Basel-City Approved Life Science Tax Incentives in Referendum Vote

In response to the OECD minimum tax, the government of the canton of Basel-City put together a legislative package last summer to remain attractive as a location for the life sciences industry in the future. This bill was approved in a public referendum vote last weekend and contains new incentives.

Incentives

The canton of Basel-City will contribute CHF 150-500 million annually to a fund, of which 80% will be used to promote innovation and 20% for other measures (voluntary parental leave, research cooperation, reduction of CO2 emissions). Promoting innovation is of particular interest to companies. The canton of Basel-City will contribute to the following activities:

• Personnel expenses for research, development and innovation performed in the canton of Basel-City (and to a lesser extent in the wider region of Northwestern Switzerland);
• Depreciation of assets for research, development and innovation located in the canton of Basel-City (and to a lesser extent in the wider region of Northwestern Switzerland);
• Expenses for clinical studies

Applications for funding must be submitted electronically each year and must be based on substantiated expenses. The bill requires that the applying company is subject to ordinary audit and that the application for funding is reviewed in advance by an auditor. Applications for funding can be submitted by legal entities that are fully liable to tax in the canton of Basel-City (legal domicile or place of effective management). In addition, legal entities with limited tax liability (permanent establishment) in the canton may also apply, but only if they also have a "qualifying facility" in the canton.

The bill does not conclusively regulate how these contributions are to be paid to companies in technical terms. The government must decide whether they should be granted in the form of a Qualified Refundable Tax Credit (QRTC, in line with the OECD's minimum tax framework) or as government grants. QRTCs can be offset against cantonal taxes on profits, capital and real estate capital gains or paid out after four years at the latest.

The bill will automatically come into force, which, as we understand it, means that applications for such incentives may already be submitted for the 2025 calendar year. Further details are not yet known and still need to be determined.

Increase Corporate Income Tax

Additionally, but independently from the referendum vote, a second rate of 8.5% for cantonal corporate income tax will be introduced for taxable profits above CHF 50 million. Profits below this threshold will continue to be taxed at 6.5%. As a result, groups affected by the OECD minimum tax will be subject to a tax burden of around 15% (together with direct federal tax). This higher tax rate should largely eliminate the need to levy the Swiss top-up tax (Swiss QDMTT) on the corporate groups concerned. The date of entry into force must be determined by the government. The new tax rate will apply for a period of ten years.

Deloitte’s View

With the important business location of Basel-City, the first canton in Switzerland has enacted new and attractive tax incentives. They are tailor-made for the life science industry and line with the OECD minimum tax framework. Further Swiss cantons are expected to follow in the next months. These new incentives differ from existing incentives in several respects. They must be applied for separately and are not integrated into the tax return. In addition, they are paid out differently and do not necessarily lead to a reduction in the tax owed, unlike the patent box or the R&D super deduction, for example. This may give rise to various follow-up questions, such as the correct disclosure under IFRS and US GAAP, or whether this could result in negative VAT consequences.