Federal Council wishes to facilitate accumulation of capital by TBTF banks in terms of tax law

Bern, 30.09.2016 - Today, the Federal Council instructed the Federal Department of Finance (FDF) to prepare a draft consultation paper on amending the participation deduction in connection with the too big to fail (TBTF) legislation. The tax burden from certain financial instruments should be reduced so that the capital accumulation of TBTF banks is not adversely affected.

The proposed solution would prevent the tax burden of the top holdings of systemically important banks from rising with the issuance of CoCos, write-off bonds and bail-in bonds. The aim of this measure is to eliminate conflicts in the TBTF legislation: the aim of the three aforementioned financing instruments is to reduce the banking sector's systemic risk. However, the issuance of these capital raising instruments for banks' top holdings results in a higher tax burden on participation income because of the prevailing tax legislation. This is contrary to the TBTF legislation's aim of strengthening the capital base of banks.

System-related increased burden

Under the current law, interest for CoCos, write-off bonds and bail-in bonds is deemed to be financing expenses and these are simply considered proportionally within the framework of the participation deduction. This reduction in the participation reduction is system-related in the current law, i.e. all interest on debt capital leads to a reduction in gross participation revenue for all corporations and cooperatives. This can result in a higher tax burden being incurred for participation revenue at federal and cantonal level in terms of profit tax at the top holding level of a banking group that has issued CoCos, write-off bonds or bail-in bonds.

This additional direct tax burden can ultimately be explained by the fact that certain banks are obliged under supervisory law to issue such financial instruments to a certain extent and said issuance has to be done via the banking group's top holding established in Switzerland, also for supervisory law reasons.

The effect described above can lead to an additional system-related profit tax burden of several hundred million francs per year for the issuers concerned. This is associated with a reduction in capital, which is inconsistent with the aim of the TBTF regulations.

Accounts by branch of activity for three financial instruments

The Federal Council is now proposing keeping accounts by branch of activity for calculating the participation deduction for the financial instruments mentioned in the case of top holdings of banking groups that have issued CoCos, write-off bonds or bail-in bonds. This means that interest payments for CoCos, write-off bonds and bail-in bonds would not be taken into account when calculating the participation deduction, and it would thus not be reduced. This would ensure that banks' accumulation of capital would progress more quickly, which is in line with the aim of the TBTF legislation.

Address for enquiries

Patrick Teuscher, Head of Communications, Federal Tax Administration FTA
Tel. +41 58 464 90 00, media@estv.admin.ch


The Federal Council

Federal Department of Finance

State Secretariat for International Financial Matters