers the following possibilities as transitional measures: (a) a tax-neutral disclosure and tax-effective amortization of hidden reserves over a period of up to ten years (so-called current law step-up or disclosure solution) or (b) the application of a special tax rate of 1.13% (capital city; cantonal and municipal taxes) for the taxation of hidden reserves and self-created goodwill realized within the next five years (so-called special tax rate solution). Furthermore, a combined solution consisting of the two options can be applied in practice (c).
- The overall limitation of measures is set at 70% of taxable net income (excluding participation income and before loss offsetting). It limits the tax-reducing effects of the patent box, the additional R&D deductions, the notional interest deduction and the current law step-up (disclosure solution).
- The partial taxation of dividends from qualifying participations for natural persons will remain – at least for the time being – at 50% in the canton of Zurich (formally, there will be a change from the half-rate to the partial taxation procedure). For direct federal tax there will be an increase to 70% (previously 60%).
- The ordinary capital tax rate remains unchanged at 0.1718% (capital city). Taxable equity attributable to qualifying investments, loans to group companies and qualifying IP may be reduced by 90%.
Importance for Zurich companies
Companies based in the canton of Zurich should prepare at an early stage for the above-mentioned changes, as the tax reform will entail fundamental changes. In particular, the following questions should be addressed:
- How are we affected by the reform?
- How will the transition from privileged tax status to ordinary taxation take place?
- Can we benefit from transitional measures?
- Can we benefit from tax privileges for R&D activities or the patent box?
- Can we claim the notional interest deduction (NID)?
- What are the effects of the capital tax and can we optimize them?
- When do we have to take which measures?
- Is our dividend strategy still optimal?
With the effective date fast approaching, companies should take timely measures to prepare for the effects of the tax reform. This includes comprehensive and early planning and simulation of the effects of the various aspects of the tax reform.