Extraterritorial change of status through the introduction of the Income Inclusion Rule

In autumn 2021, 137 countries agreed to introduce a global minimum tax of 15% on profits of international corporations. Switzerland has joined this project and plans to levy this minimum tax from 1 January 2024 as well.

The core element is a new sui generis profit tax with extraterritorial effect ("Income Inclusion Rule", IIR), which is comparable to an additional taxation in its mode of operation. All profits of directly and indirectly held foreign subsidiaries that are not subject to an aggregate tax burden of at least 15% per country will in future be recorded by means of a supplementary tax.

However, this new profit tax is not without legal problems. On the one hand, it is levied on profits without a physical connection to Switzerland and across entities, which contradicts basic principles of the Swiss tax law system. On the other hand, constitutional principles such as taxation according to economic performance or the guarantee of property can be violated in individual cases. In the author's view, this is particularly problematic when foreign companies realise hidden reserves or original goodwill that were created before the IIR came into force. In terms of the tax system, there will be a change of status on 1 January 2024, in that hidden reserves and goodwill will be transferred from a tax-exempt or low-taxed foreign sphere to an (IIR) sphere taxed by Switzerland to the extent of the rate difference at a maximum of 15%.

In analogy to the abolition of cantonal tax privileges as a result of the STAF, it would therefore only be logical that a step-up on these transferred hidden reserves (incl. goodwill) could also be claimed when introducing the IIR. Since such a step-up is not possible with the IIR on the basis of the OECD Model Rules, the author proposes the introduction of a GloBE step-up for profit tax purposes on the basis of a new Art. 25 para. 1 lit. g of the Tax Harmonisation Act (StHG). This would reduce the ordinary profit tax of the group parent company by the amount that it would have to pay in additional taxes as a result of the realisation of hidden reserves and goodwill of the foreign group companies that were transferred on 1 January 2024. Accordingly, tax system and constitutional weaknesses of the IIR could be at least partially remedied.