Corporate taxation in Switzerland underwent major transformations with the entry into force, on 1 January 2020, of the Tax Reform and AHV Financing (TRAF). This reform abolished the former privileged tax statuses — holding, domicile and mixed companies — which were contrary to OECD international standards, and replaced them with new compliant instruments: patent box, deduction for research and development (R&D) activities, and the possibility of an equity deduction (NID) in certain cantons. PBM Avocats accompanies companies and their directors in Geneva and Lausanne in managing their ordinary taxation, structuring operations and tax planning.
Tax Liability for Profit Tax: Who Is Taxed?
Every legal entity — company limited by shares (SA/AG), limited liability company (Sàrl/GmbH), cooperative, association or foundation carrying on a commercial activity — is subject to profit tax, both under the DFTA (art. 49 ff DFTA) and in the canton of its registered office or effective administration. Permanent establishments and real property situated in another canton or abroad may give rise to limited tax liability in those other states or cantons.
The DFTA taxes the taxable net profit, defined in art. 58 DFTA. Added back to the accounting profit are in particular commercially unjustified depreciation and provisions, distributions to shareholders or related persons that do not reflect reality, and income that has been concealed. The concept of "hidden capital contribution" and "hidden profit distribution" is the subject of extensive Federal Supreme Court case law.
Rates, TRAF Reform and New Tax Instruments
Since the TRAF, the DFTA rate on the profit of legal entities is fixed at 8.5% of net profit after deduction of the tax itself, i.e. an effective rate of approximately 7.83% on pre-tax profit. This rate applies uniformly to all legal entities subject to the DFTA, without progressivity. Cantons and municipalities set their own rates, which are added to the DFTA.
The patent box (art. 24a TAHA) allows any company holding patents or comparable rights to benefit from reduced taxation on the profits derived from them. The maximum reduction is 90% for cantons that adopt the minimum rate. The R&D deduction (art. 25a TAHA) allows cantons to grant a deduction of up to 150% of qualifying actual R&D expenditure. These two instruments, combined with the reduction of general cantonal rates, aim to maintain Switzerland's tax attractiveness for innovative companies.
Certain cantons, including the canton of Nidwalden, have introduced the notional interest deduction (NID), which allows a notional interest to be deducted on excess equity. This regime aims to treat equity and debt financing on a comparable tax footing, thereby reducing the tax advantage of indebtedness.
Deductions, Depreciation and Provisions
The DFTA admits as deductions all expenses justified by commercial usage that are recorded in the company's accounts (art. 59 DFTA). Deductible items include in particular: staff costs (salaries, social charges, contributions to occupational pension institutions), rents, operating costs, passive interest on borrowings, depreciation on fixed assets (in accordance with rates admitted by the FTA), provisions for identified commercial risks, losses carried forward from the seven preceding financial years (art. 67 DFTA) and donations to public benefit institutions (art. 59 para. 1 let. c DFTA).
The deduction of provisions is subject to the condition that they are justified by commercial usage: provisions for warranties, pending litigation or identified risks are in principle admitted. General or insufficiently justified provisions are rejected and added back to taxable profit. PBM Avocats advises you on depreciation and provisioning strategies to lawfully optimise your tax result.
Capital Tax, Dividends and Restructurings
The cantonal capital tax affects the company's equity (paid-up capital, statutory and free reserves, retained profit). The TRAF allows cantons to significantly reduce this tax, notably by crediting profit tax against capital tax. Company restructurings (mergers, demergers, contributions, transformations) are governed by the Merger Act (FMAA) and by the special tax provisions of the DFTA (art. 61 and 72 DFTA) and TAHA, which allow, subject to conditions, such operations to be carried out in tax neutrality.
The distribution of dividends to individual shareholders is subject to income tax in their hands, with partial taxation (art. 20 para. 1bis DFTA) for participations representing at least 10% of the share capital. Anticipatory tax (AT) of 35% is withheld at source on dividends and is refundable to beneficiaries who have correctly declared their income. PBM Avocats assists you in the optimal structuring of director-shareholder remuneration and the management of distributions.
Frequently Asked Questions on Corporate Profit Tax
What is the effective profit tax rate for companies in Switzerland?
The effective profit tax rate on the net profit of legal entities results from the combination of the direct federal tax (DFTA, fixed rate of 8.5% on net profit after tax, i.e. approximately 7.83% on pre-tax profit) and the cantonal and municipal profit tax, whose rate varies by canton and municipality. Following the Tax Reform and AHV Financing (TRAF, which entered into force on 1 January 2020), most cantons reduced their rates. Geneva applies a cantonal rate of approximately 14% on net profit, resulting in an overall effective rate (DFTA + cantonal + municipal) of approximately 13.99% for the City of Geneva. Vaud has set a cantonal and municipal rate resulting in an overall effective rate of approximately 13.79% for Lausanne.
What is the patent box and how does it work in Switzerland?
The patent box is a preferential tax regime introduced by the TRAF (art. 24a TAHA) allowing cantons to subject profits derived from patents and comparable rights to reduced tax. The canton may tax such profits at no more than 10% of the ordinary tax burden. Eligible rights include patents within the meaning of the Patent Act, supplementary protection certificates and semiconductor topographies. The profits concerned are determined by the nexus approach based on qualifying R&D expenditure. Both Geneva and Vaud have introduced this regime in their cantonal law, with their own application modalities.
Does Switzerland have a capital tax on companies?
Capital tax is a cantonal tax (the Confederation does not levy one) on the equity of legal entities. Its base is in principle the book equity (paid-up share or partnership capital, statutory and free reserves, retained profit). The TRAF allows cantons to significantly reduce this tax, notably by crediting profit tax against capital tax. Most cantons have also reduced their capital tax rates for participation rights, patents and qualifying intra-group loans. In Geneva and Vaud, specific reductions apply depending on the composition of equity.
How does the intra-group dividend regime (participation exemption) work?
The participation relief (art. 69 and 70 DFTA) prevents economic double taxation of dividends received from a subsidiary. A company holding at least 10% of the share capital or voting rights of a subsidiary (or whose market value is at least CHF 1 million) benefits from a proportional reduction of federal profit tax corresponding to the ratio of net participation income to total net profit. This mechanism applies to both the DFTA and cantonal taxes (art. 28 TAHA). Capital gains on the sale of qualifying participations also benefit from this regime.
What is the arm's length principle in corporate taxation?
The arm's length principle requires that transactions between companies within the same group be valued as if they had been concluded between independent entities under normal market conditions. In Swiss law, this principle derives from the general rules of tax law (prohibition of profit transfers between related companies) and from commitments made within the OECD framework (OECD Transfer Pricing Guidelines). The Federal Tax Administration (FTA) and cantonal authorities may reclassify intra-group transactions if the prices applied deviate from what independent third parties would have agreed. PBM Avocats assists you in transfer pricing documentation and the management of tax audits.