Taxes on profits: In which cantons they will be lowest in 2021

Switzerland continues to perform well in an international comparison when it comes to taxes on profits and income. This is shown by the latest Swiss Tax Report published by the auditing firm KPMG. It compares the profit and income tax rates of 130 countries and all 26 cantons. According to the report, the highest income tax rates in Europe are still found in Sweden (57.3%) and Denmark (56.5%) as well as Austria (55.0%). In a non-European comparison, Japan, China, Australia and South Africa have the highest top tax rates at 45% each. Various offshore domiciles and isolated Middle Eastern states still levy no taxes on income.

Rates for profit taxes in Switzerland slightly lower in 2021

After major downward movements in profit tax rates were observed in the previous year due to the STAF corporate tax reform, the tax rate reductions from 2020 to 2021 were noticeably lower. Overall, eleven cantons lowered their profit taxes this year, albeit only slightly. The cantons with the highest rates made the biggest reductions. These are the canton of Valais with around -1.6 percentage points, Zurich with around -1.5 percentage points and Bern with around -0.6 percentage points. The low-tax canton of Nidwalden has also reduced its profit tax rate comparatively sharply, by -0.7 percentage points. Across Switzerland, the average profit tax rate is currently around 14.9%, having stood at 15.1% in the previous year. At the beginning of the period under review in 2007, the average ordinary profit tax rate for companies based in Switzerland was still over 20%.

In an international comparison, Switzerland performs well. The cantons with the lowest profit tax rates occupy the top places among the locations with low tax rates after the classic offshore domiciles, Guernsey, Qatar and some (South) Eastern European countries.

Low-tax cantons: Nidwalden overtakes Lucerne

There have been hardly any shifts in the ranking of cantons with the most attractive profit tax rates compared with the previous year. The cantons of Central Switzerland and Glarus and Appenzell-Innerrhoden continue to have the lowest ordinary taxes on profits. Canton Zug, for example, has the lowest profit tax rate at 11.9%, followed by Canton Nidwalden, which has overtaken Canton Lucerne (12.3%) thanks to a slight reduction in the rate of -0.7 percentage points to just under 12%. With a profit tax rate of 21%, the canton of Berne brings up the rear - despite a tax rate reduction of -0.6 percentage points.

Moderate reduction in tax rates expected in Switzerland by 2025

For the coming years, KPMG expects a further, albeit moderate, reduction in tax rates, as some cantons have not yet implemented the full reduction in tax rates as part of the STAF corporate tax reform. They are spreading the rate reductions in stages over up to 5 years. This means that corporate taxes are expected to fall to around 14.3% by 2025. The largest tax cuts are expected in Basel-Landschaft (-4.5%), Ticino (-3.3%) and the canton of Jura (-2.0%).

Tax rates for top incomes largely unchanged

In contrast to corporate taxation, the taxation of individuals has changed little in recent years. Since the first edition of KPMG's Swiss Tax Report, the average top income tax rate in Switzerland has hardly moved at all. In 2007, for example, the rate was 34.9% and will thus remain at virtually the same level in 2021 at 33.7% (previous year: 33.8%).

The largest change could be observed in the cantons of Glarus, Schaffhausen, Jura and Fribourg, which each reduced their average income tax rates by around -0.3 percentage points in 2021. Bern and Thurgau have also slightly reduced their rates by around -0.2 percentage points each. Obwalden is the only canton to have raised its income tax rate slightly by +0.2 percentage points, but with a rate of 24.3% it is still in the top 3 of the most attractive tax cantons.

In cantons with low profit taxes, high incomes also pay low taxes

In general, it can be seen that cantons with low corporate tax rates also perform well 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 Appenzell-Innerrhoden (24.1%), Obwalden (24.3%) and other cantons in central Switzerland. Top incomes are taxed highest in Geneva (44.8%). The tax rates for top incomes are also relatively high in the cantons of Basel-Land (42.2%), Vaud (41.5%) and Bern (41.0%).

Pressure on "tax havens" increases

A reorganization of international corporate taxation is on the horizon that could also have a significant impact on Switzerland. The international tax debate is currently centered on the idea of an international minimum rate for corporate taxation. The latest statements by US Treasury Secretary Janet Yellen are increasing the pressure on low-tax countries like Switzerland. The minimum tax rate of 21% proposed by Yellen is far above the average ordinary rate for profit taxes of currently 14.9% in Switzerland.

If the proposals of the OECD, the G20 and the US Treasury Department for a planned minimum taxation were implemented, this would have consequences for tax competition. This is because the restriction of international tax competition reduces the scope for positioning oneself in the location competition by means of a competitive tax regime. Switzerland in particular could lose attractiveness as a location due to its high cost level. That is why, according to KPMG, it is important to carefully cultivate other location factors. "The level of corporate tax rates is increasingly taking a back seat. Even though the tax burden will remain an important decision-making criterion, factors such as access to talent, flexible labor market conditions, and political stability and legal certainty are becoming increasingly important," explains Stefan Kuhn, head of KPMG's tax and legal advisory practice.

Source: KPMG