The Swiss Federal Council has decided on how the global minimum taxation agreed by the OECD and G20 member states shall be implemented in Switzerland. It is foreseen that the Swiss public votes on a constitutional amendment in June 2023, providing the basis for an implementation as from 2024.
Background: The Two Pillars
After the signing of a Statement on the Two Pillar Solution to “Address the Tax Challenges Arising from the Digitalization of the Economy” by the member states of the Inclusive Framework last year, the Swiss Federal Council has presented how Pillar Two (global minimum taxation of 15%) shall be implemented in Switzerland whereas Pillar One (allocating profits of large multinational enterprises to market jurisdictions) is not ready for local implementation yet. The minimum tax will apply to multinational groups with revenues above EUR 750 million.
Pillar Two implementation in Switzerland
On 13 January 2022 the Federal Council has communicated how it intends to implement the minimum taxation in Switzerland. The main points can be summarized as follows.
Why does Switzerland want to implement the minimum taxation?
- To ensure compliance with the Pillar Two framework and to create legal certainty for Swiss and foreign groups that are within the scope of the Pillar Two framework
- To safeguard tax revenues for Switzerland so as to maintain Switzerland’s attractiveness as a business location
How will the minimum taxation be implemented?
- Only multinational groups with an annual turnover of at least EUR 750 million are in scope while nothing will change for purely domestically focused companies and SMEs;
- The minimum taxation will target groups headquartered in Switzerland (approx. 200-300 entities) as well as Swiss subsidiaries of foreign groups (approx. 2,000 entities);
- Any additional taxes will be collected by the cantons, which may dispose of such additional tax revenues;
How are multinational groups above the threshold affected?
- Depending on their situation, certain companies will face a higher tax burden in Switzerland;
- However, the minimum rate will spare them additional tax proceedings abroad;
- Companies may look forward to getting support in other areas as Switzerland will have fiscal policy leeway to maintain the country’s attractiveness as a business location through the introduction of new measures. The cantons will make sovereign decisions on such measures in favor of the location.
Will Switzerland’s implementation be in line with the OECD’s timetable?
- According to the OECD, the primary Income Inclusion Rule shall be implemented as from 2023;
- However, considering local legislative steps required and since the OECD's technical specifications will not be available until later in 2022, Switzerland intends to implement as from 2024;
- Nevertheless, the Swiss implementation will be ready when the secondary Undertaxed Payment Rule may be implemented by the countries, which is important for groups headquartered in Switzerland to spare them additional tax proceedings abroad.
Which legislative process is intended?
- Amendment of the constitution including temporary arrangements with basic parameters by means of a public vote in 2023;
- Temporary ordinance by the Federal Council to ensure that the minimum tax rate comes into force on 1 January 2024;
- Subsequent amendment of legal basis through ordinary legislative process without time pressure through which the temporary ordinance will be replaced.
Why is a constitutional amendment necessary?
- To lay the groundwork for an implementation by (temporary) ordinance of the Federal Council (which provides legal certainty and is faster than an implementation by amending legislation);
- To lay the foundations for a differing treatment of smaller and larger businesses.
An important topic that remains unclear is how the cantons will use the additional tax revenues in particular for further strengthening the attractiveness of Switzerland and the respective canton as a business location. In this connection, e.g. grants for R&D are discussed. Discussions on this topic will continue at least until the public vote on the amendment of the constitution. In the meantime, the Federation is poised to abolish the stamp issuance tax as well as the withholding tax on interests on bonds.
What happens next
The Swiss administration will work on the drafts for the constitutional amendment as well as the temporary ordinance of the Federal Council. The Confederation, cantons, cities and municipalities will work closely together on the implementation of the proposal. Further details are expected throughout 2022.
In this connection further releases of the OECD, e.g. the planned publication of a detailed commentary on the model rules (expected early 2022) need to be considered.
What can companies do now?
Besides an impact analysis (see here for further information) affected companies need to take note of the implementation of the global minimum taxation progresses in Switzerland and other countries. In particular, the timing of the implementation may be relevant as in specific circumstances, an implementation in other countries already as of 2023 may lead to additional taxes in such countries until Switzerland implements it in 2024.