CTR III – reduction of the corporate tax rates by 2019

We revert to you to confirm today’s decision of the Vaud State Council to maintain the entry in force of corporate tax reform III (RIE III) on January 1st, 2019. The revised federal project of the RIE III has recently been released for consultation (please see https://www.rsm.global/switzerland/news/newsletter-october-5-2017). This project is aimed to enter into force in 2020 at the earliest, likely in 2021. This created some rumors that the Canton of Vaud which already enacted a significant drop of his corporate tax rate (average corporate tax rate of 13.78% https://www.rsm.global/switzerland/news/corporate-tax-reform-iii-ctr-iii-state-affairs-after-referendum-canton-vaud-and-decision) might postpone the entry in force of the reduction of the corporate tax rate.

As a summary, the tax project RIE III was a federal project which aimed mainly to abolish the specific tax regimes that are currently applicable at the cantonal level (holding, mixt and domiciled company, finance branch, principal, etc.). In exchange and to maintain the tax attractiveness of Switzerland, other measures, compatible with the recent OECD projects (BEPS), were aimed to be implemented, such as the patent box regime, a special tax deduction for R&D expenses, deduction of notional interests, etc. Those measures were aimed to compensate the abolishment of the special tax regimes but they will not benefit to all companies which currently have a special tax status. Therefore the risk to see a significant portion of those companies to leave Switzerland is high as their applicable tax wouldn’t be attractive anymore. As the federal tax rate is not going to drop, most of the cantons with a high tax rate have expressed the urgency to reduce their ordinary tax rate. This is the case of the canton of Vaud. The cantons are free to determine their own tax rates. The Swiss legislation system allows the people to request a referendum against any amendment of a law provided a minimal number of them do request it. The canton of Vaud was the first one to enact the reduction of its corporate tax rate. A referendum has been requested but the project was largely adopted by the Vaud people in 2016. The entry in force was for 2019. However, the refusal of the Swiss people of the federal project on tax reform III wich aimed to introduce the compensation measures mentioned above created some uncertainty. In fact, the federal project allocated a higher part of the federal corporate tax to the cantons which had to significantly reduce their tax rate. The refusal of the federal project led to the fact that Vaud had to reduce its tax rate without receiving the federal compensation. Therefore it was uncertain for a while whether the canton would still maintain the entry in force for 2019. The Cantonal Council did took the courageous decision to maintain it despite the federal uncertainties.

As a conclusion, for the canton of Vaud, as of 2019, the applicable tax rate (including federal tax) will be of 13.78% on average for all companies that will close their books after January 1st, 2019. As the special regimes have not been abolished, companies that do benefit from a special tax status will still continue to benefit from it until the federal reform enters into force and abolishes them. The compensation measures of the federal project such as patent box etc will not enter into force in the canton of Vaud as there is currently no legal basis to allow their entry in force. The tax amendment for the canton of Vaud is therefore only on the ordinary tax rate. Is also means that as long as the special tax regimes are still valid, a company currently benefiting from a special regime will be taxed at a lower rate than today’s rate. All companies that do not benefit from a special tax regime will be taxed at an average rate of 13.78% as of 1.1.2019.

We remain at your disposal for any questions you may have.