The implementation of the STAF in the cantons of Eastern Switzerland - selected topics of profit and capital taxation

1 Starting point of the cantons SG, TG, AR and AI01

The cantons of SG, TG, AR and AI - embedded in the Lake Constance region with strong links to the southern German states of Baden-Württemberg and Bavaria, the Austrian state of Vorarlberg and the Principality of Liechtenstein - form a well-connected economic area with a total GDP performance in 2017 of CHF 57.243 billion; this corresponds to approximately 8.55% of the total Swiss GDP in 2017 of CHF 669.542 billion.02 In terms of their individual economic performance, the cantons SG, TG AR and AI are nevertheless heterogeneous: SG and TG together account for 92.88% of the GDP of the four cantons. Only 7.11% is accounted for by the cantons of AR and AI.03 In terms of GDP per inhabitant in 2017, the canton of SG leads the way with CHF 73,059, followed by the cantons of AI with CHF 61,633, TG with CHF 60,143 and AR with CHF 56,038.04

Although the AR and AI cantons lag behind the SG and TG cantons in terms of their overall economic performance, they are much smaller cantons in terms of area and population05 has always been more flexible and attractive in terms of profit and capital tax without central tax burdens. It is therefore hardly surprising that the cantons of AR and AI were able to position themselves in the top third and quarter of all Swiss cantons in terms of profit and capital tax burdens even before the implementation of the STAF, while the cantons of TG and SG were in midfield.06 Accordingly, the governments of the cantons SG, TG, AR and AI had very different starting positions and financial leeway for the implementation of the STAF in order to remain competitive on a national average in terms of both profit and capital tax.

The cantonal tax statuses, which were abolished on 1 January 2020, have never played a dominant role in the income and capital tax revenue of the cantons of Eastern Switzerland (SG, TG, AR and AI), especially compared to cantons such as Zug, Basel-Stadt, Neuchâtel or Geneva.07 Nonetheless, the cantons SG, TG, AR and AI have taken the entry into force of the STAF as an opportunity to adapt their respective profit and capital taxation systems - in line with the existing and, above all, with some new options under the Swiss Federal Tax Act - in key respects as of 1 January 2020.

The cantons SG, TG, AR and AI implemented their cantonal bills on STAF implementation at different speeds: SG and AR did not have to hold a referendum because their bills had broad political support and the corresponding referendum deadlines had passed unused. In contrast, the canton of TG - on the basis of a referendum by the authorities, which was held in the Grand Council08 - held a referendum on 9 February 2020.09 The canton of AI should have held a referendum on the cantonal implementation of the STAF on 26 April 2020, which is obligatory under the political system, after the Professional Ethics Committee had decided on 3 December 2019 to put the implementation measures into force on 1 January 2020.10 Since this cantonal commune could not take place due to the COVID 19 pandemic, the government decided in May 2020 to hold a ballot on 23 August 2020 and to have the electorate vote on the cantonal implementation of STAF. Within the framework of this vote, the electorate approved the proposal.11

2. adjustments to profit tax rates

2.1 General comments

According to Art. 129 para. 2 BV, the tax harmonisation of the cantons extends to the tax liability, the object and timing of taxes, procedural law and the law on fiscal offences. Tax tariffs, tax rates and tax allowances are expressly excluded from this harmonisation.12 Accordingly, like all other cantons in Switzerland, the eastern Swiss cantons SG, TG, AR and AI were also free to reduce the effective profit tax burden for all taxable legal entities when the STAF came into force on 1 January 2020 in order to remain attractive as a canton of domicile - namely for companies that enjoyed cantonal profit tax privileges before 1 January 2020 under one of the tax statuses.13 With regard to the profit tax rate, the overall picture for the eastern Swiss cantons SG, TG, AR and AI is as follows14:

2.2 Canton SG

The canton of SG knows the following rules for the profit tax according to Art. 81 ff. StG SG a cantonal standard rate. While the ordinary profit tax rate pursuant to Art. 89 para. 1 StG SG for the 2019 tax period was 3.75% with a surcharge of 335% of the simple tax15the ordinary profit tax rate since 1 January 2020 is16 now 2.8% pursuant to Art. 89 para. 1 StG SG with a surcharge of 302%.17 Thus, the effective profit tax rate, i.e. the profit tax rate before taxes, in the canton of SG has been 14.5% including direct federal tax since 1 January 2020.18

With its measure to reduce the effective income tax rate by almost 3% overall, the canton of SG has accepted a general and - presumably also permanent - loss of income tax revenues. Due to the low profit tax rate of approx. 10.1%, which came from status companies,19 the majority of the reduction in the profit tax rate should benefit companies that were already subject to ordinary profit tax in the canton of SG before 1 January 2020.

In a nationwide comparison, the canton of SG was unable to improve its position in the "ranking list" of nationwide profit taxation with the profit tax reduction that came into force on 1 January 2020: Until 2019 it was in the (lower) midfield in 15th position.20 or 17.4% was exactly in the state average.21 Since 1 January 2020 it has been in 17th position in the cantons' profit tax "ranking list22 and is now slightly below the state average of 15% in 2020.23 While certain tendencies of individual (mobile) companies subject to profit tax to migrate to neighbouring cantons cannot be ruled out, it can be assumed for the time being that the canton of SG will not be able to record any significant new settlements from other cantons despite a reduction in the profit tax rate.

2.3 Canton TG

The canton of TG has - practically to the same extent as its neighbour canton SG - implemented a reduction in the total profit tax burden of approx. 3% as of 1 January 2020. This was done in the hope of remaining attractive as a business location. Unlike SG, TG does not have a uniform cantonal profit tax rate. The profit tax is made up of the cantonal profit tax rate, which was reduced from 4% to 2.5% as of 1 January 2020, and the individual municipal profit tax rate. As of 1 January 2020, the municipalities of the canton TG have generally not reduced their profit tax rates.

The canton of TG, or rather its government council, expects - as it communicated to the voters in the referendum24 - expects the reduction in profit tax implemented on 1 January 2020 to provide a boost to the national economy. It is also apparently convinced that "[...] thanks to this measure [...] a large proportion of the companies that have hitherto been taxed at a privileged rate will remain in the canton of Thurgau, even though they will now be taxed at a higher rate".25. With a - creative - calculation example, it was also illustrated to the voters - and in particular to the shareholders of properly taxed companies domiciled in the Canton of Thurgau - that the profit tax burden would not only decrease by 3%. In fact, a profit tax reduction of 18% would result as of 1 January 2020, since a company domiciled in the Canton of TG with a taxable profit of CHF 500,000 and a total tax burden of 16.4% would pay CHF 82,000 in profit tax at the cantonal capital, whereas it would only have to pay CHF 67,000 from then on with a total tax burden of 13.4% if the STAF profit tax reduction were implemented, which would result in a reduction of 18%.26

With the reduction in profit tax as of 1 January 2020, the canton of TG has moved up from 14th to 10th position in the Swiss "ranking list".27 This result is in line with the strategy of the Canton TG not only to gain tax substrate with an aggressive profit tax strategy, but also to remain in the midfield of the cantons for profit tax purposes, to secure well-paid jobs in the canton by means of an attractive overall environment (housing, available land for new settlements, etc.) and thus to retain or, if need be, even expand the substrate among natural persons for income tax purposes in the canton.

2.4 Canton AR

The canton of AR - as a traditionally attractive business location with solid financing and lean administration - has not lowered the profit tax burden as of 1 January 2020. Both for the period prior to the implementation of the STAF and for the period after 1 January 2020, the ordinary - combined canton-wide uniform - profit tax rate is 13.04% for each.

Compared to 2019, the canton of AR has dropped from the 4th position of the cantons with the lowest profit tax rates in Switzerland to the 9th position as of 1 January 2020.28 The fact that the canton of AR has not implemented any further cantonal profit tax reduction in the course of the STAF implementation is mainly due to the fact that it already reduced the profit tax rate to 6% as of 1 January 200829 or on 1 January 201530 to 6.5%, thus virtually anticipating the STAF proposal as regards the level of profit tax. Now that companies had enjoyed preferential tax treatment for some time, it would hardly have been possible to convince the voters of the canton of Aargau that these same companies should in turn benefit from a reduction in profit tax as of 1 January 2020, in line with the watering can principle. Moreover, the special tax status of profit tax revenue in the canton of the AR has always played a subordinate role, which is why the government of the canton of the AR - in contrast to other cantons - has not had to make any special profit tax arrangements for such companies either.

2.5 Canton AI

Article 67(1) StG AI stipulates that the tax on profits is 6-11.5% of taxable profits, with the Grand Council setting the tax rate annually. According to Art. 67 para. 2 of the AI Tax Act, which was in force until 31 December 2019, this profit tax rate - a special feature rarely observed in other cantons - was halved on application for profit shares that were distributed in the form of a dividend in the following financial year.

By decision of the Professional Ethics Committee of 3 December 201931 the government of the canton of AI has provisionally implemented the STAF amendments in cantonal law. Art. 12 of this resolution provides for an amendment to Art. 67 para. 2 of the AI Tax Act in such a way that the rate of profit tax pursuant to Art. 67 para. 1 of the AI Tax Act can be reduced by up to 50% - and no longer in principle by half as before - from 1 January 2020 on application, with the Grand Council determining the percentage of the reduction annually in a general resolution.

This profit tax regulation grants the Grand Council of the Canton of AI considerable flexibility. Accordingly, it has reduced the profit tax rate for state, district and municipal taxes on legal entities from 8% to 6% as of 1 January 2020. At the same time, the Grand Council determined that the reduction in the profit tax rate for legal entities for profit shares that are distributed in the form of a dividend in the following financial year will now amount to 25% for the 2020 tax period instead of 50% as previously.32 With this combination of adjustments, Canton AI has succeeded in implementing a profit tax burden of between 11.5% and 12.7% - depending on the amount of the dividend distribution in the following year. In this way, Canton AI has secured the double-digit profit tax burden generally expected internationally and is likely to be the Swiss canton with the lowest (ordinary) effective profit tax burden overall from 1 January 2020.33

The profit tax relief which the canton of AI makes possible with dividend distributions still seems to be (too) little known to the general public - and presumably also to the world of consultants. The same applies to the very attractive provision of Art. 45 para. 4 StG AI, according to which, pursuant to Art. 38 para. 4 StG AI, the (cantonal) income tax calculated for the shareholder and attributable to investment income is credited against the wealth tax levied by the Canton of AI on these same investments.34 However, the fact that these very attractive regulations have not attracted much attention throughout Switzerland is likely to have changed since the implementation of the STAF.

In contrast to earlier - unconstitutional - "homeland security" regulations in other cantons, even after 1 January 2020 it is not decisive for the reduction of profit tax in Canton AI whether the dividend, which is distributed and reduces the profit tax burden of the distributing company, is actually subject to profit or income tax in Canton AI at the recipient's level. Specific ownership structures or quotas - such as for the partial taxation in the case of income tax or the participation deduction in the case of profit tax - are also not required. The only relevant factor is whether the legal entity concerned actually distributes the profit earned in the tax period following its realisation. Retained or carried forward profits therefore do not qualify for this relief.

Even after 1 January 2020, it will probably remain open how a legal entity subject to profit tax domiciled in the canton of AI will set aside a provision for profit tax if it does not yet know (conclusively) whether the supreme body of this legal entity will agree to the distribution of a dividend or whether the company will actually be in a position to actually distribute a dividend - particularly against the background of an external event such as the recent COVID 19 pandemic. The assumption is probably that the legal entity can set aside a provision for an unabridged profit tax for the time being - i.e. without assuming a dividend distribution. Subsequently, this provision will be partially offset again for the calculation of the taxable profit, if the company decides to distribute the profit of the previous year, which was recorded with the profit tax, in the form of a dividend. If - in the opposite situation - the Company has not established a sufficient provision for income tax with respect to a dividend distribution and the highest corporate body ultimately decides not to distribute a dividend, the Company should be entitled to establish a subsequent additional provision for income tax purposes.

2.6 Synthesis for the cantons SG, TG, AR and AI

The analysis - in particular the discussions and information in the run-up to the cantonal submissions - shows that the cantons SG, TG and AI, which have all reduced their ordinary profit tax rates to 1 January 2020, remain competitive within the framework of their tariff autonomy. They wanted to avoid at all costs falling or falling back in the intercantonal comparison of profit tax. Whether this political calculation works out in the medium to long term seems questionable, at least for the cantons SG and TG: Although they have implemented significant profit tax cuts of 3% each, they have not become more attractive in terms of profit tax on average in Switzerland and cannot hope for additional profit tax revenue. The latest developments surrounding the COVID 19 pandemic could further reinforce or confirm this finding. Profit tax revenues will generally decline as a result of the tax cuts under the STAF measures as of 1 January 2020. At the same time, companies that are properly taxed are likely to tax much lower profits in the medium term. Significant new settlements in eastern Switzerland - whether from abroad or from other cantons - which actually lead to a profit tax base are likely to be unrealistic, at least in the medium term.

It is likely that only the canton of AI has succeeded in standing out clearly in the nationwide "competition" for the lowest profit tax rate in Switzerland, or, with a clever combination of the reduced profit tax burden and the reduction in dividend distributions, in further improving the already good starting position - irrespective of the effects of the COVID 19 pandemic. This effect is also likely to be reinforced by the profit tax rate, according to which the canton of AI will reward dividends - which in the best case scenario will be taxed in Switzerland or the canton of AI on income - with a reduction in profit tax in the tax period 2020. The economic factor of this measure by the Canton AI will not be underestimated even after 1 January 2020. In particular, owner-managed companies will still have a low incentive to retain profits or, with the help of loans to the shareholders, to achieve the same result in terms of liquidity as with a dividend distribution, which in turn finally enriches the paying company and - ideally - triggers income taxation in Canton AI.35 The particular strength of the approach in Canton AI is probably also the fact that the Grand Council can adjust the reduction of the income tax rate every year. If - contrary to expectations - the chosen strategy generates excessive costs, the Grand Council can react immediately. This also applies to suddenly occurring events that - such as the current COVID 19 pandemic - have a strong impact on the taxation of profits or tax revenue in Canton AI.

Overall - although not with the success of the canton of AI - the strategy of the canton of AR not to implement a general profit tax reduction despite the STAF should also prove successful. The canton of AR is unlikely to lose any substantial income tax substrate and at the same time continue to hold its place in the top quarter of the "ranking" of the most attractive cantons in terms of income tax.

Against this background, the impression sometimes arises that the profit tax cuts implemented in the cantons of SG and TG, although politically well-intentioned, have essentially reduced the overall profit tax revenue, will clearly exceed the calculated revenue shortfall and will not be able to generate additional profit tax revenue. Moreover, they primarily help the companies that were previously taxed properly - and only to a small extent the companies with special tax status, which were abolished on 1 January 2020. Finally, it is likely to prove economically utopian that a profit tax cut of three percentage points will trigger an "economic stimulus" - as the cantonal government of the TG canton assumed in the run-up to the referendum on 9 February 2020.36 Similarly, a profit tax increase in the cantons SG and TG - following the significant reduction to 1 January 2020 - is likely to remain a political illusion for the foreseeable future, irrespective of the profit tax effects of the COVID 19 pandemic.37

3. profit tax rates 2020: planning possibilities in the cantons SG, TG, AR and AI, especially against the background of the COVID 19 pandemic?

Against the background of the profit tax cuts implemented by the cantons SG, TG and AI as of 1 January 2020, intertemporal profit tax issues arise. In the context of the annual financial statements relevant for the 2019 tax period, the preparation of which may be delayed due to the COVID 19 pandemic, some companies may consider that they will (particularly) benefit from the profit tax reduction if they book additional expense items in the 2019 annual financial statements which - in application of the principle of authoritativeness - reduce the profit tax burden in this tax period with a higher profit tax burden. The main focus here is likely to be on provisions for future business risks or additional / unscheduled depreciation, which will be subject to a lower profit tax rate from the 2020 tax period onwards, provided that they are then reversed and recorded with profit tax. Together with the COVID 19 pandemic, a company may also consider making provisions or extraordinary write-offs - possibly on participations or other elements of fixed assets - in view of the economic consequences of this epidemic in 2019.

It goes without saying that these two events - general profit tax reduction in the cantons SG, TG, AI as of 1 January 2020 and COVID issue in the first half of 2020 - coincide. However, it is understood that this accumulation will not significantly change the taxation and assessment practice of the cantons SG, TG, AR and AI. Tax planning considerations should not be worthwhile for the companies concerned. The practice of the tax offices or administrations of the cantons SG, TG, AR and AI will remain uniform - despite the profit tax reduction on 1 January 2020 and in line with the principle of legality and the principle of equal treatment of taxpayers: Ordinary provisions, depreciation and value adjustments in the 2019 tax period are permitted as before. In principle, they are not offset against profit tax. On the other hand, extraordinary provisions and / or extraordinary depreciation and / or value adjustments will increasingly be the focus of profit tax audits. This applies in particular with regard to the possible intention of taxable legal entities to use the differences in profit tax between the 2019 tax period and future tax periods for tax planning purposes. Existing provisions - and those audited in previous tax periods - will in principle not be affected or offset for profit tax purposes in the 2019 tax period, although they may provide the taxpaying legal entity with a profit tax advantage through the transition to the lower profit taxation from 2020.

The profit tax practice of the cantons SG, TG, AR and AI is now - for current reasons - of some practical relevance with regard to any provisions in the 2019 annual financial statements under commercial law that cover risks of the COVID 19 pandemic. According to the latest official announcements, administrative practice in these four cantons is inconsistent. However, as far as can be seen, it is not directly related to the event of the profit tax reduction on 1 January 2020, or the two events do not influence each other in practice.

3.1 Canton SG

The cantonal tax office SG has - according to the latest announcement38 - has expressed its opposition to allowing so-called "corona provisions" in the 2019 annual financial statements of legal entities to be deductible for profit tax purposes. This position is based on four arguments, whereby considerations of reducing profit tax as of 1 January 2020 do not seem to play a role:

On the one hand, it is alleged that the Director of the Federal Tax Administration informed the heads of the cantonal tax administrations by letter dated 8 April 2020. "Corona" provisions in the 2019 tax period are not justified in terms of business for direct federal tax and are therefore not permissible under tax law (even if they were booked under commercial law), which is why they must be offset against the direct federal tax in the assessment of the 2019 financial year.

On the other hand, in a letter dated 6 April 2020 to the conference members, the Executive Committee of the Conference of Cantonal Finance Directors recommended that no special provisions be allowed in the 2019 financial statements. In addition, the government of the Canton of SG has always opposed the tax recognition of "Corona" provisions in the 2019 financial statements of St. Gallen companies.

And finally, it is argued that the St. Gallen cantonal council - as legislator - has now also spoken out against "corona" provisions: When discussing the law on the granting of supplementary credits and joint and several guarantees as a result of the corona virus39 the preliminary advisory commission of the Cantonal Council still provided for the possibility of allowing taxable companies to set up "corona reserves" in their 2019 financial statements. In the end, however, the preliminary commission of the Cantonal Council waived this possibility and submitted to the cantonal parliament the alternative that the government should introduce a simplified procedure for tax exemptions in favour of affected taxable legal entities and self-employed persons. The Cantonal Council approved this alternative and enacted the corresponding law on 20 May 2020.40 As a result, the legislator of the canton SG now also rejects - indirectly - "Corona provisions" in the 2019 annual financial statements of taxable legal entities. Although the law of 20 May 2020 was subject to a mandatory financial referendum, such a financial referendum was not an issue due to the clear majority with which parliamentarians across party lines supported the bill.41

In accordance with the alternative approved by the Cantonal Council, the government is now invited to provide, within the framework of the current tax law of the Canton of St. Gallen, a simplified procedure for tax relief in favour of companies (legal entities and self-employed persons) whose economic existence is threatened and whose jobs are at risk as a result of the COVID 19 pandemic. The following key points apply for implementation42:

1. Upon request, companies (legal entities and self-employed persons) can be exempted from cantonal and communal taxes in 2019 to the extent of 40%, but not more than CHF 10,000;
2. Legal entities and self-employed persons are excluded from the waiver if the tax amount exceeds CHF 25,000 in the 2019 assessment;
3. The emergency is (only) to be made credible; and
4. The simplified procedure does not apply to applications for remission that exceed 40% of the 2019 cantonal and communal taxes or the amount of CHF 10,000.

As a result of the Canton SG solution, tax-planning motivated "corona provisions" for the 2019 tax period - with release in 2020 - are also likely to be eliminated or would be offset if a company has booked them in the 2019 income statement. At the same time, however, it is also to be expected that companies - in the sense of a politically undesirable incentive - could be tempted to seek tax relief with corresponding provisions in the 2019 income statement by reporting for 2019 exactly the profit that leads to such a tax relief for the 2019 tax period. It can be assumed that the Cantonal Tax Office SG will have to make a considerable administrative effort in order to check the income statements of companies applying for a tax remission for the 2019 income tax for expense postings - possibly bonus payments to employees who are also shareholders, special depreciations, larger value adjustments on assets, etc., possibly also increased monetary benefits - which ultimately led to the (low) reported taxable profit for 2019. Against this background, it is at least doubtful whether the political solution approach of the Canton of St. Gallen will actually lead to a proper and administratively reasonable result and ensure equal treatment of all taxable companies.

3.2 Canton TG

The canton of TG is pursuing a far more pragmatic and probably also administratively more sensible approach to the issue of "corona provisions" in the 2019 financial statements. According to the announcement of the tax administration TG43 the Government Council decided on 3 April 2020 to recognise a "corona provision" for profit tax purposes in the 2019 financial statements for companies based in the canton of TG that are particularly affected by the COVID 19 pandemic. The tax administration TG implements this decision as follows in its assessment practice44Firstly, the company must have been directly affected by the emergency closure ordered by law in spring 2020 or have demonstrably got into serious difficulties due to a massive slump in sales. Furthermore, the tax-recognised provision in the 2019 financial statements is limited to a maximum of 25% of the reported profit in 2019 (before the provision is booked) and may not exceed CHF 1 million. Finally, it is mandatory that the provision accepted for income tax purposes be reversed in the 2020 financial year or used for the intended purpose. There are also two things in particular about the TG tax administration regulation: On the one hand, companies that want to claim a "corona provision" but have already closed the 2019 financial statements can exceptionally claim such a provision in the tax balance sheet. On the other hand, legal entities that have been legally assessed can apply for a "corona reserve" by means of an audit request,45 whereby the requirements of published auditing practice must be fulfilled analogously46.

It is to be assumed that the canton TG will tolerate a "corona provision" - in the absence of a practice stipulation to the contrary - only for state and municipal tax. In other words, the canton TG is unlikely to disregard the stipulation of the Director of the Federal Tax Administration in this respect, according to which such a provision is not accepted for the purposes of direct federal tax. It does not seem entirely clear whether a "corona provision", which is booked retroactively and claimed via an appeal procedure and which at best also partially or completely reverses a dividend distribution already made, is not only advantageous from a profit tax point of view, but can also be presented in a way that is neutral in terms of withholding tax and emissions tax. It is to be assumed that any consequences of withholding tax or stamp duty on the issue of shares could cancel out the short-term profit tax advantage of the revision. The practice statement of the Tax Administration TG is silent on this question, which is presumably relevant for the companies concerned. Even if the two types of tax do not fall within the assessment competence of the canton TG, it would have been advantageous to at least refer to the fact that there is a certain degree of practical uncertainty in this regard with the Federal Tax Administration.

Irrespective of these issues on "Corona provisions", which have not been conclusively answered, it should be noted that the canton TG - as far as can be seen, the only one of the 26 cantons and as a counterpart to the generally known loss carry-forward - knows the regime of the so-called "loss carry-forward" for state and municipal taxes. In the tax period 2020, this regime will also be open to companies domiciled in the canton of TG - irrespective of a "corona provision". This already significantly eases the issue of an inopportune profit tax burden or liquidity outflow in relation to the 2019 tax period for state and municipal taxes. Pursuant to § 83 para. 1 StG TG, for profit tax purposes of the Canton of Thurgau or the corresponding municipality - but not for direct federal tax purposes - the loss from the financial year following the assessment period may be offset, whereby this provision applies to the extent that the profit of the previous year is sufficient for this.47 If the company concerned cannot offset the loss in full, i.e. "carry back" it, the remaining amount is carried forward within the seven-year loss offset period pursuant to § 82 StG TG.48 If the legal entity has already been definitively assessed for the tax period preceding the tax period in which the loss occurred, an audit within the meaning of § 179a para. 1 StG TG is possible under § 83 para. 2 St G TG, but the legal entity concerned must submit an application for an audit.

In view of the "loss carryback" and the published administrative practice on "corona provisions", companies subject to profit tax in the canton of TG are well served in a Swiss comparison. There is also no need for a costly remission procedure as implemented by the canton SG. As far as can be seen, the canton TG is one of only four cantons which have a positive attitude towards a "Corona provision" throughout Switzerland49Although the "loss carryback" is already an efficient means of enabling companies to "smooth" their profit tax burden over several tax periods in a way that preserves liquidity. The only open question is how the canton TG will treat intercantonal companies with an intercantonal tax segregation, which cannot enforce a "corona provision" for profit tax purposes in all other cantons. It will probably initially be up to the companies concerned to propose solutions to the TG tax administration or the other cantons concerned with a secondary tax domicile. However, the TG tax administration will probably also be required to find a practicable and fair solution in each individual case - after consulting the other cantonal tax administrations involved - in order to anticipate intercantonal taxation or tax separation conflicts, particularly with regard to permanent establishments in other cantons.

3.3 Canton AR

In a communication dated 23 April 2020, the tax administration of the canton of AR expressed its disapproval of "corona provisions" in the 2019 financial statements of legal entities subject to profit tax.50 It argues that provisions can only be created from the point of view of profit tax if costs were actually or at least probably incurred in the current tax period, but the amount of these costs is still undetermined and will only have a monetary effect in a later tax period. The economic effects of the COVID 19 pandemic had not yet been foreseeable in 2019, which is why under current tax law such provisions are not justified for the 2019 financial year. Furthermore, it is argued - as in the Canton SG - that the Federal Tax Administration has communicated to the cantons for direct federal tax purposes that such a provision is not possible. Furthermore, the Conference of Cantonal Finance Directors is opposed to a "corona provision". Finally, according to the Tax Administration of the Canton of Berne, there is also the risk that equal treatment would not be guaranteed, as various companies have already prepared or revised their financial statements for the 2019 tax period and have already had them approved by the respective general meeting of shareholders.

This argumentation of the tax administration of the canton of AR is surprising in so far as arguments of coherence and equal treatment seem to be in the foreground. On the one hand, a canton that has always been sovereign and traditionally liberal is free to go its own way in such assessment issues. In particular, it is not dependent on recommendations from the Conference of Cantonal Finance Directors to justify its position. On the other hand, the argument of equal treatment is unlikely to be valid in the present question. As the canton TG has demonstrated with its approach, equal treatment of taxpayers can be achieved if there is the (political) will to do so - especially since in the canton TG, companies can also have a "corona reserve" set up via an audit if the annual financial statements have already been approved by the general meeting of shareholders.

3.4 Canton AI

The tax administration of the Canton of AI has so far not commented on the issue of "corona provisions" in the 2019 financial statements of legal entities subject to profit tax. According to reports, no such statement is planned. Accordingly, no "corona provisions" are likely to be permitted for the cantonal or communal AI profit tax, or the tax administration of the canton of AI will offset them for the purposes of the 2019 profit tax both at federal level and in the canton or commune in accordance with Art. 58 para. 1 lit. b DBG or Art. 60 para. 1 lit. b no. 2 StG AI.

4. adjustments to capital tax

4.1 General comments

Article 2(1)(b) StHG does indeed require the cantons to levy a tax on capital from legal persons. However, based on Art. 1 para. 3 StHG, both the structure of the capital tax tariff and the level of the capital tax rates are the sole responsibility of the cantons. According to Art. 29 para. 1 StHG, equity capital is the subject of capital tax.51 Since 1 January 2020, however, the revised Art. 29 para. 3 S TA allows the cantons to provide for a reduction in capital tax on equity capital attributable to participation rights under Art. 28 para. 1 STA, rights under Art. 24a STA and loans to group companies. The primary objective of the revised Art. 29 para. 3 STAF is that the cantons should be able to continue to grant a reduction in capital tax for holding companies and companies with financing functions within the Group after 1 January 2020 or to maintain their capital tax burden at the level prior to the implementation of the STAF, particularly since the reduced capital tax rates for holding and management companies ceased to apply on 1 January 2020.

Against this background, the cantons SG, TG, AR and AI have not only taken the STAF implementation as of 1 January 2020 as an opportunity to adjust the profit tax burden. There were also significant adjustments to the capital tax regimes.

4.2 Canton SG

In accordance with Art. 99 para. 2 StG SG, the canton SG will credit profit tax against capital tax - both before and after 1 January 2020 and in accordance with the option granted to the cantons by Art. 30 para. 2 StHG. Thus, both before and after 1 January 2020, the St. Gallen capital tax will only become an actual burden for a legal entity domiciled in the canton of SG if this company does not pay any profit tax or pays a profit tax amount that is lower than the capital tax due in the same tax period. Therefore, holding companies are mainly affected by capital tax both before and after 1 January 2020, whose income is derived exclusively from qualifying participations and as such are indirectly exempt from participation deduction within the meaning of Art. 90 StG SG for profit tax purposes.

Prior to 1 January 2020, the capital tax for companies subject to ordinary taxation under aArt. 99 para. 1 lit. b StG SG 0.2‰ plus (i) a state tax rate of 115% under Art. 6 para. 2 lit. a StG and (ii) a surcharge of 220% under Art. 7 para. 2 StG SG on state tax, i.e. a total of 0.067%. Holding and domiciliary companies paid a simple tax of 0.01‰, but at least CHF 300, until 31 December 2019 in accordance with Art. 99 para. 1 letter a StG SG, plus (i) a state tax rate of 115% in accordance with Art. 6 para. 2 letter a StG SG and (ii) a surcharge of 220% on state tax in accordance with Art. 7 para. 2 StG SG, i.e. a total of 0.00335%.

With the entry into force of the STAF measures in the canton SG on 1 January 2020, the (simple) capital tax rate pursuant to the new Art. 99 para. 1 StG SG will be uniform for all taxable legal entities 0.2‰. The capital tax privilege for holding and domiciliary companies under aArt. 99 para. 1 letter a StG SG has been abolished. Since 1 January 2020, the canton of St. Gallen has no longer had a (simple) minimum capital tax of CHF 250 from the fifth business year after incorporation, but only CHF 100.

The Canton of St. Gallen has made use of the option expressly permitted by Art. 29 para. 3 StHG for capital tax reductions and has issued a similar provision in Art. 97 para. 2 StG SG. The St. Gallen legislator emphasised that this newly introduced reduction of taxable capital relates to the ratio of participations under Art. 90 para. 1 StG SG, rights under Art. 83bis StG SG and loans to group companies to the total assets of the taxable legal entities concerned. Accordingly, this provision is expressly a ratio calculation: the qualifying assets are placed in proportion to the total assets. The taxable equity of the legal entity concerned is reduced by this ratio. It is thus clear that the canton of SG reduces the tax base of the (ordinary) capital tax - in the sense of a direct exemption - and not the amount of capital tax in the sense of an indirect exemption.52

The capital tax reduction according to Art. 97 para. 2 StG SG holds some technical questions or unclarified aspects. According to reports, it is currently unclear whether the Cantonal Tax Office SG will clarify these in the coming months with a tax book entry.

First of all, for the ratio calculation according to Art. 97 para. 2 StG SG, it is important to know which values - profit tax values, (residual) book values or market values - are included in the calculation for the assets concerned. According to the previously published calculation53 - and in accordance with the tax system - these are likely to be the profit tax values of the assets concerned according to the tax balance sheet - and before dividend payments,54 but not the (residual) book values or the fair values. The question of the extent to which intercompany loans can be included in the calculation does not appear to be answered sufficiently clearly by the calculation published to date. For the time being, the question of whether the Cantonal Tax Office SG will make a net calculation of loan receivables and liabilities also seems to be open. It is also not sufficiently clear whether these loans must be fixed assets.55 This may be of some importance especially in the case of cash pooling activities, i.e. usually short-term receivables of a company in the group. As long as there is no net consideration, it should be undisputed that no reduction should be granted if the debtor and creditor are identical within the group ("loans within the group"); likewise, no reduction should be granted in other constellations which serve to artificially structure loans with the sole purpose - in the sense of tax avoidance - of achieving the capital tax reduction pursuant to Art. 97 para. 2 StG SG.56 However, if the reduction is only to be granted on loans (i.e. receivables that are booked under fixed assets), it is quite conceivable that a "basic amount" on the assets side of the balance sheet has the character of fixed assets in the case of cash pooling within a group. Thus, such a "basic amount" could also qualify for a capital tax reduction. Whether loan receivables within the Group are "upstream" or "crossstream" or "downstream" loans or interest/non-interest bearing or even partiary-bearing loans should not make any difference as long as loans are granted to Group companies.57 The term "group company" in connection with the capital tax reduction should be based on the definition of Art. 963 para. 1 or 2 no. 1-3 CO. In the case of "upstream" loans, it can be assumed that they qualify for capital tax relief only to the extent that they are not simulated loans or loans which violate Art. 680 para. 2 CO in terms of the prohibition of return of deposits.

As far as can be seen, there are no specific open questions regarding the group of qualifying participations under Art. 90 para. 1 StG SG (participation deduction in mixed investment companies) and the rights under Art. 83bis StG SG (patents and comparable rights, defined in an exhaustive list). Based on the exhaustive list or precise designations, there should be little scope for deviating interpretations or points of discussion with the taxable legal entities.

4.3 Canton TG

Just like the canton SG, the canton TG also credits the profit tax to the capital tax according to § 100a StG TG - in accordance with the possibility of Art. 30 para. 2 StHG - both before and after 1 January 202058. Prior to 1 January 2020, the capital tax for companies subject to ordinary taxation pursuant to art. 98 para. 1 StG TG 0.3‰ or at least CHF 100. Taking into account a total tax (state tax and municipal tax base at the cantonal capital Frauenfeld) of 227% in total59 resulted in a total capital tax of 0.083%. As in the canton of SG, holding and domiciliary companies in the canton of TG also established a reduced capital tax before the implementation of the STAF. According to a § 99 para. 1 StG TG, the simple tax was 0.01‰ until 31 December 2019, but at least CHF 300. Taking into account a total tax (state tax and municipal tax rate at the cantonal capital Frauenfeld) of 227%, the capital tax totalled 0.0027%.

Since 1 January 2020, the (simple) capital tax rate has been 0.15‰ for all taxable legal entities in accordance with the new Section 98 (1) StG TG. The reduced capital tax rate for holding and domiciliary companies pursuant to Art. 99 para. 1 StG TG was abolished.

The canton TG has also issued a similar provision to Art. 29 para. 3 StHG. Pursuant to Art. 93 para. 2 StG TG, since 1 January 2020, equity capital attributable to participation rights under Art. 86 StG TG, rights under Art. 76a StG TG and loans to group companies has been included in the assessment at ten percent, although - in accordance with express statutory regulations - the values relevant for profit and capital tax are used for the reduction, but not the book or market values. In contrast to the canton of St. Gallen, there is therefore no complete reduction or decrease in the basis of assessment for (ordinary) capital tax. The equity capital attributable to these assets is only exempted to the extent of 90% for the assessment of the (ordinary) capital tax.

In contrast to the Cantonal Tax Office SG, the Tax Administration TG has already published initial clarifications regarding individual questions currently open regarding capital tax relief under the new § 93 para. 2 StG TG. With regard to loans to group companies, the Tax Administration TG holds the following in the tax practice of the Canton TG to § 92 StG TG (StP 92 No. 1)60 that only the asset surplus of group receivables and liabilities qualifies for the reduction. This means two things:

On the one hand, the group of receivables in the Group61 - presumably in accordance with the definition of a "group" in Art. 963 para. 1 or 2 nos. 1-3 of the Swiss Code of Obligations - not limited to elements of fixed assets. The scope of receivables also applies - presumably without restriction or subject to tax avoidance - to cash pooling credit balances or current accounts, i.e. to current asset items within the Group, without it being necessary or concrete to determine a "base amount".

On the other hand, mirrored loans or loans granted in a circle are eliminated from the outset for the calculation of the capital tax reduction, without the tax administration of the canton TG having to examine or assert the facts of the tax evasion. However, simulated "upstream" or "crossstream" loans or loans which violate Art. 680 para. 2 OR in terms of the prohibition of the restitution of deposits may not qualify - in terms of tax avoidance - for the calculation of the capital tax reduction in the canton TG either, or only to a reduced extent.

4.4 Canton AR

The canton of AR did not make use of the option under Art. 30 para. 2 StHG, according to which cantons can credit the profit tax against the capital tax, either before or after 1 January 2020.62 However, just like the cantons SG and TG, the canton AR has standardised or reduced the capital tax rate for all taxable legal entities as of 1 January 2020. While the (simple) capital tax for ordinary taxed companies pursuant to aArt. 90 para. 1 lit. b StG AR was 0.1‰ until 31 December 2019, it was reduced to a uniform 0.065‰ as of 1 January 2020. As in all other Swiss cantons, the canton AR abolished the (special) capital tax rate for holding and management companies as of 1 January 2020. According to art. 90 para. 1 lit. a StG AR 0.15‰, this rate amounted to CHF 900, but at least CHF 900. The (simple) minimum capital tax amounts to a uniform CHF 900 according to art. 90 para. 2 StG AR, which has been in force since 1 January 2020.

The legislature of the canton of AR has decided to implement Art. 29 para. 3 StHG as well. The new reduction of taxable capital introduced by Art. 87 para. 2 StG AR is structured in the same way as in the canton SG; it is also a proportional calculation. It also involves a proportional calculation, which places the qualifying assets in relation to the total assets, whereby the taxable equity capital of the legal entity concerned is reduced by this ratio - in the sense of a direct exemption.

The tax administration of the canton of AR has not published a statement on the technical questions or the as yet unclarified aspects of the capital tax reduction under Art. 87 para. 2 StG AR. Nor, according to reports, does it plan to publish one. It is to be assumed that the tax administration of the Canton of the Canton of Aargau will apply the principles published in the tax book of the Cantonal Tax Office SG or the Tax Administration TG by analogy in its practice - as is the case with various other assessment topics. Due to limited human resources, it is also planned that the tax administration will clarify questions regarding capital tax relief with taxpayers on a case-by-case basis.

4.5 Canton AI

Pursuant to Art. 75 para. 2 StG AI, the Canton of AI - like the Cantons SG and TG, but unlike the Canton of AR - will credit profit tax against capital tax both before and after 1 January 2020 in accordance with the option provided by Art. 30 para. 2 StHG.

With effect from 1 January 2020, the Professional Ethics Committee of the Canton of AI, by decision of 3 December 201963 Art. 75 para. 1 StG AI was adjusted in such a way that the capital tax rate - combined for state, district and municipal taxes - is uniformly 0.1-0.6‰ for all taxable legal entities. The Grand Council of the Canton of AI, in its decision of 2 December 2019, set the capital tax rate for the 2020 tax period at 0.5‰64. The previous Art. 75 para. 1 lit. a and b StG AI provided for a (simple) capital tax of only 0.01-0.06‰ for holding and management companies and 0.1-0.6‰ for all other legal entities. Since 1 January 2020, the Canton of AI no longer applies this article.65 The minimum capital tax for corporations in Canton AI is a uniform CHF 500 both before and after 1 January 2020.

Just like the cantons SG, TG and AR, the Professional Ethics Committee of the canton AI has also implemented Art. 29 para. 3 of the Swiss Federal Law on Statistics in a cantonal provision as of 1 January 2020. In accordance with Art. 13 para. 2 of the Professional Ethics Committee's decision of 3 December 201966 50% of the equity capital attributable to participation rights under Art. 68 para. 1 StG AI, rights under Art. 24a StHG and loans to group companies is included in the assessment of the capital tax. The tax authorities of the Canton of AI have not yet published any concrete examples of how this capital tax reduction is calculated. It is understood that there are no plans for such a publication. However, it can be assumed that in Canton AI, too, it is a ratio calculation in which the qualifying assets are placed in proportion to the total assets, whereby this ratio is then halved (50%) and with this ratio the taxable capital is reduced for the assessment of the capital tax due. For individual questions regarding loans to group companies, as already partly clarified in practice by the cantons SG and TG, the cantonal tax administration AI does not plan to issue a separate announcement or directive for the time being. It can therefore be assumed that the Tax Administration AI will apply the (published) practice of the Cantons SG and TG analogously.

5. implementation of STAF and tax relief for economic development in the cantons of Eastern Switzerland

According to Art. 5 StHG, the cantons may - both before and after 1 January 2020 - provide tax relief by way of cantonal legislation for companies that are newly opened and serve the economic interests of the canton for the year of establishment and the nine subsequent years. In this context, even a substantial change in business activity may be treated in the same way as a new company being founded. The canton SG has implemented this regulation in Art. 11 StG SG, the canton TG in § 4 para. 1 StG TG, the canton AR in Art. 67 para. 1 StG AR, and the canton AI in Art. 4 para. 1 StG AI. Only the wording of Art. 67 para. 1 StG AR seems to go - slightly - beyond the requirements of Art. 5 StHG, in that significant extensions - and not only changes in business activities - also allow tax relief. At least according to the observable practice, tax relief is also possible in the other cantons of Eastern Switzerland SG, TG and AI, if a company does not change its operating activities, but substantially expands them, for example, by opening up additional markets abroad or initiating an "internationalisation" of its business, which was previously limited to Switzerland, or by substantially expanding its production capacities with a new building at its previous or a new location.

The tax administrations or tax offices of the cantons SG, TG, AR and AI as well as the cantonal governments or the location promotion agencies have so far not made any concrete statements on the question of the relationship between tax relief within the meaning of cantonal tax law and the STAF implementation measures, neither for existing tax relief nor for tax relief to be granted in the future. According to reports, none of the four cantons concerned plans to specify this relationship in a practical instruction.

5.1 Canton SG

The cantonal tax office SG is reported to have granted existing tax relief67 to 1 January 2020, in so far as the rate of the relief to be granted from 1 January 2020 onwards is 20 percentage points lower than the relief previously granted. New tax relief - following the implementation of the STAF and the associated general cantonal reduction in profit tax to 14.5% - will continue to be granted by the canton of SG with a certain degree of restraint.68 However, the rate of the relief to be granted should also be about 20 percentage points lower due to the reduction in the rate of profit tax. When applying for tax relief after 1 January 2020, the canton of SG will pay particular attention to whether the tax relief applied for is neutral for the canton of SG with regard to the national fiscal equalisation system or whether it is at best to its disadvantage. It is also important to note that since 1 January 2020, the Canton of St. Gallen is reported not to allow any additional deduction for research and development expenses or a patent box for companies that benefit from a tax break or wish to benefit from it in the future. The canton of St. Gallen therefore does not tolerate any "accumulation" of the newly introduced profit tax instruments with tax relief. From a purely practical point of view, this attitude is likely to result in the profit tax focus from January 1, 2020 being increasingly on the additional deduction for research and development expenses or on the patent box - and less on the instrument of tax relief. The aim of this practice is likely to be that companies which qualify for tax relief in principle will introduce a patent box instead of such a general tax relief or achieve the same profit tax result as with a tax relief by means of an additional deduction for research and development expenses.69

5.2 Canton TG

The canton of TG has also not yet commented on the future practice of tax relief. This also applies to the question of whether a company with tax relief that was already in force before 1 January 2020 can claim all the benefits of cantonal STAF implementation. However, it seems at least clear that the profit tax level of a company taxable in the canton of Thurgau with existing cantonal tax reliefs should not be reduced due to the fact that the canton TG has reduced profit tax by approximately 3% as of 1 January 2020. In other words, companies with existing tax relief in the canton are obliged to pay from 1 January 2020 at least the amount of profit tax they paid before 1 January 2020, taking into account cantonal tax relief. This regulation ensures that tax relief granted to companies and the reduction in profit tax in the canton TG cannot be cumulated as of 1 January 2020. According to reports, a combination of tax relief and input promotion measures under the STAF is also ruled out in the canton TG - as in the canton SG - from 1 January 2020.

5.3 Cantons AR and AI

The tax administrations and governments of the cantons of AR and AI have not yet made any active statements on the subject. There are no plans for directives or publications on the subject. In the canton of Aargau, however, it is reported that at least an exchange between the government and the tax administration is currently underway on the question of how the canton of Aargau should deal with tax relief in combination with the STAF measures in the future. Due to the fact that the canton of AR has not implemented a general profit tax reduction as of 1 January 2020, it has slightly decreased its profit tax burden on average in Switzerland. As a result, certain relaxations in tax breaks could make it possible for new companies to relocate to the AR canton to a greater extent. It should be noted that the canton of the AR has in the past been reluctant to offer tax relief under Art. 67 para. 1 StG AR.70 It has so far adhered to the (informal) agreement71 under which a company in a canton is not granted tax relief if this would be to the detriment of another Swiss canton in the sense of "shopping" or "poaching".

6. the additional deduction of research and development expenditure in the cantons of Eastern Switzerland

Art. 25a para. 1 StHG, which came into force on 1 January 2020, provides that the Swiss cantons may, upon request, allow research and development expenses incurred by the taxpayer directly or indirectly through third parties in Switzerland to be deducted by a maximum of 50% over and above the commercially justified research and development expenses. The cantons SG, TG, AR and AI have all provided for such "R&D deduction" for taxable legal entities in their respective STAF proposals, which came into force on 1 January 2020. The implementation of this "R&D deduction" in the cantons of Eastern Switzerland is as follows:

6.1 Canton SG

In accordance with Art. 85bis StG SG, the canton SG has granted a profit-reducing deduction for research and development expenses incurred by a domestic company for its own research or for contract research since 1 January 2020.72 The additional "expense item" permitted for profit tax purposes is lower than the maximum amount permitted under Art. 25a para. 1 StHG. It amounts to 40% of this business-related expenditure. In the case of own research and development, this "expense" is composed of directly attributable personnel expenses. In accordance with Art. 25a para. 3 lit. a of the Swiss Federal Law on Statistics, the canton of St. Gallen grants a surcharge of 35%. In the case of domestic contract research, the "expenditure" - in accordance with Art. 25a para. 3 lit. b StHG - amounts to 80% of the amount73which the company subject to profit tax in the canton of SG has paid to the contracted company. The following example calculation results:74

The taxable profit after R&D deduction must also be examined to determine whether it violates Art. 85ter StG SG. Art. 85ter St G SG states that the taxable profit after R&D deduction and other relief (patent box and step-up depreciation) may not fall below 60% of the taxable profit before relief. If this occurs, the taxable profit of the company is in any case increased to 60% of the taxable profit before all reliefs. In the above example, the taxable profit after R&D deduction is 76.4% (CHF 764,000 / CHF 1,000,000) of the taxable profit before R&D deduction. Thus, the relief limitation of 60% pursuant to Art. 85ter StG SG does not apply.

The Cantonal Tax Office SG has not yet specified detailed questions regarding the R&D deduction in accordance with Art. 85bis StG SG in any separate tax book instruction. Practice in the canton of SG is essentially guided by the analysis published on this topic by the Swiss Tax Conference on 4 June 2020.75 However, it is understood that the Cantonal Tax Office SG intends to issue a separate tax accounting statement for R&D deductions pursuant to Art. 85bis StG SG in the foreseeable future.

It should first be clear that the R&D deduction pursuant to Art. 85bis StG SG is limited to domestic contract research and own research.76 Contract research carried out abroad by a commissioned third party is not eligible for profit tax relief. In addition, the R&D deduction pursuant to Art. 85bis StG SG - in accordance with the provisions of Art. 25a para. 4 StHG - is in principle only available once or only to one of the parties involved. A double deduction, i.e. both on the side of the principal and on the side of the agent, is thus excluded.77 As a rule, the legal entity which commissioned the work and which is subject to profit tax in the canton of St. Gallen should claim this deduction for itself. If, however, a legal entity subject to profit tax in the canton of SG is commissioned to perform domestic research and development for a (Swiss) company which - for example, due to the lack of a separate cantonal deduction option - is denied the deduction in its own favour, the legal entity subject to profit tax in the canton of SG may claim such a deduction for itself as the commissioner.

The term "research and development" is defined in Art. 85bis para. 2 StG SG - in accordance with the provisions of Art. 25a para. 2 StHG. Only scientific research and science-based innovation qualifies as such under Art. 2 of the Federal Act of 14 December 2012 on the Promotion of Research and Innovation (FIFG)78. The procedure should be carried out in accordance with the Frascati Manual to be consulted for this purpose.79 the OECD80 that the R&D activities must be novel, creative, uncertain as to results, systematic and transferable and/or reproducible. Concrete practical examples of this are missing from the analysis published by the Swiss Tax Conference on 4 June 2020.81 However, the illustrations in the Frascati Manual should provide sufficient detail of the main practice, whereby - as always - the individual case must be assessed.82

Personnel expenses for the company's own R&D activities are narrowly defined in Art. 85bis para. 3 StG SG - in accordance with the provisions of Art. 25a para. 3 lit. a StHG. Expense items outside the R&D area do not qualify for this. This also applies to the overhead costs of a company attributable to the R&D area, such as expenses for secretarial services, for finance/accounting or for the management of a company. Also excluded are costs for quality control, market launch or testing activities. Personnel expenses consist of wages, salaries, bonuses, social benefits (employee and employer), commissions, incidental personnel costs, etc., whereby expense items recorded in the income statement qualify for R&D deductions in the same way as capitalized costs and depreciation.83

The R&D deduction represents a profit tax-reducing fact, for which the company liable to tax in the canton of SG is required to provide evidence. It is recommended that the company submits a project description, for example, showing the individual stages / milestones, etc.84

6.2 Canton TG

Since January 1, 2020, the canton of TG has also granted a profit-reducing deduction for research and development expenses in accordance with § 77a StG TG. In the canton of TG, the additional expense item of 30% of the business-related expenses is well below the maximum of 50% permitted under federal law and the canton SG's approach of 40%.

The canton of TG has not currently published its own administrative practice on "R&D" deduction and will not do so. The analysis of the Swiss Tax Conference of 4 June 2020 will be relevant for the assessment practice of the Tax Administration TG.

6.3 Canton AR

The canton of AR has also decided to introduce an additional deduction of research and development expenses as of January 1, 2020, in accordance with Art. 25a StHG. In contrast to the cantons SG and TG, Art. 70a para. 1 StG AR grants the maximum permissible extension of the deduction of 50% over and above business-related research and development expenses in accordance with Art. 25a para. 1 StHG.

On 2 July 2020, the Cantonal Tax Administration AR published an information sheet on the deduction of research and development expenses.85 This leaflet is not the publication of a separate administrative practice on "R&D" deduction. In essence, the Tax Administration AR repeats the legal basis. It clarifies that this additional deduction is subject to the 50% relief limit pursuant to Art. 70b of the Swiss Federal Tax Act and refers to the analysis of the Swiss Tax Conference of 4 June 2020 for the substantive assessment of the "R&D" deduction pursuant to Art. 70a para. 1 of the Swiss Federal Tax Act.86

6.4 Canton AI

In its decision of 3 December 2019, the Professional Ethics Committee of the Canton of AI decided to implement Art. 25a of the Swiss Federal Law on Taxation in cantonal law for the time being as of 1 January 2020 and - like the neighbouring canton of AR - also to grant the maximum permissible extension of the deduction of 50% over and above business-related research and development expenses pursuant to Art. 25a para. 1 of the Swiss Federal Law on Taxation.87 In the canton of AI, no separate practice definition is planned for the "R&D" deduction. The AI tax administration is likely to base its assessment practice - like the other cantons in Eastern Switzerland - on the analysis of the Swiss Tax Conference of 4 June 2020.88

7. special practices in the cantons of Eastern Switzerland with regard to profit tax

In addition to the STAF measures described above, the cantons SG or AI and TG have developed certain special practical features which took effect on 1 January 2020. These are relevant for the implementation of the STAF in the cantons SG or AI and TG and deserve special mention.

7.1 Cantons SG and AI: Options for action for holding companies with hidden reserves, especially on portfolio investments89 and intellectual property rights - the "noted item solution

With the abolition of the cantonal holding status as of 1 January 2020, the - now properly taxed - previous holding companies will be confronted with the question of how to deal with hidden reserves that exist as of 31 December 2019, for example, on portfolio holdings or intellectual property rights. Since these hidden reserves were created under the profit tax cantonal holding regime, but are henceforth not subject to participation deduction within the meaning of Art. 91 para. 2 StG SG or Art. 68 para. 1 StG AI, they are to be subject to a special profit tax solution.90 The cantons SG and AI offer the holding companies concerned three options:91

In the first option, the holding company allows capital gains on portfolio holdings or intellectual property rights to be taxed at a special rate of 1.5% for a period of 5 years, i.e. until 31 December 2024. The central question with this option is whether the holding company will actually realize such capital gains on the portfolio holdings or intellectual property rights by December 31, 2024.

In the second option, the holding company applies for the 2019 tax period to use the so-called "memorandum item solution".92 Under this memorandum item solution, the holding company must apply for cantonal holding privilege for the 2019 tax period - and for both profit and capital tax.93 - give up. The hidden reserves on the portfolio holdings or on the intellectual property rights are "labelled" in the sense of a "memorandum item" for the purposes of future ordinary taxation of profits in the canton and are accordingly exempt from cantonal / communal profit tax if they are realised in (any) subsequent tax periods. The only disadvantage of this option for the holding company is that a possible later reduction in value of the portfolio investments or intellectual property rights concerned will reduce the amount of the "labelled" hidden reserves.

In the third option, the holding company makes a revaluation under commercial law of the portfolio holdings or intangible assets rights in its commercial balance sheet as at 31 December 2019.94 This option leads to the result that the direct federal tax of effectively 7.8% pursuant to Art. 68 DBG is payable on the hidden reserves disclosed under commercial law, whereas in the canton of SG or AI there are no profit tax consequences. With this measure, the holding company can create a subsequent depreciation substrate - both at the federal level and in the canton of SG or AI. The disadvantage of this solution is that the holding company, to the extent that it cannot offset losses based on Art. 67 para. 1 DBG, suffers an outflow of liquidity and the taxable capital of the holding company in the canton SG or AI increases due to the capital gain reported in the income statement.95

The (former) holding companies domiciled in the cantons of SG or AI will be free to choose between the three options until they file their 2019 tax return or finalise their 2019 annual accounts. Whether a majority will decide in favour of one or the other solution will ultimately only be revealed by the assessment practice for the 2019 tax period.

7.2 Canton TG: Calculations for intercantonal tax differentiation for companies claiming the deductions provided for in the STAF

On 15 January 2020, the Swiss Tax Conference published Circular No. 34 on intercantonal tax separation for companies claiming the deductions provided for in the STAF.96 The canton TG has in its tax practice97 This circular letter is widely illustrated or acknowledged, but for some calculations a separate - deviating - practice has been published.

For the additional deduction of research and development expenses exceeding the relief limit, the canton TG - in contrast to Circular Letter No. 34 of the Swiss Tax Conference, which illustrates the same example98 - loss compensation in two steps.99 The canton TG takes the position that cantons with investment properties must assume a negative total operating result, first those cantons in which operating sites are located (referred to as canton B in the illustration of the canton TG), and then the pure property cantons (referred to as canton C in the illustration of the canton TG)). The negative total operating result must be allocated in proportion to the net profits incurred. The Canton TG justifies this practice, which puts the Real Estate Canton - as traditionally the Canton TG - in a better position than the other cantons with STAF measures, with a decision of the Federal Supreme Court of 5 November 2019.100 According to this decision, real estate gains of real estate companies are to be taxed at the location of the property and losses are to be offset primarily against the profit at the main tax domicile.101 The segregation practice published by the Canton TG - in contrast to the currently available circular no. 34 of the Swiss Tax Conference - is in line with this Federal Court ruling. A complete compensation of the loss of separation is made

1. in the main tax domicile canton, then
2. in the secondary tax domicile canton and
3. in the investment property canton

In contrast to the practice of the Swiss Tax Conference's Kreisschreiben No. 34, the main tax domicile canton and the secondary tax domicile canton contribute much more to the loss of tax revenue. The relief limit for STAF measures in these two cantons is "leveraged" in favour of the investment property canton. As a result, the canton TG - with reference to the decision of the Federal Supreme Court of 5 November 2019102 - even after the implementation of the STAF as a real estate canton profit tax substrate.

The principle formulated by the Federal Supreme Court in its decision of 5 November 2019 on the assumption of losses by the canton in which the company is headquartered will also be applied by the TG Tax Administration in all further calculations of the tax separation in its own published administrative practice103 consistently. Here too, it can be assumed that the canton TG would like to use this approach to improve its starting position for intercantonal tax refunds at the expense of other cantons for the time being.

This approach is surprising, especially since the Swiss Tax Conference traditionally publishes separation rules in such a way that taxpayers can assume that there is a consensus among the cantons and should not expect any (fundamentally) contradictory assessment practice in any one canton. It is doubtful whether the Federal Supreme Court's decision of 5 November 2019 regarding real estate companies tel quel, which is (certainly) relevant for the canton TG, is applicable to STAF withdrawal constellations. If the published practice of the Canton TG104 were to be enforced in practice, the respective discharge limits in other cantons would remain "dead letters" for long periods in the case of intercantonal elimination constellations. It is doubtful whether the Federal Supreme Court will judge such a solution to be in line with the new cantonal discharge limits introduced on 1 January 2020. Taxpayers can at least expect that the Federal Supreme Court will make a differentiated ruling in such an intercantonal double taxation conflict involving the relief limitation and not simply refer to its ruling of 5 November 2019.