TRAF – initial experiences taking the Canton of Zurich as an example

As part of the Tax Reform and AHV Financing (TRAF) implemented as of January 1, 2020, in the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal Levels (DTHA) the federal government gave the cantons the ability to use several measures to lower the tax burden so as to at least partially soften the increased taxation on former status companies.

Essentially the cantons are free to choose the measures they implement in their cantonal tax law, as long as these remain within the guidelines in articles 24a-d and 25a-b DTHA.

Additional deductions and possibilities for optimization in the Canton of Zurich

The Canton of Zurich has decided to set down the following additional deductions or possibilities for optimization in cantonal tax law:

According to §64a-b of the Zurich Fiscal Code, net income on patents and similar rights may, on application, be taxed on a privileged basis (patent box).

Under §65a, on application additional deductions for research and development (“R&D”) 50% above the expense justified for business reasons may be recognized. For own research, an additional deduction of 100% of the attributable personnel expense (including social security costs) plus a mark-up of 35% for material costs may be recognized. For domestic contract research, an additional deduction of 80% may be recognized.

With taxable net income of TCHF 100, eligible R&D expense of TCHF 10 and domestic contract research of TCHF 20, an additional R&D deduction of TCHF 14.25 may be recognized (TCHF 13.5 + TCHF 16 = TCHF 29.5/2).

Documentation of the research/project is required for the tax authorities to approve the application. Form A describes the minimum elements this documentation must contain.

In addition, in §65b the Canton of Zurich has brought in a deduction for self-financing. This allows companies with high equity to recognize an imputed interest rate deduction by inverse analogy with FTA Circular no. 6 on concealed equity.  

To provide relief in particular for companies that previously benefited from the holding company privilege, §81a has also introduced a reduction in taxable equity in respect of shareholdings, patents and loans to Group companies.

Initial experiences in practice

Based on the first fiscal year with the new deductions, it is apparent that it is worth contacting the authorities in good time and that it may, for example, be necessary to make adjustments to internal processes for internal R&D deductions. It is necessary to be able to demonstrate to the tax authorities, for instance, how the number of hours on eligible R&D projects was calculated.

We will be happy to assist you with any questions you may have on potential deductions or drafting the necessary documentation, all the way up to submitting the tax return and communicating with the authorities.