Swiss BEPS 2.0 Pillar Two implementation - applying IIR as per 1 January 2025, delaying UTPR indefinitely

On 4 September 2024, the Swiss Federal Council announced the application of the Income Inclusion Rule (IIR) effective from 1 January 2025. The application of the Undertaxed Profits Rule (UTPR) is delayed indefinitely.

Detailed overview

The legal basis for the Qualified Domestic Minimum Top-up Tax (QDMTT), IIR and UTPR has existed since the entry into force of the Swiss Pillar Two ordinance on 1 January 2024 (see EY Global Tax Alert, Swiss BEPS 2.0 Pillar Two implementation — Switzerland to apply QDMTT beginning 1 January 2024; IIR and UTPR delayed, dated 28 December 2023). However, due to uncertainties regarding the global implementation landscape, the Federal Council decided in 2023 to delay the application of the IIR and UTPR. Now, at its meeting on 4 September 2024, it has decided to apply the IIR from 2025 onward (see the Federal Council's press release).

With the introduction of the IIR, Switzerland will be able to tax the undertaxed profits of foreign constituent entities of in-scope Swiss multinational enterprises (MNEs), as well as of foreign constituent entities of Swiss intermediate holding companies of foreign MNEs.

The reason the Federal Council gave for applying the IIR is that Switzerland can safeguard its tax revenues from foreign taxation through the application of foreign UTPRs, as most EU Member States, as well as the United Kingdom, Canada and Australia, are set to apply the UTPR from 2025. Furthermore, this provides legal certainty for Swiss-headquartered MNE groups, avoiding subjecting them to tax proceedings in multiple foreign jurisdictions applying the UTPR.

Estimates suggest that the IIR should lead to additional tax revenues of between 125 million Swiss francs (CHF 125m) and CHF 250m for the federation and of between CHF 375m and CHF 750m for the cantons.

As the UTPR has been subject to criticism from a legal standpoint and the revenue potential of the tax is likely more limited, the Federal Council decided to delay its application indefinitely. The Federal Department of Finance will, however, continue to closely monitor international developments with regard to Pillar Two.

Outlook

Most MNE groups will welcome this decision. In particular, Swiss-headquartered MNE groups with constituent entities in jurisdictions that apply the IIR (and UTPR) will appreciate this development, as it allows them to fulfill a large part of their Pillar Two compliance obligations solely through Switzerland without being involved in multiple tax proceedings abroad.

For additional information concerning this Alert, please contact:

Ernst & Young Ltd, Zurich

• Daniel Gentsch

• Thomas Semadeni

• Stefan Ruest

Ernst & Young Ltd, Geneva

• Ioseb Nutsubidze

• Sarah Drye

Ernst & Young Ltd, St. Gallen

• Roger Krapf

Ernst & Young LLP (United States), Swiss Tax Desk, New York

• Alain Horat

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.