Corporate taxation after the Tax Reform and AHV Financing

The end of the special cantonal regimes

For three decades the Swiss answer to international tax competition had been a set of cantonal special regimes. Holding companies paid no cantonal profit tax on their participation income, and domiciliary and mixed companies, whose activities were mainly directed abroad, paid cantonal tax on their foreign income only at reduced rates. These regimes were the basis on which Zug, Geneva, Basel and Zurich attracted the regional headquarters, trading companies and financing entities of international groups. From the early 2000s the European Union and later the OECD regarded them as harmful because they distinguished between domestic and foreign income, a practice known as ring-fencing. A first attempt to replace them, the Corporate Tax Reform III, was rejected by the electorate in February 2017.¹

The second attempt succeeded. The Federal Act on Tax Reform and AHV Financing of 28 September 2018, known in German as STAF and in English as TRAF, was accepted in the federal vote of 19 May 2019 by 66.4 per cent of voters, with a turnout of 42.7 per cent.² The political compromise that carried it tied the tax reform to additional financing of about two billion francs a year for the old-age and survivors’ insurance, the AHV. The reform abolished the cantonal special regimes with effect from 1 January 2020. In their place it introduced a set of instruments that the StHG either requires or allows the cantons to use: a patent box for profits from patents and similar rights, an additional deduction for research and development expenses, a notional interest deduction for cantons with a high tax burden, relief on the capital tax for participations, patents and group loans, and an overall limitation of the relief. At the same time it raised the taxation of dividends from qualifying participations held by individuals to at least 70 per cent at federal level and at least 50 per cent at cantonal level, while increasing the cantonal share of the direct federal tax to 21.2 per cent.³

The reform also contained transitional provisions for companies leaving the special regimes. Hidden reserves that had built up under the privileged status could be disclosed and then taxed at a separate reduced rate over a period of up to five years, which allowed companies to spread the increase in their tax burden. For many former holding and mixed companies in Zurich the transitional relief of the first years after 2020 was more important than the new instruments.⁴

The Zurich implementation of 2019

Zurich had prepared its implementation in parallel with the federal legislation. The cantonal package, known as Steuervorlage 17 after the working title of the federal bill, was the result of an agreement between the canton and the city of Zurich, which as the largest corporate tax commune had most to lose from a rate reduction. The electorate of the canton accepted the cantonal implementation on 1 September 2019 by just under 56 per cent.⁵

The Zurich package combined a moderate rate reduction with full use of the new federal instruments. The cantonal profit tax rate fell from 8 to 7 per cent with effect from 1 January 2021. The combined burden of federal, cantonal and communal taxes on profit before tax in the city of Zurich thus fell from about 21.15 per cent to about 19.7 per cent. The canton adopted the patent box with the maximum relief of 90 per cent allowed by federal law. It set the additional deduction for research and development at the maximum of 50 per cent, calculated on the qualifying personnel costs plus a surcharge of 35 per cent. As a canton with a high tax burden it introduced the deduction for self-financing. It also reduced the capital tax on equity attributable to participations, patents and group loans by 90 per cent. The federal limitation of relief applies, so that at least 30 per cent of taxable profit before the special deductions remains subject to ordinary taxation. The partial taxation of dividends from qualifying participations of at least 10 per cent was set at the federal minimum of 50 per cent for cantonal purposes.⁶

The statutory provisions are found in the Steuergesetz itself. The patent box is regulated in § 64b StG, the additional research deduction in § 65a StG and the deduction for self-financing in § 65b StG, with the limitation of relief in § 65c StG.⁷ The capital tax is levied at 0.75 per mille of taxable equity.⁸ Using all the instruments to the maximum, a company in the city of Zurich can reduce its effective profit tax burden to about 11.8 per cent before tax. That floor results from the limitation of relief and lies close to the ordinary rates of Zug and Lucerne.⁹

The practical significance of these instruments differs from one sector to the next. The patent box and the research deduction are designed for pharmaceutical, medical technology, engineering and technology companies. Zurich has a large number of such companies, from the research laboratories of international technology groups to the spin-offs of the ETH and the University. For banks, insurers and asset managers they are of little use, since financial services rarely generate patent income and their research activities are limited. For the financial sector the relevant instruments are the rate itself and the deduction for self-financing.

The notional interest deduction

The deduction for self-financing, commonly called the notional interest deduction, is the most distinctive element of the Zurich system. The StHG allows a canton to introduce it only if the combined cantonal and communal tax burden in its capital reaches a certain minimum. Because the threshold was set so that only high-tax cantons would qualify, Zurich is in practice the only canton that has made use of the option. A widely used international tax guide states that the deduction is currently available only to companies resident in the canton of Zurich.¹⁰ The federal Ordinance on the Deduction for Self-Financing of Legal Entities (SR 642.142.2) defines the details. The deduction applies only to cantonal and communal taxes, since the DBG contains no corresponding provision.

The mechanism is technical. The company calculates its core equity, the equity it needs to finance its assets, by applying fixed capitalisation rates to the different categories of assets according to their risk. Taxable equity in excess of this core equity is the so-called security equity. On the security equity the company may deduct a notional interest that corresponds to the yield of ten-year Swiss federal bonds on the last trading day of the preceding calendar year. For the part of the security equity that finances loans to related parties, a rate comparable to the rates charged between third parties may be used. Participations qualifying for the participation deduction and certain loans that would produce unjustified tax savings are excluded, because they must be financed entirely by core equity. The Cantonal Tax Office published a practice note on the deduction in January 2024, which applies to all open tax periods from 2020.¹¹

For the financial centre the deduction has particular interest because it favours group financing companies and treasury centres. A group that finances its subsidiaries from Zurich with equity can reduce its cantonal tax on the resulting interest income, which partly compensates for Zurich’s higher rate. The value of the deduction depends on the level of Swiss interest rates. In the years of negative interest rates up to 2022, when the yield of ten-year federal bonds was close to zero or negative, the standard rate produced little or no deduction. When yields rose in 2022 and 2023, the deduction gained practical weight. With the return to very low Swiss interest rates since 2024 its value has fallen again. Companies that rely on it must therefore budget for fluctuations in a relief that no single group can influence.

The second step and the vote of 18 May 2025

The Zurich package of 2019 had been presented as the first of two steps. In November 2023 the government proposed the second step: a reduction of the profit tax rate from 7 to 6 per cent, which would have lowered the combined burden in the city of Zurich from 19.7 to 18.2 per cent. To limit the revenue loss, the partial taxation of dividends from qualifying participations was to rise from 50 to 60 per cent. The government relied on an updated study by BAK Economics, which concluded that in the most likely scenario the reform would produce no loss of revenue once its dynamic effects were taken into account. Communes suffering significant losses were to receive compensation of 20 million francs a year for the first two years. The government pointed out that, together with the first step, the reduction of the profit tax amounted to about 25 per cent, far less than in Basel-Stadt or Geneva.¹²

The Kantonsrat adopted the amendment. The Social Democrats, the Greens and the Alternative Liste took the referendum, so that the bill came before the electorate on 18 May 2025. The parties of the centre and the right, the FDP, SVP, GLP, Mitte and EDU, supported the bill. The press compared the proposed reduction with the much larger cuts in other cantons since 2019: 68 per cent in Basel-Stadt, 67 per cent in Geneva and 61 per cent in Vaud.¹³

The electorate rejected the bill by 54.5 to 45.5 per cent, with 179,439 votes against and 149,962 in favour. The left had argued that the reduction would cost the public sector some 350 million francs a year, money that would be missing for public services and investment. Finance Director Ernst Stocker regretted the result with the remark that the canton would therefore remain a Steuerhölle, a tax hell, for companies. Observers attributed the result partly to the canton’s recent announcement that infrastructure projects would be delayed, and partly to a broader scepticism towards the demands of business.¹⁴ Six years earlier a similar reduction had passed. The difference lay partly in the context. In 2019 the rate cut was part of a federal reform that also abolished privileges, whereas in 2025 it was a stand-alone reduction without such a counterweight.

The vote of May 2025 was the second defeat for the business lobby in a short time. In September 2022 the electorate had rejected, by the narrowest of margins, an initiative of the Alternative Liste entitled “Keine Steuergeschenke für Grossaktionärinnen und Grossaktionäre”. It would have raised the taxable portion of dividends from qualifying participations from 50 to 70 per cent for cantonal and communal taxes. The difference was 4,310 votes, with 50.5 per cent against and 49.5 per cent in favour. The cities of Zurich and Winterthur voted in favour, while most rural communes voted against.¹⁵ Taken together, the two votes show an electorate that is prepared neither to raise the tax on entrepreneurs’ dividends nor to lower the tax on corporate profits. The status quo of 2021 has thus been confirmed twice.

Effective burdens in 2026

The effective tax burden on corporate profits, including the direct federal tax, is the figure that international groups compare. According to the annual survey of KPMG, the effective burden in the city of Zurich in 2026 is 19.47 per cent, a slight fall of 0.14 percentage points from 2025, which reflects the lower cantonal multiplier. Zug stands at 11.71 per cent, Lucerne at 11.66 per cent and Schwyz at 13.30 per cent. Geneva, which reduced its rate sharply after 2019, stands at 14.70 per cent, while Basel-Stadt has raised its burden by 1.49 points to 14.53 per cent in response to the OECD minimum tax. The Swiss average is 14.43 per cent.¹⁶ Within the canton the burden varies with the communal multiplier. In 2025 a Zurich tax firm calculated an effective burden of 19.6 per cent in the city and of 17.3 per cent in Kilchberg.¹⁷

The difference of almost eight percentage points between the city of Zurich and Zug is the largest between any two major business locations in the country. For a company with a taxable profit of ten million francs it amounts to almost 800,000 francs a year. KPMG observed in 2025 that the round of cantonal tax cuts triggered by the TRAF had come to an end. In its view the future was more likely to bring slight increases in connection with the minimum tax.¹⁸ For large groups within the scope of the minimum tax, the gap between Zurich and Zug is in any case narrower than the headline figures suggest, because Zug’s rate lies below 15 per cent and the difference must be paid as a top-up tax. For companies below the threshold of the minimum tax, which include most small and medium-sized firms, most asset managers and most family offices, the full difference remains.

Notes

1. Wikipedia, “2017 Swiss referendums”, https://en.wikipedia.org/wiki/2017_Swiss_referendums, recording that the federal law of 17 June 2016 on Corporate Tax Reform III was rejected in the vote of 12 February 2017 by 59.1 per cent of voters. ↩
2. EFD, “Volksabstimmung zum Bundesgesetz über die Steuerreform und die AHV-Finanzierung (19.05.2019)”, cited above. ↩
3. ESTV, dossier F “Steuerharmonisierung” (October 2022), cited above, which describes the STAF as a significant extension of harmonisation because it abolished the cantonal status regimes and introduced the patent box into the StHG. ↩
4. Art. 78g StHG, bilingual edition, https://www.droit-bilingue.ch/de-fr/6/64/642.14-78g-138.html, which provides for the separate taxation of hidden reserves, including self-created goodwill, that existed at the end of a cantonal status regime and are realised within the following five years. The technique is often called the “two-rate model”. ↩
5. Zürcher Steuerinfo-Service (zsis.ch), “Umsetzung der STAF im Kanton Zürich”, https://zsis.ch/en/articles/umsetzung-der-staf-im-kanton-zuerich/. ↩
6. Taxpartner AG, “Stimmvolk des Kantons Zürich sagt JA zur Steuervorlage 17”, https://taxpartner.ch/stimmvolk-des-kantons-zuerich-sagt-ja-zur-steuervorlage-17/. The article also reports that the package originally envisaged a second reduction of the rate to 6 per cent, which would have brought the combined burden in the city to about 18.2 per cent. ↩
7. StG ZH, LS 631.1, consolidated version valid from 1 January 2024, cited above, §§ 64b, 65a, 65b and 65c. ↩
8. Kanton Zürich, Steuern im Kanton Zürich (30 November 2023), cited above, which gives the profit tax rate of 7 per cent from 1 January 2021 and the capital tax rate of 0.75 per mille. ↩
9. zsis.ch, “Umsetzung der STAF im Kanton Zürich”, cited above. ↩
10. PwC, Worldwide Tax Summaries, “Switzerland: Corporate – Deductions”, https://taxsummaries.pwc.com/switzerland/corporate/deductions. The Tax Foundation, “Switzerland Tax Reform”, https://taxfoundation.org/research/all/global/switzerland-tax-reform/, describes the deduction as available only in cantons with a high effective rate, primarily Zurich. ↩
11. Kanton Zürich, Kantonales Steueramt, Zürcher Steuerbuch no. 65b.1, “Merkblatt Abzug für Eigenfinanzierung”, 22 January 2024, https://www.zh.ch/de/steuern-finanzen/steuern/treuhaender/steuerbuch/steuerbuch-definition/zstb-65b-1.html. ↩
12. Kanton Zürich, media release of 23 November 2023, “Steuersubstrat stärken und Firmen massvoll entlasten”, https://www.zh.ch/de/news-uebersicht/medienmitteilungen/2023/11/steuersubstrat-staerken-und-firmen-massvoll-entlasten.html. ↩
13. SRF, “Tiefere Gewinnsteuern für Firmen im Kanton Zürich sind umstritten”, https://www.srf.ch/news/schweiz/abstimmungen-kanton-zuerich-sollen-firmen-im-kanton-zuerich-weniger-gewinnsteuern-zahlen. The report gives the burden in the city of Zurich as 19.6 per cent and the burden that would have resulted as 18.1 per cent. ↩
14. SRF, “Zürich versenkt tiefere Steuern für Unternehmen”, 18 May 2025, https://www.srf.ch/news/schweiz/abstimmungen-kanton-zuerich-zuerich-versenkt-tiefere-steuern-fuer-unternehmen. ↩
15. SRF, “Knappes Nein zu höheren Steuern für Grossaktionäre”, 25 September 2022, https://www.srf.ch/news/abstimmung-kanton-zuerich-knappes-nein-zu-hoeheren-steuern-fuer-grossaktionaere. ↩
16. KPMG Switzerland, Clarity on Swiss Taxes: Finding a balance (May 2026), https://assets.kpmg.com/content/dam/kpmgsites/ch/pdf/kpmg-ch-swiss-taxes-2026-clarity.pdf.coredownload.inline.pdf. KPMG measures the burden in the cantonal capital, including federal, cantonal and communal taxes. ↩
17. Reichlin Hess AG, “Corporate Tax Rates and Tax Rates for Individuals for 2025 in the Cantons Zug, Lucerne, Zurich and Schwyz”, 5 March 2025, https://www.reichlinhess.ch/en/2025/03/05/corporate-tax-rates-and-tax-rates-for-individuals-for-2025-in-the-cantons-zug-lucerne-zurich-and-schwyz/. ↩
18. KPMG Switzerland, media release, “Corporate tax rates decline in Switzerland – global minimum tax and US tariffs top agenda”, May 2025, https://kpmg.com/ch/en/media/press-releases/2025/05/clarity-swiss-taxes.html, quoting Stefan Kuhn, Head of Tax and Legal at KPMG Switzerland. The release reports a Swiss average effective rate of 14.4 per cent and mentions Geneva, Schaffhausen, Vaud and Basel-Stadt as cantons that had raised or planned to raise their rates. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.