Tax Breaks Announced For Swiss ‘Too Big To Fail’ Banks
The Swiss Government is to ease the requirements on banks affected by the Too Big To Fail (TBTF) regime to ensure that they are not subject to an additional tax burden as a result of the legislation.
The TBTF regime requires systematically important banks to have sufficient capital so that taxpayers do not have to bail them out in the event of a crisis. This obligation can result in them issuing TBTF instruments such as bail-in bonds, write-off bonds, and contingent convertible bonds (CoCos).
The issuance of TBTF instruments must be carried out by the group parent company from January 1, 2020 at the latest, in accordance with the requirements set by the Swiss Financial Market Supervisory Authority (FINMA). The group parent company transfers the funds from TBTF instruments internally to those group companies that require capital.
The Federal Council said that this increases the profit tax burden on financial interest revenue for the group parent company, as the so-called participation deduction is lower. It added that more taxes lead to lower capital and are therefore inconsistent with the TBTF legislation’s aims.
To support the TBTF legislation’s aims, the calculation of the participation deduction for the group parent company of systematically important banks will be adjusted on a selective basis.
The Council said that TBTF instruments’ interest expense should no longer be part of financing expenses, which reduce the participation deduction. In addition, the funds from TBTF instruments transferred to group companies are to be excluded from the group parent company’s consolidated statement of financial position.
The Swiss Parliament had intended to exempt TBTF instruments from withholding tax. However, the Federal Council said that, as a result of criticisms of this proposal, the measure will be limited to systematically relevant banks in order to keep the exemption as narrow as possible.