Pillar Two: Switzerland's Draft Pillar Two Decree


On August 17, 2022, the Swiss Federal Council issued a draft decree for the implementation of Pillar Two of the OECDs Two Pillar Solution from January 1, 2024. The draft decree is subject to a consultation procedure that will last until November 17, 2022. 
Although the planned implementation date is January 1, 2024, this doesn’t appear in the draft decree. The explanatory notes state that if international implementation in other countries is delayed, Switzerland will also consider pushing back the commencement date.
The approach taken in the Swiss draft decree differs from the UK draft legislation and the EU Draft Directive in a number of respects.  In this article we look at the key highlights of the Swiss Draft Pillar Two Decree. 
Transposition into Swiss Domestic Law
Firstly, it does not attempt to redraft the OECD Model Rules, instead it transposes the OECD Model Rules into Swiss law by way of a direct static reference in Article 2 of the Draft Decree. It also provides that the OECD Model Commentary applies when interpreting the OECD Model Rules. This makes the Swiss Draft Decree much shorter (at just 5 pages) than the UK and EU legislation. 
Wherever the OECD Model Rules use the text ‘Implementing Jurisdiction’, the Draft Decree provides that this is considered to be Switzerland. 
Inclusion of Corporate Inversion Anti-Avoidance Rule
One point to note is that Article 2(3) of the Draft Decree provides that Switzerland is an implementing jurisdiction for the purpose of Article 9.3.5 of the OECD Model Rules.  This is an optional anti-avoidance rule for corporate inversions  that jurisdictions can choose to implement or not. It relates to the transitional rule that excludes MNEs from the under-taxed payments rule for the first five years of operations. 
There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.

This is because if an MNE group had its Ultimate Parent Entity (UPE) in a jurisdiction it would generally be subject to the Income Inclusion Rule (IIR) on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.

Therefore, a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule. 

Therefore, Article 9.3.1 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction.  Switzerland includes this provision in the Draft Decree. 

The fact that the OECD Model Rules are incorporated by a static reference means that much of the detailed application rules and definitions are not included in the Draft Decree. 

Swiss Supplementary Tax

The Draft Decree applies the new Global Minimum Tax in two ways:

 – a “Swiss Supplementary Tax’; and 

 – an ‘International Supplementary Tax’. 

The ‘International Supplementary Tax’ applies the provisions of the OECD Model Rules to foreign low-taxed constituent entities. It follows the OECD Model Rules and applies the income inclusion rule on a top-down basis to Swiss UPEs and Intermediate Parent Entities where the MNE Group has turnover of at least 750 Million Euros. It doesn’t specifically mentioned Partially-Owned Parent Entities, but they would be included due to the general transposition of the Model Rules in any case. 

It also includes the Under-Taxed Payments Rules where there is at least one constituent entity in Switzerland. 

The Swiss Supplementary Tax is a domestic minimum tax. It allows Switzerland to tax the low-taxed profits of entities located in Switzerland up to the 15% minimum rate. The explanatory notes make it clear that the location of the UPE is irrelevant for the purposes of the Swiss Supplementary Tax, and therefore this would apply irrespecive of whether the UPE jurisdiction introduces Pillar Two Rules or not. 

Article 5 of the Draft Decree provides that the Swiss Supplementary Tax is calculated based on the provisions of the OECD Model Rules ‘by analogy’.  This therefore ensures that the Swiss Supplementary Tax is a Qualified Domestic Minimum Top-Up Tax for the purposes of the OECD Model Rules. 

Article 4(2) of the Draft Decree provides that if a foreign jurisdiction implemented Pillar Two rules using a turnover threshold lower than 750 Million Euros, this would also apply for the purposes of the Swiss Supplementary Tax. 

Allocation of Tax

The Draft Decree follows the general allocation rules that are contained in the OECD Model Rules, but includes a specific adjustment to reflect the fact that Switzerland has a cantonal tax system and the Pillar Two minimum tax needs to be allocated between relevant cantons. 

The general rule is that standard jurisdictional blending applies so that GloBE income and covered taxes of all entities within Switzerland are blended to determine the Swiss effective tax rate and whether any top-up tax is due. 

For the purposes of the Swiss Supplementary Tax, it is then allocated to the entity’s in Switzerland based on the low-taxed entity’s share of the top-up tax payable.