Tax Report 2020: Comparatively low corporate taxes in Switzerland

KPMG's "Swiss Tax Report 2020" compares the profit and income tax rates of 130 countries and all 26 cantons. While ordinary profit tax rates have stagnated in almost all cantons across Switzerland over the past few years, they fell by around two percentage points last year - from 17.1 to 15.1% on average in Switzerland. The reason for the sharp decline last year is the tax rate cuts implemented by many cantons as part of the tax reform (STAF). In particular, the canton of Geneva has substantially reduced its profit tax rates against the backdrop of STAF, from over 24 to 14%. At the beginning of the period under review in 2007, the average ordinary profit tax rate for Swiss-based companies was still over 20%.

Tax Report 2020 points to paradigm shift

Relatively low taxes on profits will continue to be a key location factor in the future due to Switzerland's high labor costs. However, low corporate taxes alone are not enough to maintain competitiveness in the long term. This is also against the backdrop of a sharp paradigm shift emerging in the international tax landscape. This is because the rules for allocating tax substrate could undergo major upheavals with the OECD/G20's BEPS 2.0 project. "We are observing that the project, which was originally focused only on the digital economy, is visibly expanding into a far-reaching reorganization of international rules for many industries," said Stefan Kuhn, head of tax and legal advisory at KPMG. "Switzerland is therefore well advised to actively engage in discussions within the OECD and other bodies involved, and to forge alliances with countries that also care about an attractive environment for business and society," Kuhn warns.

KPMG assumes that competition between locations will intensify further in the wake of the Corona crisis. This is because the already highly indebted countries have taken on massive additional debt during the pandemic and will therefore fight even harder for tax revenues. As a result, factors such as access to markets and a qualified workforce, a modern infrastructure, and investment and legal certainty are likely to play an increasing role in international location competition in the future.

Large tax cuts in the canton of Geneva and Fribourg

The cantons of Central Switzerland and the canton of Appenzell-Innerrhoden continue to have the lowest ordinary profit tax rates. Tax rates in these cantons have been largely stable, with Zug and Uri making noticeable reductions. The canton of Zug now leads the way in corporate taxation with a profit tax rate of 11.9% and has pushed the frontrunner Lucerne (12.3%) from first to second place. Another striking development is that of the canton of Glarus, which has made up nine places thanks to a substantial reduction in its profit tax rate and now ranks among the three most attractive tax cantons.

The greatest movement in corporate taxation last year was seen in western Switzerland. Geneva in particular significantly reduced its ordinary profit tax rate. While this was still over 24% last year, it is now around ten percentage points lower, at 14%. Geneva has thus handed over the red lantern to Valais and moved into the midfield. Fribourg, which was still in the lower midfield last year with a profit tax rate of almost 20%, also moves into the front half of the table.

For the coming years, a further (albeit moderate) reduction in tax rates can be assumed, as some cantons have not made the full reduction in tax rates as of 2020 under the STAF. By 2025, the largest tax cuts are expected in Basel-Landschaft (-4.5%), Valais (-4.8%) and Ticino (-3.3%).

Switzerland (still) well positioned for corporate taxation

According to the Tax Report 2020, some Swiss cantons also perform very well in a European location comparison. The cantons of Zug, Lucerne and Glarus ranked among the top locations with low tax rates, after Guernsey (0%) and some (Southern) Eastern European countries. Appenzell Innerrhoden and the other cantons of central Switzerland are also among the most attractive locations for companies in terms of taxation, ranking after Ireland, Liechtenstein and Cyprus (12.5% each).

The least attractive profit tax rates in Europe are found in Malta (35%), Germany (30%) and France (28%), with France lagging behind Germany last year with a rate of 31%. The marked reduction in tax rates in Greece (-4%) is striking.

In a global comparison, Switzerland has made up places in the top third thanks to the various cantonal tax rate reductions, overtaking Hong Kong (16.5%) and Singapore (17.0%). Only various offshore domiciles and Qatar (10%) have lower profit tax rates than Switzerland (outside Europe). Globally, profit tax rates have fallen sharply since 2018, especially in the Middle East and with the recent tax reform in the US.

Big change in Basel-Stadt

The taxation of private individuals shows a similar picture to corporate taxation: the cantons that apply low corporate tax rates are largely also ahead in the comparison of top income tax rates. The lowest income tax rate, at around 22.4%, is applied by the canton of Zug, followed by Obwalden (24.1%), Appenzell-Innerrhoden (24.9%) and other cantons in central Switzerland. Top incomes are taxed highest in Geneva, with a rate of 44.75%. Tax rates for top incomes are also relatively high in Basel-Land (42.2%) and Ticino (40.2%).

Compared with the previous year, there has been little movement in income tax rates. As in the previous year, the average income tax rate in Switzerland is 33.8%. The biggest change was seen in Basel-Stadt, which increased its rate by around three percentage points from 37.4 to 40.3%. In addition, only Lucerne raised its tax rate for individuals, albeit only minimally from 31.16 to 31.17%. Seven cantons have slightly lowered their rates.

(Southern) Eastern European countries tax top incomes lowest

In a European comparison, Bulgaria (10%), Romania (10%) and Hungary (15%) top the ranking of locations with the lowest top income tax rates. The canton of Zug makes it into the top ten in Europe with a rate of 22.4%. The majority of cantons are in the European midfield, with Geneva, the canton with the highest tax rate for top incomes (44.75%), ranking at the bottom.

The highest income tax rates in Europe are still found in Sweden (57.2%) and Denmark (55.9%) - followed by Austria (55.0%). Finland (53.75%) and Belgium (53.5%) are also among the countries with the highest top income tax rates.

Globally, the picture is not uniform. While various offshore domiciles and isolated Middle Eastern countries continue to levy no taxes on income, tax rates are relatively high in countries such as Japan (46%), China (45%), Australia (45%), South Africa (45%), the USA (37%) and India (35.9%).

Source: Tax Report 2020 by KPMG