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Dr. Silvia Zimmermann and Jonas Sigrist
Pestalozzi Attorneys at Law Ltd, Switzerland
HCo, a business entity formed under the law of Host Country (“HC”), is a member of a multinational group headed by FCo, a business entity formed under the law of Foreign Country (“FC”). In addition to HCo, the FCo multinational group includes many other subsidiaries, including FSub1 through FSub4 (the foreign subsidiaries). FCo, HCo, and the foreign subsidiaries are treated as corporations for HC income tax purposes.
HCo plans to open up a research and development (“R&D”) centre in HC to create intangible property, in particular, high-tech instrumental devices for the aviation and aerospace market. (As used here, “intangible property” is an idea, such as an invention or a trademark, and an “intangible asset” is a right, or set of rights, pertaining to intangible property.) The R&D centre will be engaged in a number of projects, with the hope of creating a number of valuable inventions. Limited foreign rights to some inventions will be licensed to FSub1, the foreign rights to other inventions will be sold to FSub2, and the foreign rights to other inventions will be contributed as capital to FSub3. In addition, with respect to some R&D projects, HCo will enter into a cost sharing arrangement with FSub4, under which FSub4 will share in the costs of the R&D and will acquire the foreign rights to the intangible property created by the projects.
The Swiss income tax treatment – barring some exceptions – is governed by the Swiss statutory accounting rules.1,2 Hence, the question is whether expenditures incurred in conducting R&D shall be booked as expenditures in the profit and loss account, or whether they shall be capitalised and shown as an asset in the balance sheet.3 Expenditures incurred in conducting R&D may be capitalised as fixed assets if:
Given that basic and discovery research do not have an ascertainable value, expenditures occurred for such research cannot be capitalised.5 In addition, goodwill does not meet the above listed requirements. Thus, goodwill cannot be capitalised in the balance sheet, either. An exception applies for goodwill acquired from another party in the course of an asset deal. Such derivative goodwill shall be capitalised and written down within a certain period of time (usually within five years).6
To the extent that it is admissible to capitalise intangible property, the entity bearing the expenditures allocated to such intangible property may capitalise such expenditures as a fixed asset in its balance sheet, but it is not obliged to do so.7 Thus, if expenditures incurred in conducting R&D have created a sustainable and ascertainable value, it is at the discretion of the entity conducting R&D whether it capitalises such expenditures as a fixed asset in the balance sheet, or whether it deducts such expenditures directly in the profit and loss account. In the latter case, the intangible assets are often listed with a pro memoria value of CHF 1 in the balance sheet.8 To the extent that the expenditures incurred in conducting R&D have not created any ascertainable value, they must be booked as expenditures in the profit and loss account.
Expenditures incurred in conducting R&D that have been capitalised as a fixed intangible asset may be written down later on, diminishing the taxable profit. For further explanations on the amortisation of intangible assets and their tax treatment see section I.F. below.
The maximum value of an intangible asset in the balance sheet amounts to the expenditures for the creation of such intangible asset.9 To the extent that the ascertainable value of such intangible asset falls below the book value, the book value of the intangible asset must be depreciated accordingly.10 On the other hand, it is admissible under Swiss statutory accounting provisions to book depreciation exceeding the actual decrease of the ascertainable value of the intangible asset, as well as to omit revaluing depreciated intangible assets in cases where their ascertainable value has recovered.
Due to the decisiveness of Swiss statutory accounting treatment, expenditures incurred in conducting R&D generally qualify as expenses reducing the taxable income within the tax period in which they are booked as expenditures in the profit and loss statement.11 Depreciation and amortisation generally also qualify as expenses reducing the taxable income, while the revaluation / appreciation of (intangible) assets is subject to Swiss income tax.
Expenditures booked as such in the statutory profit and loss statement are accepted as expenses reducing the taxable income to the extent they serve a business reason.12 Generally speaking, all expenditures in line with the purpose of the company are deemed to have a business reason and are, therefore, accepted as tax deductible expenses.13 While expenditures made in favour of a shareholder and / or affiliates are regularly challenged, expenditures incurred in conducting R&D are generally accepted as tax deductible expenses. Tax deductibility of such expenditures may be restricted due to transfer pricing rules (see section I.C. below) as well as due to rules on the limitation of amortisation (see section I.F. below).
For the time being, Swiss federal tax law does not provide for any specific tax incentive in relation to R&D expenditures. However, there is a small canton in central Switzerland (Nidwalden) that has recently introduced rules providing for reduced taxation of the net income derived from the licence and sale of intangibles (the so called IP-Box, outlined in subsection 1 below). In order to improve tax competitiveness and to replace existing special tax status contested by the EU by more widely accepted incentives, the introduction of Federal rules (inter alia) providing for lower taxes on income derived from intangible property is being considered (outlined in subsection 2 below). For the time being, there already exist tax incentives for enterprises that are newly set up in certain economically marginal regions (subsection 3 below) as well as special tax regimes for holding companies, for administrative companies, and for mixed companies (subsection 4 below). Although not specifically applying to intangible property, entities conducting R&D particularly benefit from tax incentives for newly set up companies, and entities licencing intangible property may particularly benefit from the special tax regimes. Further, the Swiss federal parliament has discussed introducing a special tax deduction for R&D expenses.
With effect from January 1, 2011, the net income allocated to companies and permanent establishments in the Canton of Nidwalden derived from the use or alienation of intellectual property will be taxed at a reduced rate of 20 percent of the ordinary cantonal tax rate.14 While the ordinary statutory corporate income tax rate in the Canton of Nidwalden amounts to 6 percent,15 the statutory cantonal tax rate on income derived from intellectual property therefore only amounts to 1.2 percent. Including the federal income tax (statutory rate of 8.5 percent on the profit before taxes16), this results in an overall tax burden on the net income derived from intellectual property of 8.84 percent after deduction of taxes.
Licence income qualifying for the Nidwalden IP-Box tax incentive is defined in art. 57a para. 2 of the Tax Ordinance of the Canton of Nidwalden as follows: “Licence income denotes payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work, including cinematographic films, any patent, trademark, design or model, plan, secret formula or process, or payments for information concerning industrial, commercial, or scientific experience. Licence income also covers gains on a disposal of such assets. Licence income further includes income arising from the use of intellectual property among affiliated companies.”17 In the view of the tax administration of the Canton of Nidwalden, this definition of licence income is equivalent to the term ’royalties' as defined in art. 12 para. 2 of the OECD Model Tax Convention on Income and Capital.18
Given that this tax incentive is granted on the net income derived from the use of intangible property, segment reporting is required for all income and expenses allocated to intangible property qualifying for the IP-Box tax incentive.19 The income derived from intangible assets must be documented by licence agreements.20 Income from trade, manufacturing and other activities (partially) resulting from the use of intangible assets owned by the entity using these intangibles itself (embedded income) does, therefore, not qualify for the Nidwalden IP-Box. Therefore, income in the context of goodwill, going concern value, profit potential, a market premium, and the like cannot benefit from this tax incentive.21
A renowned Swiss tax law professor has issued a legal opinion stating that the Canton of Nidwalden, referring to the Swiss Constitution and the Tax Harmonisation law, is allowed to provide such an IP-Box tax incentive.22 Given, however, that the income subject to the cantonal income tax, as well as that the admissible incentives and exceptions are governed by Swiss federal law, it has been questioned whether the Nidwalden IP-Box is in line with Swiss federal law.23 It is, however, very unlikely that any Nidwalden company will challenge this incentive. Therefore, the Nidwalden IP-Box will remain in place at least until a uniform decision on a tax incentive for intangible property will be made in the course of the next corporate tax reform at the federal level (Federal Corporate Tax Reform III).
In order to improve the competitiveness and attraction of Switzerland from a corporate tax point of view, as well as in order to replace current corporate tax reliefs that have been questioned by the European Union, Switzerland is preparing the implementation of a third general amendment of its current federal corporate income tax law (Corporate Tax Reform III).24 On February 13, 2007, the Commission of the European Communities decided that Swiss tax relief for holding, administrative and mixed companies25 qualifies as indirect state aid and is, therefore, not in line with the Free Trade Agreement between Switzerland and the European Economic Community dated July 22, 1972.26 This statement, made after 35 years of uncontested application of these tax statuses, has a political basis and aims at weakening the competitiveness of the Swiss corporate tax system. Given that the statement is not convincing from a legal point of view, it has been criticised for being incorrect by legal doctrine in Switzerland.27 However, regardless of the legal qualification of the existing tax reliefs, Switzerland is planning to modify its corporate tax system in order to diminish the EU political pressure.
Inter alia, it is considered to introduce provisions into the Swiss federal tax acts providing for a tax incentive on income derived from intangible assets.28 There has not been any final decision on the scope, on the amount, and on the functioning of such a tax incentive.29 It is likely that the federal rules will provide for a similar solution as the IP-Box existing in the Canton of Nidwalden and that the tax harmonisation law will authorise the cantons to decide on an amount of tax reduction on income derived from intangible property.
New as well as existing enterprises setting up a new business activity in Switzerland may be granted a tax holiday and other incentives for such new business activity, including most importantly a full income tax holiday for up to ten years.30 At the federal level, such tax holiday may only be granted if (i) the canton grants the same tax holiday, (ii) the enterprise is located in a defined area that is less developed than the Swiss average, (iii) the primary activity performed includes industrial activities or production related services, and (iv) the canton demands the subsequent payment of wrongfully claimed tax reliefs.31 The cantons are free to provide for less or other requirements.32 They usually request that the company creates a certain amount of full time jobs and makes a certain minimum investment into the tax-exempt business. Such tax holiday does not specifically aim at creating a tax incentive for R&D activities. Given, however, that such tax holiday requires a new business activity and it is only granted if such activity creates a certain amount of jobs and improves the economic situation of the region where such business activity is conducted, companies benefiting from such tax holiday are usually engaged in substantial R&D activities and are creating substantial intangible assets during the tax holiday.
Swiss companies meeting the following requirements qualify as holding companies:
While Swiss holding companies are subject to the ordinary federal corporate income tax, they do not have to pay income tax at the cantonal level, except for the net income derived from Swiss real estate.33 According to legal practice, it is admissible that holding companies conduct some auxiliary activities. In addition to mere activities in relation to the managing of their subsidiaries, holding companies may – to a certain extent – in particular hold and use intangible assets without having to pay cantonal income tax on the respective income (e.g., trademarks and/or patents to be licenced to its subsidiaries). However, R&D activities and the registration of new IP rights are generally not admissible for holding companies.34
Administrative companies are defined as companies not qualifying as holding companies, which carry out administrative activities, but do not conduct any commercial business activities in Switzerland.35 Mixed companies are companies undertaking their commercial activities predominantly abroad.36 According to the practice of most cantonal tax authorities, the latter is usually the case provided that 80 percent of both the income and the expenses are foreign-sourced.37 At the federal level, administrative and mixed companies are taxed at ordinary rates. However, only a quota of their income derived from foreign sources is subject to cantonal income tax (usually 5 percent of the foreign source net income for administrative companies and 5-25 percent of the foreign source net income for mixed companies).38 This usually results in a total tax burden in Switzerland of between 9-12 percent.
The tax relief for administrative and mixed companies does not specifically aim at granting a tax incentive for the income derived from intangibles. However, it is possible for administrative companies to use and to licence IP rights and know-how, resulting in reduced taxation of such income at the cantonal level. Mixed companies are usually engaged in international trading activities. Consequently, foreign-source trade income increased by the embedded value of intangibles as well as foreign-source income from the licencing and sale of intangibles is also taxed at a reduced level.
With respect to mixed companies, another possibility for increasing the tax effect of the deduction of R&D expenses would consist in allocating all R&D expenses to the (fully taxed) Swiss income, rather than allocating such expenses proportionately to domestic and to foreign income segments. The authors believe that such cost allocation would be possible without any change of the relevant tax law provisions. The tax authorities have, however, so far disallowed such cost allocation.
Principal companies take on important functions of an international group, such as the centralised acquisition, R&D, planning and controlling manufacturing and sales, marketing, finance, treasury and the like.39 A principal company bears the business risks and is the owner of the distributed products. In such a structure, the manufacturing companies of the group are toll or contract manufacturers and the local distribution companies act as commissionaires or limited risk distributors. At the federal level, a maximum of 50 percent of the net income resulting from the principal's trading activities is allocated to the place of the foreign limited risk distributor. Accordingly, often only 50 percent of such trading income is subject to Swiss federal corporate income tax. At the cantonal level, principal companies generally qualify for the tax relief of a mixed company. Depending on the facts of the individual case and the place of residence of the principal company within Switzerland, the effective total corporate income tax burden may only amount to around 5 percent. Principal companies in general are the owners of the intangible assets of the group. Given that the main value driver for the profit of a trading activity is often the intangible property (registered IP rights or embedded intangibles such as know-how or goodwill), the tax relief for principal companies usually results in a very low tax burden for income derived from intangibles.
Requests have been filed by members of the Swiss Federal Parliament to introduce rules allowing a deduction of R&D expenses exceeding the costs actually incurred in order to promote R&D activities in Switzerland.40 The Swiss Federal Council recommended not introducing such incentive for the time being. There is, however, a report in preparation that will analyse the introduction of such a R&D incentive complementary to the tax reliefs planned in the course of the Corporate Tax Reform III.
Under Swiss tax law, the terms and conditions of transactions between group companies must correspond to the terms and conditions agreed by independent third parties, i.e. all intragroup transactions must comply with the arm's-length principle.41 Switzerland does not have any specific transfer pricing legislation (neither for transactions involving intangibles nor for other transactions) and does not plan to implement any transfer pricing legislation in the near future. In order to determine adequate transfer prices, the Swiss tax authorities follow the international transfer pricing guidelines of the OECD.
Only in relation to private companies providing public services, which are partly held by public authorities, Swiss federal income tax law explicitly states that the payment for services provided to affiliated persons shall either correspond (i) to the fair market value, (ii) to the production costs plus a markup, or (iii) to the end price deducting an adequate profit spread.42 In other words, this provision states that (i) the comparable uncontrolled price method, (ii) the cost plus method, or (iii) the resale price method should apply in such situations. Given that it is hardly possible to determine the fair market value or the resale price of public services, the cost plus method usually applies.43
On March 19, 2004, the Swiss Federal Tax Administration published a circular on the taxation of service companies, stating that the transfer prices shall primarily be determined on the basis of comparable uncontrolled transactions, and that the cost plus method may only be accepted in very exceptional cases.44 However, at least in cases where it is difficult to determine the market price of a service, the cost plus method is still the most commonly used method to determine the applicable transfer price (usually with a markup of between 5 and 20 percent).
In general, there is no obligation to determine transfer prices based on a certain method and adequate transfer prices are generally accepted, regardless of the calculation method applied. Thus, there usually exists a substantial discretion. A taxpayer may request the Swiss tax authorities to approve a certain transfer price in advance (tax ruling). In the course of such ruling request, the taxpayer and the tax authorities may discuss the appropriate transfer price. Despite being an informal confirmation, such tax rulings are legally binding to the extent that (i) the confirmation is limited to a specific case outlined in the ruling request, (ii) the confirming tax authority was competent to issue the ruling, (iii) the requesting party relied on the correctness of the ruling, (iv) the requesting party has taken steps which would lead to a disadvantage if the ruling were invalid, and (v) the tax ruling does not violate higher ranking public or private interest, typically a clear legal provision.
Although there are no specific documentation requirements in relation to transfer prices, it is recommended that the terms and conditions for the use of intangible property rights by affiliates are determined in a written licence agreement and that there are records on the calculation of adequate transfer prices.
Therefore, it is mainly at the discretion of HCo and FSub1 to decide on the calculation method used for the determination of a fair consideration for the licence granted by HCo to FSub1. It is advisable that HCo and FSub1 determine the royalty for such licence based on a formal transfer pricing study. To the extent that there exists a foreign transfer price study, such documentation may also be used for Swiss purposes. It is also advisable to determine the purchase price paid by FSub2 to HCo based on a valuation issued by an expert. In both cases, HCo should apply in advance for a binding confirmation from the competent Swiss tax authorities on the intended royalty charged to FSub1 and on the intended purchase price to be paid by FSub2, in advance. The transfer pricing study/valuation and the draft agreement outlining the scope of the licence have to be attached to such ruling request. Such binding tax ruling is granted free of charge and usually takes a few weeks.
If HCo has not requested such tax ruling and the authorities deem the royalty paid by FSub1 or the purchase price paid by FSub2 to be too low, such transaction qualifies as taxable benefit granted by HCo to the respective FSub in the amount of the difference between the price paid and the deemed fair market value of the consideration. The Swiss tax consequences of benefits granted to affiliated companies are outlined in section I.H.2., below. If the royalty paid by FSub1 or the purchase price paid by FSub2 is deemed to be too low, the difference between the deemed fair market value of the consideration and the price paid qualifies as hidden contribution by the respective FSub to HCo. Such contribution made by any other affiliate, apart from the direct shareholder, does not result in any immediate Swiss tax consequence. However, such transaction will result in higher reserves of HCo that are subject to latent income and withholding tax upon future distribution. Therefore, the Swiss tax authorities hardly intervene if they deem the consideration paid by a foreign affiliate to a Swiss corporation to exceed the fair market value.
There is no specific tax legislation or published legal practice with respect to cost sharing arrangements pertaining to the creation of intangible property. In view of the documentation of the transfer prices as well as in view of the allocation of the intangible property rights created under cost sharing arrangements, it is advisable for HCo and FSub4 to define the terms and conditions of their cost sharing arrangement in a specific written agreement. Terms and conditions set forth in such an agreement must comply with the arm's-length principle.
According to Swiss Federal income tax law, companies engaging third parties in R&D activities on their behalf may book a provision of 10 percent of their taxable annual income for such costs, up to a maximum of CHF 1 million.45 Therefore, even though the expense might not qualify as a provision in accounting terms, the accounting of such R&D provision is deductible from Swiss income tax within the abovementioned limits. If such provision is not used for outsourced R&D activities within an adequate period, it shall be dissolved and entered as income in the profit and loss statement. The maximum period for which such provision may be kept in the books depends on the circumstances of the specific case.46
In general, the income of Swiss companies is taxed based on their profit shown in their statutory profit and loss statements set up in accordance with recognised accounting standards.47 The source of income, for instance from licencing or from the sale of intangibles, is not relevant from a Swiss income tax perspective. Companies benefiting from a special tax regime, under which certain income is only partially taxed, must, however, file a segment report for Swiss income tax purposes. Administrative and mixed companies, paying Swiss cantonal income tax on a small quota of their income derived from foreign sources, must allocate their expenses accordingly.48 Principal companies, paying only Swiss Federal income tax on as low as 50 percent of their trading income, must separately account for their net income derived from trading activities.49 If all distributed products are manufactured by third parties or by group companies on account of the principal company, the net income derived from manufacturing and from trading activities is fixed at 30 percent manufacturing (fully taxed) and at 70 percent trading (partially taxed) by the Federal Tax Administration.50
Given that HCo operates a research and development centre, it hardly meets the requirements to qualify as a holding, as an administrative or as a mixed company. If in addition the key functions and business risks of trading activities of the group are allocated to HCo, it might qualify as a principal company.51 However, even in such a case, the income immediately derived from licencing or from the sale of intangibles would not qualify as trading income taxed subject to the principal company tax rules. Therefore, unless HCo had its place of business or a permanent establishment in the Canton of Nidwalden and had to account for its IP income separately in order to benefit from the IP box,52 the characterisation and source of HCo's income derived from the licence or sale of intangibles is not relevant from a Swiss tax perspective.
Only to the extent that the owner of the intangibles is an individual holding the intangibles as a private asset is it relevant whether the income derived from the intangibles results from licencing or from the alienation of intangible assets. While the income derived from licencing or any other compensation for the use by third parties is subject to ordinary Swiss income tax,53 capital gains derived from the sale of intangibles held by an individual as a private asset are exempt from Swiss income tax.54
Following the general rule on the relevance of the Swiss statutory accounts,55 the amounts written down in the statutory financial statement are also deductible for Swiss income tax purposes. Swiss statutory accounting provisions, however, only prescribe that overvalued assets must be written down, while it is admissible to write down assets without a corresponding decrease of their market value and to omit revaluating assets with an increased value.56 From a tax perspective however, depreciation and amortisation are only admissible to the extent that such adjustment of the book value is based on business reasons.57
The Swiss Federal Tax Administration has, therefore, published safe haven rules defining the maximum annual amortisation allowed for Swiss income tax purposes. The maximum annual amortisation for intangible assets amounts to 40 percent of the value in the last annual balance sheet (i.e. in the case of degressive/reducing-balance depreciation) or to 20 percent of the initial value (i.e. in the case of linear/straight-line depreciation).58 Any higher depreciation may only be deducted from the taxable income to the extent that the respective company provides evidence on the actual decrease of the value of the depreciated asset in question.59 Some cantons also allow writing down some assets to a pro memoria amount in the year of the acquisition of such asset.60
Often, the tax authorities add up any depreciation exceeding the above threshold and establish a separate tax balance sheet relevant for tax assessments in future years. Some cantons, however, instead add up an amount in order to compensate for the interest savings resulting from such excessive amortisation (so called one-time settlement).61 Such alternative correction procedure is also accepted for Swiss federal tax purposes, provided that it results in the same overall tax burden as the ordinary correction of excessive amortisations with a separate tax balance sheet.62
Thus, HCo may account for tax deductible annual amortisations on its capitalised intangibles at a rate of 20 percent in case of straight-line depreciation or at a rate of 40 percent in case of reducing-balance depreciation. Any higher depreciation may only be deducted from Swiss income tax to the extent that HCo proves a respective decrease of the actual value of the depreciated intangible asset. In the records used for internal accounting and for group consolidation, which are usually based on international financial standards or on the Swiss Generally Accepted Accounting Principles, HCo might have to use a lower amortisation rate than in the statutory accounts relevant for Swiss tax purposes, corresponding to the actual decrease of the intangibles' value. For Swiss tax purposes the Swiss statutory accounts are decisive.
Given that the profit of Swiss companies is generally taxed at the same rate regardless of the source of income, the allocation and apportionment of deductions is not relevant for Swiss companies provided that they are not benefitting from a special tax regime nor operating a foreign permanent establishment.63 To the extent that deductions (relating to intangibles) cannot be allocated to a certain category of income in the segment reporting of an administrative or of a mixed company, such income shall be apportioned proportionally based on the gross income derived from each segment.
A segment reporting is generally also required if the IP-Box tax provisions of the canton of Nidwalden apply. With respect to the cost allocation for the calculation of the net licence income qualifying for the IP-Box taxation in the Canton of Nidwalden, art. 57a para. 3 of the Tax Ordinance of the Canton of Nidwalden states: “Net licence income corresponds to the licence income minus the proportionate financing costs, the administrative expenses allocated and apportioned in accordance with the income as well as a proportionate amount of taxes. The Tax Office reserves the right to demand proof of the actual administrative expense. Financing costs are defined as interest on debt as well as other costs which in economic terms is equal to interest on debt. In addition, directly attributable depreciation as well as licence payments to other companies (sublicencing) must be deducted.”
Contributions made by the direct (Swiss or foreign) shareholder into the capital of its Swiss subsidiary are subject to a Swiss issuance stamp tax of 1 percent of the fair market value of the contributed assets, regardless of whether the subsidiary capitalises such amount and regardless of whether it issues any shares as consideration for such contribution.64 If, however, the contributor does not directly hold any shares in such entity after the contribution or if such entity has not been incorporated under Swiss (or Liechtenstein) law, there is no issuance stamp tax levied. A contribution by a shareholder without any consideration does not give rise to any income tax consequence at the level of the receiving subsidiary.65 Contributions paid into the direct Swiss subsidiary, which are duly recorded and reported by the latter, qualify as reserves from capital contributions in terms of Swiss income tax law, i.e., they can be paid out in the future without any Swiss income or withholding tax consequences.66
If an asset other than cash is contributed into the capital of a Swiss corporation against the issuance of shares (contribution in kind), such contribution must be shown in a notarised deed; the board of directors must confirm in a report that the value of such contribution in kind is accurate, and finally, the auditors must approve the same.67 Concerning intangible assets, the valuation might be difficult already by itself. It is, however, sufficient if the auditor confirms that the agreed value is reasonable rather than approving a detailed valuation.68 In order to qualify for a contribution in kind, the asset must not only have a value, but it must also be (i) admitted to capitalise the asset in the balance sheet, (ii) freely disposable for the receiving company, and (iii) alienable (in order to fulfill potential creditors' claims in any bankruptcy procedure). Known IP rights such as patents, copyrights, and trademarks with an ascertainable market value may be freely used and/or alienated and can, therefore, be contributed against the issuance of shares. However, goodwill and other intangibles allocated to a certain business activity can usually not be sold separately at market value to a third party and therefore, do not qualify for a contribution in kind. Also in relation to know-how and registered IP rights that can only be rationally used within the group, it is questionable whether such intangibles qualify for a contribution in kind.
Besides this issue, there are no aspects with respect to which the contribution of intangibles could be treated unlike the contribution of any other fixed asset.
If a Swiss resident makes a contribution into a (direct or indirect) foreign subsidiary, the restrictions outlined in subsection 1.1 above do not apply. If a Swiss company contributes (intangible or any other) assets into its subsidiary, it shall – based on Swiss statutory accounting provisions relevant for income tax purposes – book the contributed asset against a corresponding increase of the value of the participation accounted in the balance sheet (accounting record: participation in subsidiary / intangible assets).
If the contributed (intangible) asset has been recorded in the statutory balance sheet of the Swiss company at fair market value, the contribution results in a mere replacement of the company's assets (replacement of intangible by additional interest in subsidiary).69 Such contribution does not give rise to any Swiss tax consequences at the level of the contributing Swiss parent company.
If the contributed asset has been recorded below fair market value, it is at the discretion of the contributing parent company whether it records the contribution at fair market value (resulting in a release of hidden reserves) or at the value previously recorded in the statutory balance sheet (resulting in a transfer of the hidden reserves from the contributed asset to the participation in the receiving subsidiary).70 Since any revaluation in the accounts of a Swiss entity (i.e. realisation of hidden reserves in the books) is subject to Swiss income tax, even if such revaluation does not affect the profit and loss statement, a contribution recorded at fair market value is subject to Swiss income tax to the extent that the fair market value of the contributed asset exceeds the previously recorded book value.71 Income derived from qualifying participations of at least 10 percent is generally exempt from Swiss income tax due to the participation reduction, which applies regardless of the taxation at the level of the (foreign or domestic) subsidiary.72 Therefore, hidden reserves transferred from an intangible asset (or other fixed asset) to the company's interest in a participation may later on be realised by a sale of the shares in the subsidiary without any tax consequences at the level of the parent company. Therefore, the tax authorities argue that such contribution recorded below fair market value in the statutory financial statement results in a realisation of the hidden reserves for Swiss income tax purposes, i.e. the amount of the hidden reserves transferred from the contributed asset to the participation is subject to Swiss income tax at the level of the parent company (resulting in the possibility of a future income tax free revaluation of the participation up to such amount). However, a substantial part of legal doctrine states that there is no sufficient legal basis for taxation of such transaction and that such taxation of hidden reserves may only take place in cases of tax avoidance.73
To the extent that the recorded value of the participation after the contribution exceeds the effective fair market value of the participation, it shall be depreciated accordingly. Such depreciation is booked as expenditure affecting the profit and qualifies as deductible expense for tax purposes.74
The facts of the case study do not mention whether the fair market value of the intangible assets contributed to FSub3 correspond to the value shown in the statutory balance sheet of HCo. Therefore, potential income tax consequences at the level of HCo regarding the accounting of the contributed assets in HCo's statutory balance sheet cannot be appraised. To the extent that all shares in FSub3 are held by FCo rather than by HCo after the contribution (i.e., FSub3 does not allot any shares to HCo as consideration for the contribution), the transaction does not qualify as direct contribution by HCo and the so-called triangular theory applies for Swiss income tax purposes (outlined in subsection 2 below). Nevertheless, any hidden reserves realised at the level of HCo in the course of such indirect contribution are subject to Swiss income tax.
Contributions to affiliates that are neither directly nor indirectly owned by the contributing company generally qualify as taxable income rather than as tax neutral contributions. With respect to Swiss income tax, the so-called triangular theory applies, i.e. such contribution is treated as a taxable distribution of profit to the joint parent by the affiliate undertaking the contribution, and as a subsequent contribution by the joint parent into the affiliate receiving the asset contributed.
Given that a contribution by an affiliate other than the direct or indirect parent company qualifies as profit distribution at the level of the contributing affiliate, such contribution is also subject to Swiss withholding tax of 35 percent of the contributed amount at the level of the contributing Swiss affiliate.75 With respect to Swiss withholding tax, the so-called theory on direct benefit generally applies, i.e. the affiliate receiving the contribution has to request refund of the withholding tax paid by the contributor, rather than the joint parent company. Only if the contribution is made by the parent in the course of a restructuring of a distressed affiliate, does the triangular theory apply for withholding tax purposes.76 The determination of the affiliate entitled to refund of the Swiss withholding tax is relevant if the recipient is a foreign entity, because such foreign entity is only entitled to complete (or partial) refund of Swiss withholding tax if the applicable tax treaty provides for an exemption (or limitation) of Swiss withholding tax.
Therefore, if HCo does not hold any shares in FSub3 after the contribution of intangible assets to FSub3, such transaction is treated as follows:
There are no other aspects of intangible property with respect to which there are special Swiss income tax rules.
There does not exist any general definition of intangible property in Swiss legislation. The explanations of the Swiss Federal Counsel on the recently introduced new accounting provisions state that all intellectual property eligible for registration as well as any other intangible rights such as know-how and goodwill qualify as intangible property.77 Such broad definition of intangible property rights corresponds to the general understanding of intangibles in Swiss legal doctrine and practice.
Besides the IP-Box in the canton of Nidwalden, the definition of intangible property in Swiss income tax law is so far only relevant with respect to intangibles held by individuals as a private asset, because income derived from licencing or other external use of intangibles held by individuals as a private asset is subject to a specific income tax provision.78 The definition of income derived from intangible property under this provision corresponds to the broad definition outlined in subsection A. above.79 However, given that the use of intangible assets by individuals usually qualifies as business activity subject to ordinary taxation rather than as income from the use of intangibles held as private assets, this definition is hardly ever relevant.80
With regard to the definition of licence income qualifying for the Nidwalden IP-Box, reference is made to section I.B.1 above. Also with regard to the Federal IP-Box that is currently being considered, it is envisaged to provide for a broad definition of intangible property, including intangible rights not eligible for public registration.81 Therefore, the question on the qualification of income for such IP-Box relief will depend on the question whether such relief will be limited to earnings derived from the licencing or from other external use or sale of intangibles (such as the Nidwalden IP-Box), or whether such relief will be extended to a part of the income from manufacturing, trade and/or other income allocated to the use of embedded intangibles. Further, there have also been suggestions limiting the IP-Box to income derived by legal entities having a certain substance in Switzerland and/or that conduct R&D activities to a certain extent in Switzerland.82
In Swiss legal doctrine, there has not been any statement published so far on the Revised OECD Discussion Draft on transfer pricing of intangibles, which analyses potential consequences of the suggested modifications of the definition of intangibles and the transfer pricing principles.83 SwissHoldings, an association representing the interests of 57 Swiss based multinational enterprises, has so far been the only Swiss-based organisation that has filed a position paper on the Discussion Draft to the OECD Centre for Tax Policy and Administration, to our knowledge.84 SwissHoldings generally welcomes the efforts to introduce more specific transfer pricing guidelines and has commented on several paragraphs of the Discussion Draft, recommending some clarifications and amendments in order to ensure that the revised guidelines remain viable for Swiss-based companies. For example, in relation to paragraph 17 of the Discussion Draft, they suggest that temporary transfers of employees should not give rise to a transfer of any intangibles. Further, in relation to paragraph 160 of the Discussion Draft, they suggest that cost-based methods may still be used if financial data for the proper use of other methods are lacking and that the newly suggested guideline should be softened accordingly.
The Swiss tax authorities have not made any official statement on the Revised OECD Discussion Draft on transfer pricing of intangibles so far.
1 Reich Markus, Steuerrecht, 2nd ed., Zurich 2012, §15, nos. 61 et seq.
2 Swiss Code of Obligations (CO), art. 957 et seq. The Swiss statutory accounting provisions have been amended per Jan. 1, 2013. It is still admissible to account based on the old provisions until the business year ending before Jan. 1, 2015. Based on the newly introduced provisions and according to the legal doctrine and practice published so far, the amendment of the Swiss statutory accounting provisions does not result in any change in relation to the accounting treatment of intangible assets.
3 Art. 959a para. 1 no. 2 lit. d CO requires that intangible fixed assets are booked on a separate account in the balance sheet.
4 Swiss Chamber of Auditors and Tax Experts, Swiss Accounting Handbook, Volume I, Zurich 2009, no. 6.13.2.
5 Swiss Chamber of Auditors and Tax Experts, loc. cit., no. 6.13.3.
6 Lipp Lorenz, in: Roberto Vito/Trüeb Hans Rudolf (ed.), Handkommentar zum Schweizer Privatrecht, Ergãnzungsband: Revidiertes Rechnungslegungsrecht 2013, Zurich/Bale/Geneva 2013, nos. 19 et seq. to art. 959a CO; Neuhaus Markus R./Blãttler Jörg, in: Honsell Heinrich/Vogt Nedim Peter/Watter Rolf (ed.), Balser Kommentar Obligationenrecht II, 4th ed., Bale 2012, no. 41 to [old]art. 663a CO.
7 Swiss Chamber of Auditors and Tax Experts, loc. cit., no. 6.13.2.
8 Swiss Chamber of Auditors and Tax Experts, loc. cit., no. 6.13.2.
9 CO, art. 960a para. 1 and 2.
10 CO, art. 960a para. 3.
11 Swiss Federal Act on Federal Direct Taxes (DBG), art. 58 para. 1 lit. a; Swiss Federal Act on the Harmonization of Direct Taxes of the Cantons and Municipalities (StHG), art. 24 para. 1 lit. a.
12 DBG, art. 58 para. 1 lit. b; StHG, art. 24 para. 1 lit. b.
13 With detailed explanations Reich, loc. cit., §69, nos. 69 et seq.
14 Tax Act of the Canton of Nidwalden, art. 85 para. 3.
15 Tax Act of the Canton of Nidwalden, art. 85 para. 1.
16 DBG, art. 68.
17 Guideline no. 85 on Taxation of License Income of the cantonal Tax Office Nidwalden dated Jan. 17, 2011, section 1, published on http://www.steuern-nw.ch/uploads/tx_sbdownloader/RL_Besteuerung_von_Lizenzertraegen__english__01.pdf (visited on Jan. 8, 2014).
18 Guideline no. 85 on Taxation of License Income of the cantonal Tax Office Nidwalden dated Jan. 17, 2011, section 2.1.
19 Guideline no. 85 on Taxation of License Income of the cantonal Tax Office Nidwalden dated Jan. 17, 2011, sections 2.3 and 3.6.
20 Guideline no. 85 on Taxation of License Income of the cantonal Tax Office Nidwalden dated Jan. 17, 2011, sections 3.2 et seq.
21 Hausmann Rainer/Roth Philipp/Krummenacher Oliver, Lizenzbox als alternatives Steuermodell zur gemischten Gesellschaft, in: Der Schweizer Treuhãnder 1-2/2012, p. 88 et seq.
22 Hinny Pascal, Lizenzbox des Kantons Nidwalden, in: IFF Forum für Steuerrecht 2011, p. 138 et seq.
23 In detail Cavelti Ulrich, Bemerkungen zum Gutachten über “Lizenzbox des Kantons Nidwalden”, July 19, 2011.
24 Report to the Swiss Federal Department of Finance dated Dec. 11, 2013, published on http://www.news.admin.ch/NSBSubscriber/message/attachments/33314.pdf (visited on Jan. 8, 2014), p. 4 et seq.
25 These tax reliefs are briefly outlined in subsection I.B.4 below.
26 Decision of the Commission of the European Communities dated Feb. 13, 2007 (published on http://eeas.europa.eu/delegations/switzerland/documents/eu_switzerland/20070213_kommission_steuern.pdf (visited on Jan. 10, 2014). Roth Philipp, Der Steuerstreit zwischen der Schweiz und der Europãischen Union, in: Der Schweizer Treuhãnder 10/2010, p. 722 et seq.
27 See e.g. Roth Philipp, Der Steuerstreit zwischen der Schweiz und der Europãischen Union, in: Der Schweizer Treuhãnder 10/2010, p. 722 et seq.
28 Report to the Swiss Federal Department of Finance dated Dec. 11, 2013, p. 27 et seq.
29 Suggestions on such Federal IP-Box are outlined by Gentsch Daniel/Matteotti René/Roth Philipp, Steuerliche Innovationsförderung im Rahmen der Unternehmenssteuerreform III, in: Der Schweizer Treuhãnder 11/2013, p. 776 et seq.
30 Swiss Federal Act on Regional Policy, art. 12 para. 1; StHG, art. 23 para. 3.
31 Swiss Federal Act on Regional Policy, art. 12 para 1 and para 2.
32 Greter Marco, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/1, 2nd ed., Bale 2002, StHG, art. 5, nos. 4 et seq.
33 StHG, art. 28 para. 2.
34 For the legal practice in the Canton of Zurich Richner Felix/Frei Walter/Kaufmann Stefan/Meuter Hans Ulrich, Kommentar zum Zürcher Steuergesetz, 3rd ed., Zurich 2013, §73, nos. 13 et seq.
35 StHG, art. 28 para. 3.
36 StHG, art. 28 para. 4.
37 For the Canton of Zurich Richner/Frei/Kaufmann/Meuter, loc. cit.,§74, no. 14.
38 Richner/Frei/Kaufmann/Meuter, loc. cit.,§74, no. 23.
39 The taxation of principal companies bases on the practice of the Swiss Federal Tax Administration as set forth in the circular no. 8 of Dec. 18, 2001.
40 Motion no. 08.3853 of Ruedi Noser dated Dec. 17, 2008; Postulate of the Commission of the Swiss National Council no. 10.3894.
41 Brülisauer Peter/Poltera Flurin, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/2a, 2nd ed., Bale 2008, DBG, art. 58, no. 103; Reich, loc. cit., §20, no. 25.
42 StHG, art. 24 para. 5; DBG, art. 58 para. 3.
43 Brülisauer/Poltera, loc. cit., DBG, art. 58, nos. 301 et seq.
44 Circular no. 4 of the Swiss Federal Tax Administration on the taxation of service companies dated Mar. 19, 2004.
45 DBG, art. 63 para. 1 lit. d.
46 Reich Markus/Züger Marina, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/2a, 2nd ed., Bale 2008, DBG art. 29, nos. 42 et seqq.
47 See section I.A. 1 above.
48 See section I.B. 4.2 above.
49 See section I.B. 4.3 above.
50 Circular no. 8, no. 3.
51 See section I.B. 4.3 above.
52 See section I.B. 1. above
53 StHG, art. 7 para. 1; DBG, art. 20 para. 1 lit. d (income from movable property).
54 StHG, art. 7 para. 4 lit. b; DBG, art. 16 para. 3.
55 See section I.A.1 above.
56 CO, art. 960a.
57 StHG, art. 24 para. 4 in connection with art. 10 para. 1 lit. a; DBG, art. 62 para. 1.
58 Instruction sheet A 1995 of the Swiss Federal Tax Administration on the depreciation of fixed assets.
59 Kuhn Stefan/Klingler Michel, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/2a, 2nd ed., Bale 2008, DBG, art. 62, no. 9.
60 Among others, see Tax Book of the Canton of Lucerne, section 4.1; TG StP 30 Nr. 7.
61 Among others, see Tax Book of the Canton of Lucerne, section 4.2.
62 Instruction sheet A 1995, section 4.
63 The income derived from foreign permanent establishments is unilaterally exempt from taxation in Switzerland (DBG, art. 52 para. 1).
64 Swiss Federal Act on Stamp Taxes, art. 5 para. 1 lit. a and para. 2 lit. a in connection with art. 8 para. 1 lit. a and lit. b and para. 3.
65 StHG, art. 24 para. 2 lit. a; DBG, art. 60 lit. a.
66 StHG, art. 7; DBG, art. 20 para. 3; Swiss Withholding Tax Act (VStG), art. 5 para. 1bis.
67 CO, art. 634 et seq.
68 CO, art. 635 no. 1. However, in case of substantial contributions, the company's board of directors usually asks for an external valuation of the assets contributed.
69 Brülisauer Peter/Helbing Andreas, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/2a, 2nd ed., Bale 2008, DBG, art. 60, no. 14.
70 Brülisauer/Poltera, loc. cit., DBG art. 58, no. 211 and 213; with additional references to doctrine.
71 Brülisauer/Poltera, loc. cit., DBG art. 58, nos. 266 et seq.
72 StHG, art. 28 para. 1bis and 1ter; DBG, art. 69 et seq.
73 Brülisauer/Poltera, loc. cit., DBG art. 58, nos. 230 et seq.; with additional references to doctrine.
74 Brülisauer/Poltera, loc. cit., DBG art. 58, no. 215.
75 VStG, art. 4 para. 1 lit. b, art. 10 and art. 13 para. 1 lit. a. Given that the tax rate of 35 percent is levied on the gross amount of the profit distribution, a withholding tax of 53.8 percent is levied at the level of the distributing entity if such entity makes a distribution without withholding the 35 percent withholding tax (distributed gross amount / 65 * 100 * 35 percent).
76 Instruction sheet of the Swiss Federal Tax Administration on the determination of the recipient of benefits for withholding tax purposes of Feb. 2001.
77 Swiss Federal Gazette 2007, p. 1706.
78 See section I.E. and footnote 50 above.
79 See also Reich, loc. cit., §13 no. 178.
80 Reich Markus, in: Zweifel Martin/Athanas Peter (ed.), Kommentar zum Schweizerischen Steuerrecht I/2a, 2nd ed., Bale 2008, DBG, art. 20, no. 124.
81 Report to the Swiss Federal Department of Finance dated Dec. 11, 2013, p. 289 et seq.
82 Report to the Swiss Federal Department of Finance dated Dec. 11, 2013, p. 289 et seq.
83 Huber Markus F./Berr Fabian, Blickpunkt OECD, in: SteuerRevue 10/2013, p. 709 et seq. summarize the most important innovations without taking any position on their own.
84 Comments by SwissHoldings on the Revised Discussion Draft On Transfer Pricing Aspects Of Intangibles dated Sep. 25, 2013, published on http://www.oecd.org/ctp/transfer-pricing/swissholdings-intangibles.pdf
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