Zurich: Application for cantonal SV17 implementation submitted

The federal government plans to bring SV17 into force on 1 January 2020 and to abolish the special cantonal tax statuses on that date in order to avoid international sanctions. In order to ensure that the Canton of Zurich is also ready by that date, the Directorate of Finance, acting on behalf of the Government Council, has also adopted an accelerated procedure and drafted the implementation proposal in parallel with the deliberations in the Federal Assembly, so that the Cantonal Council has sufficient time to deliberate.

Broad range of instruments helps Zurich

The Government Council's proposal is based on the expected decisions of the Federal Assembly and on the cornerstones already adopted earlier for the cantonal implementation of the SV17. This means that the Government Council wants to retain the companies that are currently specially taxed (holding companies, finance companies, etc.) in the canton with a wide range of new tax instruments and to reduce the corporate tax rate moderately in two stages in order to keep the Canton of Zurich competitive and to avoid excessive losses of income. In detail, among other things:

• With the self-financing deduction taken up by the Federal Councils, the increase in the tax burden on group financing companies can be kept within reasonable limits. These are particularly important for the Canton of Zurich. The new deduction introduced by Finance Director Ernst Stocker in Berne as an optional cantonal measure does not bring cantons and municipalities less tax revenue, but rather higher tax revenue.
• An additional deduction for research and development, now limited to 50 percent and now limited to personnel expenses, will make Zurich a more attractive location for research and innovation.
• To ensure that Zurich remains and becomes attractive for the exploitation of research results, the government council wants to introduce a patent box that reduces the tax burden on patents and similar rights by up to 90 percent.

A 70 percent relief limit on these new instruments will ensure that all companies pay a minimum level of tax. The so-called status companies, whose reduced taxation must now be abolished as a result of international pressure, paid more than CHF 260 million to the canton in 2015 - with an upward trend in previous years. Their share of cantonal profit tax revenue rose from 10 to 16 percent between 2013 and 2015 alone.

Moderate reduction of the profit tax rate

However, these measures alone are not sufficient to maintain the competitiveness of the Canton of Zurich. At the ordinary tax rates, Zurich is in danger of being left behind in terms of corporate taxes by practically all cantons, including other important economic centres such as Basel, Geneva or Vaud, which have had a higher corporate tax burden than Zurich up to now. For this reason, the Government Council is also planning a moderate and staged reduction in the rate of profit tax from 8 to 7 percent (one year after the SV17 comes into force) and from 7 to 6 percent two more years later. This would reduce the total tax burden on companies from 21.15 percent today to 18.19 percent at that time (federal, cantonal, municipal and church tax combined).

Even with this, the canton of Zurich would still be relatively expensive compared to most neighbouring cantons, which are significantly reducing their rates to as low as 12.09 percent (Zug and Schaffhausen). However, in view of the high central-locational qualities of Zurich as a business location, the Government Council believes that the gap would be justifiable. In combination with these instruments, however, Zurich can offer mobile companies with financing, research or patent exploitation activities rates comparable to those of low-tax cantons. These companies, namely the financing companies, will pay not less but more tax than before. Moreover, additional income can also be expected because the federal government is now attaching conditions to the capital contribution principle.

Lower loss of earnings expected

The Finance Directorate has had the financial impact of SV17 in the Canton of Zurich reassessed using more recent figures from BAK Economics. These estimates are extremely difficult and subject to uncertainty because certain assumptions have to be made regarding the dynamic effects. In other words, much will depend on how the companies most affected and their employees react. According to BAK Economics, the reduction of the profit tax rate from 8 to 6 percent will, according to the middle and most probable variant, lead to reduced income of CHF 275 million for the canton and CHF 250 million for the municipalities. It is interesting to note that these revenue losses are the same for the municipalities regardless of whether the reduction to 7 or 6 percent is implemented.

After the measures have taken full effect, the offsetting of the additional income will result in a loss of 205 million francs for the canton and 195 million francs for the municipalities if the measures are reduced to 6 percent. However, the loss of income for the municipalities will be practically compensated for because the canton will make the cantonal share of the direct federal tax, which has been increased by around CHF 180 million, available in full to the municipalities, also in stages, through a higher cantonal share of additional benefits, through fiscal equalisation and with transitional compensation for municipalities and towns that are particularly affected.

Solution compatible for cities and municipalities

In the end, the combined revenue shortfall for all municipalities amounts to CHF 45 million (if the figure is reduced to 6 percent). The national churches will also be compensated. The main burden of the SV17 will thus be borne by the canton - if the profit tax rate is reduced to 6 percent, the estimate is 175 million francs net. The cantonal government has already stated earlier, and also emphasises it in its proposal to the cantonal council, that it wants to cope with this shortfall without the canton's population having to expect a tax increase. In view of the burden on the state budget, however, it does not see any possibility for further relief beyond the reduction of the state tax base from 100 to 98 percent from 2020, which was announced independently of the SV17.

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