Switzerland: introduction of a super fiscal deduction for R&D expenses

On May 19th a major overhaul of the Swiss fiscal system was adopted by referendum, with 66.4% of positive votes and an electoral participation of 42.7%. The previous referendum was rejected by the Swiss population in February 2017, leading the Swiss Federal Council to revise its finance bill (Tax Proposal 17). The aim of this reform is to modernize the Swiss legislation regarding international rules and to strengthen the national attractiveness in the context of an increased international tax competition.

What is the measures’ content and when will they be effective?

The most iconic measures of the reform for companies that carry out R&D activities are the following:

  1. The introduction of a “patent box”

The net profit attributed to patents and to similar rights shall be taxed with a deduction of maximum 90% (Swiss cantons are free to set a lower deduction, see tab attached at the end of the note). On a federal scale, these profits are taxed without any deduction. This measure will follow the Nexus approach, which OECD pushes for (the company benefitting from the patent box has to realize a certain level of R&D activities).

2. The introduction of a 50 % super deduction on R&D expenses

This deduction involves:

  • R&D staff expenditures…
  • … increased by a mark-up of 35% meant to compensate the fact that the deduction doesn’t apply to other expenses…
  • …Except in the case of R&D subcontracting with Swiss companies, eligible within the limit of 80% of the invoiced amount.

The rate of 50% is an upper limit, and cantons are free to set a lower value. (see tab attached at the end of the note).

Eligible activities are:

  1. Scientific research: the systematic research of new knowledge; it covers especially:
  2. Basic research: research whose first aim is the acquisition of knowledge,
  3. Applied research: research whose first aim is to contribute to practical-based problem solving.
  4. Science based innovation (innovation): development of new products, processes or services for economy and society through research, especially applied research and the highlight of its results.

Expenses related to product launch and their promotion on the market are excluded.

The value of these two measures (patent box and super deduction) cannot however exceed 70% of the taxable profit of the company that will benefit from it (a lower level can be set by each canton)

Within the other significant measures for companies, we can mention the deduction of notional interests for cantons with a high taxation, the end of tax privileges for companies that are mostly active on an international level (companies with a specific tax status), as well as cantonal tax regimes. The same taxation rules shall apply to all companies from large corporate groups to SMEs.

These measures are planned to come into effect on January 1st, 2020. This date is not formally set by the Federal Council.

Expected application of the main measures by the cantons

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