Small firms desperate for planned tax reform

Some tax regulations give small businesses a headache Keystone

Small businesses and shareholders in Switzerland are hoping to benefit from a series of proposed tax breaks being debated in the Senate this week.

Experts say the tax reforms would go some way towards untangling a complex set of rules that place a heavy tax burden on Swiss entrepreneurs. But they also criticise the proposals for not going far enough.

Both chambers of parliament are devoting time this summer session to a second set of corporate tax reforms following the implementation of a first raft of changes in 1997.

On Tuesday the Senate is debating proposals to introduce tax relief on share dividends that would dampen the effects of double taxation.

Switzerland is one of the few Organisation for Economic Cooperation and Development (OECD) countries that taxes dividends at both company and individual level.

This means that companies pay taxes on the profits they make and the same profits are then taxed a second time through personal tax levied when the income is distributed to shareholders via dividends.

Parliament will debate proposals to exempt a portion of dividends from the secondary tax at the federal level, but this legislation would not affect rates set by cantons.

Relief

The government wants to make 20 per cent of dividend payments tax free, but the Senate may vote to double that concession. However, the Swiss Business Federation, economiesuisse, wants more.

“We approve of this package, but we would have wished for a more ambitious set of proposals,” said spokesman Pascal Gentinetta. “We are in favour of shareholder relief of about 50 per cent like in Germany, Luxembourg or France.”

The issue of double taxation is only one item on corporate tax reform agenda. Last week the House of Representatives debated the issue of taxation during company buyouts, which is indirectly related to double taxation on dividends.

In Switzerland, tax is levied on share dividends but not on the sale of shares. In the past entrepreneurs avoided dividend tax by pumping profits back into the company and funnelling the cash into their own coffers via a holding company when they sold the business or passed it on to the new generation.

Loophole

In 2004 the Federal Court partially closed this loophole by ruling that these profits could still be subject to tax in some cases – a principle known as “partial liquidation”.

Parliament will consider rushing through legislation to overrule this judgement, which has caused consternation by effectively blocking the handover of small and medium-sized enterprises (SMEs) in Switzerland.

Thousands of SMEs may simply go bust unless the situation is rectified, tax expert Toni Amonn told swissinfo.

“The economic consequences of the court ruling are terrible. About 50,000 businesses could be affected by it in the next five to ten years,” he said.

“A lot of people could lose their jobs as a consequence because each transfer [to the next generation, or management buyout or company takeover] that does not work will lead to the bankruptcy of the company.

“In my experience most entrepreneurs have some 90 per cent of their assets in their company because dividend distribution is too expensive.”

swissinfo, Matthew Allen

In brief

The issues of double taxation on dividend payments and the “partial liquidation” court ruling are part of a package of tax reforms known as “company tax reform II”.

Parliament hopes to pass legislation as soon as January 2007 that clears up issues created by the federal court ruling two years ago. Experts have urged councillors to backdate this legislation to 2004.

Measures to offer tax relief on dividend payments may take longer to implement, with some observers predicting an enforcement date some time in 2008.

Key facts

Corporate tax is levied at federal, cantonal and municipal levels. The combined rate of tax will therefore depend on where people live.
Typically companies face a tax bill of some 20-25% on their profits while in the worst cases individual shareholders may have to pay double that amount on their dividend income.