Federal Council wishes to facilitate banks' accumulation of capital

Bern, 09.06.2017 - During its meeting on 9 June 2017, the Federal Council initiated the consultation on the proposed Federal Act on the Calculation of the Participation Deduction for Too-Big-to-Fail (TBTF) Instruments. It will prevent an increased tax burden caused by the issuance of certain financial instruments in order to facilitate banks' accumulation of capital.

The Federal Council is proposing to overcome the negative effect of TBTF instruments (see box) on the participation deduction for profit tax. To achieve this, the interest paid to investors and the transfer of funds from TBTF instruments recognised in the statement of financial position are to be excluded from the calculation of the participation deduction.

The federal act should prevent a higher tax burden for the group parent companies of banks when TBTF instruments (CoCos, write-off bonds and bail-in bonds) are issued. These instruments are already exempt from withholding tax and stamp duty, and this change will extend the exemption to profit tax and strengthen the capital base of banks.

The group parent companies of all banks in Switzerland will be able to benefit from this after the issuance of TBTF instruments has been approved by FINMA. This will guarantee a faster accumulation of capital and greater stability for the Swiss financial centre.

Financial implications

In the long term, the profit tax increase caused in the absence of statutory amendments would result in additional receipts of up to several hundred million francs per year for direct federal tax and cantonal taxes. The proposed change will eliminate this potential increase in receipts.

The participation deduction is reduced with TBTF instruments

The participation deduction is a profit tax instrument that prevents double or even multiple taxation within the same group. Companies can deduct financial interest revenue (e.g. subsidiaries' dividends) for tax purposes.

If a bank issues TBTF instruments at group parent company level, as it is obliged to do under supervisory law, two effects influence the participation deduction and thus the tax burden on financial interest revenue:

On the one hand, the bank pays interest on TBTF instruments to the capital providers. This increases financing expenses.

On the other hand, the bank transfers the debt capital raised in this way to subsidiaries. This increases the group parent company's statement of financial position.

Together, without corrections, the supervisory law requirements for TBTF instruments (obligation to issue TBTF instruments and obligation to issue them at group parent company level) lead to a higher tax burden, which curbs the accumulation of capital and is thus contrary to the objectives of TBTF legislation.

Address for enquiries

Joel Weibel, Communications Specialist, Federal Tax Administration FTA
Tel. +41 58 464 90 00, media@estv.admin.ch