At its meeting on 4 September 2024, the Federal Council decided to introduce the Income Inclusion Rule (“IIR”) as of 1 January 2025. Under the IIR, the profits of direct and indirect foreign subsidiaries of Swiss constituent entities will be subject to a minimum tax rate of 15%, provided that they are part of a multinational group that generates consolidated revenues of at least EUR 750 million and thus falls within the scope of the OECD minimum. The IIR applies in cases where any undertaxed excess profits are not already covered by a qualified domestic minimum tax (“QDMTT”).
The Federal Council argues that by introducing the IIR, Switzerland is securing tax revenue that can be used to strengthen the country as a business location. If Switzerland had not introduced the IIR, the foreign tax base that will be taxed with the IIR in Switzerland in the future would in most cases have been subject to the Undertaxed Payment Rule (“UTPR”) in other countries. However, it is currently difficult to estimate how high the additional revenue from the IIR will be. The federal government estimates that the additional tax revenue will be between CHF 500 million and CHF 1 billion per year.
The application of the UTPR to foreign subsidiaries of Swiss companies would have led to complex UTPR procedures abroad for the groups of companies concerned. By introducing the IIR, the companies concerned will be spared these administrative burdens.
No introduction of a UTPR
On 4 September 2024, the Federal Council also decided not to introduce a UTPR in Switzerland for the time being. The UTPR is the fallback rule for the OECD minimum tax, which ensures that all companies in a multinational group are subject to a minimum tax rate of 15%.
The Federal Council was of the opinion that the legal uncertainties and location considerations in particular should be given greater weight than the comparatively low tax revenue. The federal government based its decision on an expert opinion by Prof. Dr. René Matteotti.
Paradigm shift in Swiss tax policy
The introduction of the IIR represents a paradigm shift in Swiss tax policy. Until now, Switzerland has refrained from taxing foreign subsidiaries of Swiss companies if they were subject to a tax burden that was too low.
Implementation status worldwide
While most EU countries have implemented a QDMTT and the IIR by 2024 and are obliged under EU law to implement the UTPR by 2025, there are no plans for implementation in sight in major countries such as the USA, India, China and Brazil. Further developments remain to be seen.