Tax, grant and support f rameworkfor innovat ionin Vaud (Swi tzer land)

October 7, 2019

Jean-Michel ClercAttorney-at-law

Rue du Grand Chêne 2CH-1002 LausanneTél. + 41 (0)21 552 63 63Fax + 41 (0)21 552 63 61jmc@mercuris.legalwww.mercuris.legal

Content1. Vaud – Switzerland at the crossroad of business and innovation

• A business accelerator in the heart of Europe• Vaud assets

2. Overview of the Vaud financial grants and supports

3. Overview of the Vaud profit tax

• Overview of the Swiss tax system• Vaud tax solution• The Big Picture• What kind of business do you want to establish?

4. Qualifying Business Models for Tax Holiday on profit and equity / Terms and conditions

• Start-up companies• Production/Manufacturing companies• HQ Sales companies• Shared Service Centers• Terms and Conditions

- Vaud tax holiday- Federal Tax Holiday in Vaud

5. Overview of other tax tools to be implemented (legislative process still in progress)

• R&D Incentives (input support to innovation)• Patent box regime (output support to innovation)• General limit to tax reduction• Step-up

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7 October 2019 3

Zoom on VaudMap of Canton of Vaud

Vaud –SwitzerlandAt the crossroad ofbusiness andinnovation

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Switzerland: a business accelerator in the heart of Europe

Switzerland has a very long tradition of serving as a business location and /or a global orregional platform for businesses expanding internationally.

ü Central location in the heart of Europeü EU market accessü No strict anti-avoidance rules

ü Liberal approach, decentralized,data protection & legal certainty

ü Europe’s most flexible labor lawü Highly skilled and motivated workforceü Best universities in continental Europeü Innovation hub - most innovative country

in the world for 7 consecutive years

ü Competitive tax systemü BEPS compliantü Transparent administrative

environment

ü Legal, political, economic andfinancial stability

ü Social peace (no strike)ü According to the 2016 Global

Peace Index Switzerland ranksn°1 in Europe and n°7 globallyEurope

but notEU

Peaceof

mind

Businessfriendly

Taxeffective

• Quality of life• Innovation hub

centre of innovation (clusters, applied research)industrial expertise (watch, food, machine tool, pharma, medtech)finance expertise (banking, insurance, fintech)leading education (universities, EPFL, engineering schools, IMD, etc.)qualified workforce (language skills, foreign population acceptance,

• High performance of infrastructure digital, airport, railroad, highways, etc.• Governmental stability and business friendly environment

competent and business oriented administration• Presence of successful companies acting as role models

Nestlé, Novartis, Logitech, Cisco, Honeywell, Medtronic, etc.• Competitive tax solution• Funding opportunities

Swiss Confederation grants (Innosuisse)Private/public platforms such as InnovaudCantonal grants from the Canton of Vaud.European Union programs

• International schools• 3rd largest population of Switzerland of any Swiss canton

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Vaud assets

Overview of the Vaudgrants and supportsto innovation

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Department of Economic Affairs, Innovation and Sport

The Office of Economic Affairs for Innovation (SPEI) may grant Financial help to carry out R&D and/or productionactivities in the Canton of Vaud:

Ø investment support such as loan guarantees and partial coverage of bank interest;

Ø innovation support such as acquiring intellectual property rights (up to CHF 5,000) and developing new products,improving or developing plant, obtaining certification or homologation (up to CHF 30,000);

Øcommercialization and internationalization support such as market analysis, new business opportunities (up to CHF30,000) and attending exhibitions or business conventions (up to CHF 5,000); and

Ø training support such as training of technical or scientific staff (up to CHF 15,000 per employee) and sustainabledevelopment training (CHF 1,000 to 3,000 per employee).

Canton can set a maximum support budget for each enterprise for the training of its technical and scientific staff(50% of the salary for 6 months i.e., max CHF 15,000 for each new employee hired). The support does not coveradministrative, financial and commercial staff but only covers R&D and/or production staff.

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Private organizations supported by the cantonDEV (Economic Developmnent of Vaud) is a Private organization operating as official partner of the Canton of Vaud’s Department ofEconomy, Innovation and Sport

- “One-stop shop” to assist foreign companies in their establishment in our region- Free-of-charge services

Project AnalysisBusiness PlanCompany CreationTaxationPublic AuthoritiesPartner IntroductionReal estateNetworkWork and residence permitPrivate schools

Innovaud is a private/public platform that focuses on innovation in the Canton of Vaud.It supports all innovative businesses – from start-ups and SMEs to giant multinationals – and on the various support options that are availableto each of them.Innovaud provides practical assistance in

- Financing- Support- Promotion- Networking- Hosting

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CONTACT US :Tel. :+41 21 644 00 60Email : info@dev.chWeb : ww.dev.ch

Support provided by the Swiss Confederation and the EUBy the Confederation

- Switzerland Innovationsupport in financing projects and partnering

- Innosuissefunding of innovation projects run jointly by companies and research institutionscoachingpartnering

By the EU- Horizon 2020- Eureka- Eurostars

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Overview of the Vaudprofit tax

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Overview of the Swiss tax systemv Companies that have their seat in Switzerland are liable to tax on an unlimited basis, subject to properties and business abroad.

v Each canton is free to decide its tariffs (level of profit and equity taxation).

v Profit tax is levied at 3 different levels (Federation, Canton and Municipality) whereas equity tax is levied at cantonal and municipal levelsonly.

Ø In general, profit tax is levied on the net profit after tax as per the statutory accounts. Some adjustments may take place based onspecific tax rules.

Ø Equity tax is levied on the total net equity of the company at year-end. In Vaud, profit tax can be credited against the equity tax.Cantonal tax holiday if granted, is usually applicable to equity tax as well.

v Dividend (formal and constructive) as well as interest paid on bonds issued by a Swiss-based entity are subject to withholding tax (35%).Foreign shareholders can obtain the refund of withholding tax if they are able to enjoy treaty protection.

v Issuance of shares and additional contributions from direct shareholders are subject to federal issuance stamp duty (1%). Exemptions mayapply in the context of national or international restructurings.

v Transactions on shares, bonds and other types of securities may be subject to turnover stamp duty if a Swiss Security Dealer is involved in thetransaction.

v Switzerland levies value added tax (VAT) at the general rate of 7.7%. Other rates may apply in specific cases.

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Vaud tax solution for businessFinanceR&D andDesignProcurementWarehousingManufacturingMarketingSalesDistributionAfter salesHQ - management1

Low tax rate, participation relief, step up*Patent box*, special R&D deduction*, taxholiday, low tax rate, step up*Low tax rate, step up*Low tax rate, step up*Low tax rate, tax holidayLow tax rateLow tax rate, step up*Low tax rateLow tax rateLow tax rate, patent box*, special R&Ddeduction*, tax holiday, participationrelief, step up*

Management

* Legislative process in progress. Some measures are optional. Cantonal draft bill should be presented to the parliament inDecember 2019.Entry into force contemplated as from the fiscal period 2020 if no referendum is launched.

1 HQ may encompass all or some of the above activities. Tax holiday may therefore beapplicable as a whole covering all activites if regrouped within a HQ.

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Vaud : The big picture

Ø step upØ patent boxØ R&D super deduction

Not implemented yet, but legislative process inprogress.**

Effective Vaud and federal ordinary Tax Rate on profit

(“ETR”) approximately 13.79%* in average

Lower ETR achievable where any of the specific taxmeasures** in the right side box applies.

Depending on the number of jobs, the return oninvestment, the economic sector, the locationand the type of activity : tax holiday up to100% during a period of up to 10 years.

If cantonal tax holiday at 100%, profit tax rate of7.83% (ETR at federal level)

Vaud & federal profit taxes

tax holidays on profit

* Exact rate varies depending on the municipality coefficient.** Cantonal draft bill should be presented to the parliament in December 2019. Entry into force foreseen as from the fiscal period 2020 if no

referendum is launched.

Qual i fy ing Bus inessModels for TaxHol iday

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Start-up companies

� New companies as real start-up (development phase) for instance R&D, production or commercialization in theregion and that are mostly funded for the start of their business.

� Has a more or less long phase of developing a product, testing an idea, validation of a technology or aneconomic model.

� IP owned by the applicant in Vaud.

� Collaboration with local educational or research institute.

� Limited possibility of subcontracting to related parties

� In principle eligible for full tax holiday.

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Production/Manufacturing companies

� New companies active in the industry or cutting edge advanced technology (IT)

� Existing companies may qualify if they manufacture new innovative products within anew autonomous department of activity

� Activity exercised on Vaud territory

� No mandatory IP ownership

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HQ Sales companies

� These companies are often engaged in services / contract (toll) manufacturing with thirdparties and / or subsidiaries.

� IP can be owned directly or licensed from affiliates

� Products are sold to end-customers directly or through related commissionaires / limitedrisk or third-party distributors.

� These companies centralize the core entrepreneurial functions of the group for a specificgeographical area (e.g. EMEA – Worldwide)

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Shared Service Centers

� Captive companies within a group of companies.

� Provides services to group companies – for example: data center, R&D center,administrative services.

� Their remuneration is determined by transfer pricing methods recognized by theOECD principles.

� The company is usually taxed on the basis of an adequate margin (intra-grouptransfer pricing review).

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Overview of Vaud Tax HolidayTerms and Conditions

Qualifying business models

Start-up Production company HQ Sales Shared Service Center

Benefits Up to 100% tax holiday Up to 100% tax holiday Maximum tax holiday of 50% in thedistricts of Morges and Nyon and 75% in

other regions

Up to 100% tax holiday

Commonconditions

ü New business (appraised from an economic point of view)ü Activities included in the scope of areas favoured by the Economic Development Lawü Tax holiday over 2 consecutive periods of 5 years (10 years)ü Clawback provision: 15 years usually (5 years after the end of the tax holiday)ü Limitation of dividend distribution may applyü Information duty in connection with business plan filed with the request (discrepancies to be announced)

Specificconditions

ü Start-up (development phase)ü IP owned by the applicantü Collaboration – relationships with

local educational or researchinstitutes (e.g. EPFL, UNIL, IMD,etc.)

ü Limited possibility ofsubcontracting to related parties

ü Industry or cutting edge technology(IT)

ü No mandatory IP ownershipü Creation of FTE 10 jobs within 5 yearsü CHF 1 million in long term real estate

lease (10 years) or investments ofCHF 1 million (Vaud subcontractorsonly qualify)

ü Regional/ Global HQ with commercialactivities

ü FTE 40 jobs (50% of local contracts)within 5 years

ü CHF 4 millions in long term real estatelease (10 years) or investments of CHF4 millions (Vaud subcontractors onlyqualify)

ü Financial grant of at least CHF 0.5million granted to local publicinstitutions in the field of culture,education, R&D, sports, etc.

ü Data center, R&D, administrativeand HQ services, etc.

ü Provides services to groupcompanies

ü FTE 25 jobs within 5 yearsü CHF 2.5 millions in long term real

estate lease (10 years) orinvestments of CHF 2.5 millions(Vaud subcontractors qualify aswell)

Geographicareas

No geographic restriction No geographic restriction No geographic restriction as such butvariation in amount of incentive (cf.

“Benefits” above)

No geographic restriction

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Overview of Federal Tax Holiday in VaudTerms and Conditions

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Qualifying business models

Start-up Production company HQ Sales Shared Service Center

Benefits ü Tax relief will depend mostly on new jobs created or preserved. For each newly created job, a maximum tax credit of CHF 95’000 per year and for each job preserveda maximum tax credit of CHF 47’500 per year can be granted. FTE positions are the basis for this tax credit and if work contract is governed by Swiss law.

ü The tax credit will be applied against the federal profit tax in the respective tax period. In case the tax credit exceeds the amount of federal profit tax due for a giventax year, it can be carried forward within the agreed tax holiday period (maximum of 10 calendar years).

Commonconditions

A new business activity with importance for the regional economy meeting at least four of the eight regional economy conditions mentioned below :ü as main condition the creation of new jobs or the reorientation of existing jobs with the view to maintain them on a long term basisü investments within the regionü integration into the cantonal economic development strategy;ü purchase and orders or acquired services within the region;ü collaboration with local research or educational institutes with a direct connection to the planned project;ü regional training opportunitiesü innovative solutions related to the improvement of production/manufacturing of new goods or new processes; orü sales market reaching beyond the region where the tax holiday is grantedThe federal tax holiday cannot be granted at more advantageous conditions than the ones prevailing at cantonal level.Clawback applies as well (usually for a period of 15 years if tax holiday is granted for 10 years)

Specificconditions

10 FTE jobs to be created within aperiod of 5 years

10 FTE jobs to be created within a period of 5years

40 FTE jobs to be created within aperiod of 5 years

25 FTE jobs to be created within aperiod of 5 years

Geographicareas

In Canton of Vaud, the federal tax holiday is available in the following communes only : Aigle, Bex, Château-d’Oex, Cheseaux-Noréaz, Grandson, Lavey-Morcles,Montagny-près-Yverdon, Moudon, Rennaz, Sainte-Croix, Valeyres-sous-Montagny, Vallorbe and Yverdon-les-Bains.

October 7, 2019

Overview of otherpotential tax tools onprofit

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These measures are not implemented at cantonal level and some of them are optional.Legislative process is in progress. Cantonal draft bill should be presented to theparliament in December 2019. Entry into force contemplated as from the fiscal period2020 if no referendum is launched.

R&D Incentive

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Cantonal measure Content

Input support to innovationOptional for the canton

Cantons have the possibility to introduce R&D incentives in the form of an increased deduction for R&D expenses (“super R&Ddeduction”) amounting up to 150% of commercially justified R&D expenses incurred in Switzerland.

Only for R&D connected to scientific research (both basic and applied research) and science-based innovation.

The relevant R&D expenses cover own salary expenses directly connected to the R&D expenses and outsourced R&Dperformed by a Swiss affiliate or a Swiss third party.

The super R&D deduction applies on said own salary expenses increased by 35% (capped to the total amount of expenses) andon 80% of said outsourced R&D expenses.

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Example (150%)R&D

expenses CalculationSuper R&Ddeduction

Salaries related to R&D : 180,000 x 135% 243,000 X 50% 121,500

Swiss outsourced R&D : 300,000 x 80% 240,000 X 50% 120,000

500’000 241’500

R&D deduction for tax : 500,000 + 241,500 = 741,500 (subject to general limit, cf. slide 25)

Patent box regime

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Cantonal measure Content

Output support to innovationMandatory for the canton

Companies may opt at any time for this tax regime. Specific rules deal with the start and the termination of the regime.

Qualifying IP includes patents and comparable IP rights.

Swiss or EU patent (Convention 1973, version 29.11.2000) and corresponding foreign patents thereof are concerned.

Rules described in a draft federal ordinance :

· Income derived from non-patented innovation and protected softwares are not eligible for the patent box regime (unlessthe software is part of a patented innovation).

· Application of the residual method and the OECD “Modified Nexus Approach”

For the application of this incentive, the following R&D costs are eligible :

· Own R&D expenses incurred in Switzerland· R&D expenses from Swiss affiliates or permanent establishments· R&D expenses from Swiss or foreign third parties

For the determination of the profit linked to the Patent box, the residual method is used (all profit not related to patents orcomparable rights are disregarded and ordinarily taxed).

Up to 90% of the income derived from qualifying IP can be tax exempt for cantonal tax purposes. A canton may decide a lowerexemption rate.

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General limit to tax reduction

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Cantonal measure Content

General limitation to taxreduction derived from thePatent box and the R&DincentiveMandatory for the canton

The tax impact resulting from the R&D super-deduction and the patent box alleviation cannot exceed 70% of the taxableprofit(before carried-forward losses and participation relief ) without said reductions,

Said tax reliefs either separately or in combination shall not lead to carried-forward losses.

Cantons can strengthen the maximum limit.

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Step-up

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Measure Content

For both cantonal and federalprofit tax, except for patentbox

Entry into Swiss tax jurisdictionTransfer of assets or functions from abroad into a Swiss business or permanent establishment, transfer of seat or effective place ofmanagement into Switzerland.

Hidden reserves and goodwill can be declared in tax neutrality and their further amortization according to Swiss taxprinciples is tax deductible. Hidden reserves on participations of at least 10% held in companies are disregarded.

Exit out of Swiss tax jurisdictionTransfer of assets or functions from Switzerland into a foreign business concern or permanent establishment, liquidation, transfer ofthe seat or effective place of management outside of Switzerland.

Hidden reserves and goodwill are liable to tax.

Entry into the Patent Box regime (canton only)

R&D expenses related to the eligible IP rights incurred within the current and the 10 previous tax periods (including the superR&D deductions if any) that have been tax deducted are added to the taxable profit upon entry into the Patent Box. Theycan then be fiscally amortized within the next 5-10 years.

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Thank You

For any questions please feelfree to contact:

Jean-Michel ClercAttorney-at-lawRue du Grand Chêne 2CH-1002 LausanneTél. + 41 (0)21 552 63 63Fax + 41 (0)21 552 63 61jmc@mercuris.legalwww.mercuris.legal

The above slides aim to provide with a high level overview of tax aspects and regimes that may be of interest to the Group and its stakeholders.The information contained herein is of general nature only. While the presentation covers many relevant areas, it can of course not be exhaustive. It is emphasized that it isnot designed to provide the comprehensive information necessary to take decisions. Tailor-made counsels are thus to be sought in each individual case. In particular,figures mentioned are only examples and they do not constitute warranties nor representations.