Central Record — Switzerland is included in the list of countries with qualified status for QDMTT, but does not (yet) qualify for QIRR

The Central Record lists the jurisdictions that received a temporary "qualified" status for their Income Inclusion Rule (IIR) and/or Qualified Domestic Top-up Tax (QDMTT) domestic regimes. It will be updated on a regular basis, once additional domestic legislations pass the transitional qualification process.

Switzerland enacted QDMTT rules effective as of 1 January 2024. It is now confirmed that Switzerland passed the transitional qualification process for its QDMTT regime and thus eligible for the QDMTT Safe Harbour.

On 4 September 2024, the Swiss Federal Council announced that it will further introduce IIR effective as from 2025, but that the decision to introduce an Undertaxed Payment Rule (UTPR) was deferred to a later date.

As of 13 January 2025, it is not yet confirmed whether Switzerland's IIR regime has passed the transitional qualification process for its IIR.

Administrative Guidance on Article 9.1 of the GloBE Model Rules related to selected tax attributes under Transition Rules

Background

The purpose of Article 9.1 of the GloBE Model Rules (MR) is to determine the treatment of tax attributes upon transition into Pillar Two:

• Article 9.1.1 MR allow large multinational enterprises (MNEs) to take into account deferred tax attributes at the beginning of the first year during which they become subject to Pillar Two (principle).
• Article 9.1.2 and 9.1.3 MR however provide for limitations to this principle (exceptions) to prevent outcomes which would not be aligned with the policy objectives of the rules. These Articles notably deny the benefit of tax attributes (such as deferred tax assets — DTAs) resulting from certain events or transactions that occurred after the 30 November 2021, when such tax attributes have to be taken into consideration for Pillar Two purposes.

Treatment of certain pre-GloBE tax attributes under Pillar Two — Selected tax credits and basis differences

As a reminder of the Pillar Two rules, once MNE Groups have become subject to Pillar Two rules, Article 4.4.1(e) MR provides that deferred tax expenses arising from the generation and use of tax credits shall be excluded for the purposes of computing the GloBE ETR (reduction of the Effective Tax Rate).

In contrast, Article 9.1.1 MR allows MNE Groups to take into account all of pre-existing DTAs reflected or disclosed in the financial accounts upon transition into Pillar Two, subject to the limitations of Article 9.1.2 and 9.1.3 MR.

In a previous AG issued on 2 February 2023 (Chapter 4), the OECD IF clarified the application of Article 9.1.1 and 9.1.3 MR. Clarifications on Article 9.1.1 MR at that time seemed to broaden the scope of tax attributes that would be available for use under Pillar Two. Notably, the February 2023 AG stated that pre-existing DTAs arising from tax credits — including pre-existing DTAs which were not recognized in the financial accounts (assuming however that they are disclosed) — were available for use when computing the GloBE ETR in years when the Pillar Two rules apply. In that context, no adjustments to the DTAs were required for Pillar Two purposes, except the recasting at the lower rate between the domestic and GloBE minimum rate.

The new AG issued on 15 January 2025 now narrows again the scope of tax attributes that will be available for use under Pillar Two. The January 2025 AG now provides for limitations aiming at preserving the integrity of the GloBE rules by preventing the exploitation of pre-existing DTAs to shield low-taxed income.

In particular, the January 2025 AG denies the benefit of certain pre-existing DTAs, when such pre-existing DTAs derive from:

• A governmental arrangement concluded or modified after 30 November 2021;
• A retroactive change in a tax treatment due to an election exercised after 30 November 2021;
• Tax basis differences arising from the introduction a new corporate income tax system after 30 November 2021; or
• Losses that arose more than five fiscal years prior to the entry into force of a new corporate income tax system introduced after 30 November 2021.

Notably, the exception related to "governmental arrangements" includes any form of agreement, ruling, decree, grant, decision or alike which provides for a specific entitlement to a tax credit or relief (such as a tax basis step-up) that "does not arise independently of the arrangement", i.e., where no critical aspect of the credit or relief, such as eligibility or amount, relies on discretion exercised by said government.

When a benefit is denied, the affected tax attributes or deferred tax expenses need to be excluded for the purposes of the detailed GloBE calculations, and for the purposes of determining the Simplified Covered Taxes under the Transitional Country-by-Country Reporting (CbCR) Safe Harbour.

For Switzerland, affected tax attributes could be those that derive from cantonal tax reliefs or credits or from tax basis step-ups, which were granted, amended or renewed — with or without retroactive effect — on the basis of a decision (decree, ruling or alike) confirmed on or after 30 November 2021.

Grace Period and Grace Period Limitation

Even if the OECD IF decided to deny the benefits of tax attributes derived from arrangements concluded with General Governments before the GloBE MR came into effect (but after 30 November 2021), the members of the OECD IF reached an agreement for a Grace Period, during which a limited portion of the affected tax attributes and deferred tax expenses could be taken into account for the purposes of Pillar Two.

The Grace Period is granted for two years (i.e., FY24 and FY25 in most cases).

The Grace Period is only available if the concerned governmental arrangement, election or change in tax law was concluded, exercised or enacted before 18 November 2024. Governmental arrangements, elections or changes in tax laws concluded after 18 November 2024 do not benefit from the Grace Period.

The Grace Period is also limited in its effect: the maximum amount of deferred tax expenses that can be used for Pillar Two purposes is capped at 20% of the originally recorded (or disclosed) DTA.

Finally, the February 2025 AG makes clear that the Grace Period is not designed to allow the acceleration of the reversal of the affected tax attributes and DTAs. The reversal is thus limited to the amount that would have reversed under the applicable rules prevailing as of 18 November 2024 , i.e., tax law in effect, election in effect, accounting methodology used for the recording (or disclosing) of the DTA, or the terms of the governmental arrangement on 18 November 2024.

Switch-off Rule

If a QDMTT jurisdiction does not adopt the limitations stated in the new AG, said jurisdiction will not disqualify for QDMTT.

Instead, an affected MNE Group would become subject to the "Switch-off Rule", whereby the affected MNE Group will be prevented from applying the QDMTT Safe Harbour to all Constituent Entities in said QDMTT jurisdiction.

Switzerland — Outlook for 2025

It is not yet known whether Switzerland will adopt the limitations of the new AG related to Article 9.1 MR on the concerned tax attributes (e.g., selected tax credits and tax basis step-ups granted or renewed in the Transition Period) or whether the Switch-off rule would thus apply.

For the future, at cantonal level, Swiss authorities could be encouraged to adopt measures that qualify under the GloBE rules in order to replace its existing cantonal tax incentives. The canton of Zug, Grison and Basel-Stadt already announced their intent to put in place Qualified Refundable Tax Credits (QRTCs) for cantonal income tax purposes.

To be noted that existing tax reliefs available for Swiss direct federal tax purposes should meet the requirements to be available for use under Pillar Two.

For additional insights on the new AG to Article 9.1 on how they could impact tax attributes in other jurisdictions, you may also read our International blogpost.

We further recommend MNE Groups to analyze whether their tax benefits are affected by the new AG, including those that arose in connection with a covered governmental arrangement concluded in Switzerland such as tax ruling or tax basis step-up.

1 Updates on GloBE Information Return, User Guide for Tax Administrations and Multilateral Competent Authority Agreement on the Exchange of GloBE.

2 Central Record of Legislation with Transitional Qualified Status, Articles 8.1.4 and 8.1.5 of the Global Anti-Base Erosion Model Rules, Article 9.1 of the Global Anti-Base Erosion Model Rules.