On 13 February 2007, the European Commission announced that it had decided that certain company tax regimes in Swiss cantons which exempt foreign-source income of companies established there constitute State aid incompatible with the proper functioning of the 1972 EU-Switzerland Agreement (Agreement between the European Economic Community and the Swiss Confederation of 22 July 1972, "the Agreement"). The Commission asks Switzerland to amend these tax schemes to bring them in line with the terms of the Agreement.
Under Swiss law, the Cantons may exempt foreign-source profits from cantonal and municipal corporate income tax and all cantons implemented such exemptions in different forms. As a result, many headquarters, co-ordination and distribution centres of multinational groups are established in Cantons such as Zug and Schwyz to minimize their tax liabilities. Because those multinationals, in general, generate most of their profits in the EU markets, the tax regimes may directly or indirectly affect trade between the EU and Switzerland. Pursuant to complaints raised by various Member States, Members of the European Parliament and businesses, the Commission examined various cantonal tax regimes on compatibility with the State aid provision of Art. 23(1) of the Agreement.
The issue was referred to the Joint Committee established under the Agreement on 15 December 2005 and was further discussed with Switzerland at an expert meeting on 4 May 2006 and subsequent meetings of the Joint Committee on 5 May and 14 December 2006, but no solution has been reached in that framework.
The Commission noted that the EFTA states concluded free trade agreements with the EU similar to the Agreement in 1972. Under these agreements similar state aid actions have already been taken. Furthermore, the tax regimes comparable to the Swiss regime are not allowed in the EU based on the state aid provision of Art. 87 of the EC Treaty and the Commission has taken action against Member States on those grounds. Finally, the EU referred to the Code of Conduct for Business Taxation of 1997 in which all Member States committed themselves to abolish similar preferential tax measures and to promote the standards of the Code with third countries .
Following its decision, the Commission will discuss the further procedure with the Member States with a view to negotiate a modification of the tax schemes concerned with Switzerland to abolish the exemption of foreign-source profits and to terminate the resulting distortion of competition.
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