Nidwalden IP Box, Corporate Tax Reform III – Introduction of a Swiss IP Box Regime

Switzerland currently offers a well established IP Box taxation regime in one Canton, the so-called Nidwalden IP Box. According to Nidwalden’s taxation laws in force since January 1st, 2011, these rules provide for separate taxation of net licensing income resulting from the right to use IP at a flat rate of 1.2% of the Nidwalden cantonal and communal taxes.

Responding to increased pressure and scrutiny of Switzerland’s tax treatment widely privileging holding, mixed and so-called “domiciliary companies” in many of the approximately 3,000 Cantonal and communal tax jurisdictions the Swiss government proposes fundamentally to reshape corporate tax. .

Published on September 22, 2014 for comment by January 31, 2015 the Swiss Corporate Tax Reform III envisages discontinuing the privileged tax status for holding companies, mixed and domiciliary companies, the Swiss Finance branch concept as well as the principal company taxation. As per today, it is uncertain whether or not a grandfathering period of some few years will be introduced allowing taking advantage of previously obtained tax status after the Corporate Tax Reform III entered into force.

Instead, the draft of the Corporate Tax Reform III would, if enacted, introduce a special tax treatment favourable to certain eligible intellectual property rightsholders, as part of more general drive to strengthen the Swiss competitiveness (eg introducing a notional interest deduction on equity, of step-up mechanisms revealing hidden reserves when changing from a previous privileged tax status to the ordinary tax status, of a general reduction of corporate income tax rates, new rules on offsetting tax loss carry-forwards and the abolishment of stamp issuance duty).

The proposed Swiss IP Box Regime appears similar to the UK’s. It provides for a tax base reduction of 80%. In light of the current review and adjustment of IP box regimes in the EU by the European Commission, the draft proposed a row definition of intellectual property qualifying for the Swiss IP Box taxation. Due to OECD efforts regarding proceeds affected b Base Erosion and Profit Shifting (“BEPS”) Action 8 (transfer pricing issues in the key area of intangibles) the Swiss draft set stipulates stringent IP entry tests, such as substantial contribution to development or advancement of the IP, control over development of qualifying IP (i.e. strategic planning and funding of development), and being part of a Group in case of exclusive licensing.

As both, EU and OECD are currently reviewing all existing IP Box regimes, the Swiss IP Box rules may be adapted in the course of the legislative proceedings aligning with the results of either of these reviews. Resolution of differences of opinion notably between the UK; Luxembourg, Netherlands and Germany will likely shape the look and timing of the Swiss draft going forward. From a practical perspective it will be interesting to see how corporations can prove meeting eligibility criteria.

The combined result is likely to be also the current Nidwalden IP Box will be adapted once the Federal law is settled and a well-targeted Swiss IP Box will be in place. Corporations now benefitting from the Nidwalden IP Box may benefit from certain grandfathering of rules, or granted time to adapt to comply with the new law once enacted.

Carlo Scollo Lavizzari / Dr Philipp Ziegler