On March 21st 2007 the UK government issued its annual Tax Budget. Most notable change from a Swiss perspective is the reduction of the corporate income tax rate from 30% to 28%, as from 1st April 2008, which will reduce the tax rate of a Swiss subsidiary of a UK parent that is needed to avoid the application of UK CFC legislation from 22.5% to 21%.

Significant changes will be made to several areas of UK legislation, the precise impact of which will need careful consideration. The reduction in the headline rate of tax from 30% to 28% from 1 April 2008 (although with a gradual increase for smaller companies from 19% to 22% by 1 April 2009) may bring benefits, although potentially offset in cash terms by sweeping changes to the availability of tax allowances on capital expenditure. Publicly-quoted companies may start making adjustments to their deferred tax assets and liabilities from July 2007, when the new rules are expected to become law. The UK announced that it plans to release a Consultation Document by late Spring on their "Controlled Foreign Companies" ("CFC") legislation and the taxation of dividends received from foreign subsidiaries. The CFC rules target UK groups with subsidiaries in low tax jurisdictions, the basic rule being that where an overseas subsidiary pays less than 75% of the tax that would have beeen charged on UK principles and certain qualifying exemptions are not met, then the UK parent will be assessed to tax on the profits of its overseas subsidiary as if it were a UK company.

The reduction in the main UK corporate tax rate is, therefore, of importance to Swiss companies, in that:

  • For those Swiss companies with significant UK operations, these will be subject to the lower rate of taxation from April 1st 2008, although the benefits of this in cash terms may be potentially offset by the changes in the UK’s system of tax depreciation; and
  • For those UK companies that have Swiss operations, the local rate of Swiss taxation that needs to be paid in order to avoid the UK CFC legislation will be reduced from 22.5% down to 21%.

This reduction in the main UK corporate tax rate has effectively reduced by 1.5% the minimum amount of overseas tax a company needs to pay in order to avoid triggering UK CFC issues. Given the lower tax rates here in Switzerland this could materially impact the overall quantum of taxes paid.

In case of questions, please refer to Richard Chadwick, Director, Tax Management Consulting, Rene Zulauf, Partner, International Tax, or your personal Deloitte tax advisor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.