Talks between Switzerland and the European Commission have failed to settle a dispute over the low corporate tax in some Swiss cantons.
The European Union argues that special tax rates accorded to holding companies in parts of Switzerland distort competition and violate a free-trade agreement. Bern rejects the allegation.
Following the talks on Thursday, the Commission said dialogue would continue in a bid to resolve differences between the two sides.
"Switzerland is our near neighbour and thanks to our free-trade policy is closely integrated into our domestic market. It is important for both sides that the market can function smoothly," commented European Commissioner for External Relations Benita Ferrero-Waldner.
The head of the Swiss Mission in Brussels, Bernhard Marfurt, said Switzerland had reaffirmed its position that the 1972 agreement only dealt with trade. He said the Commission had failed to show how certain cantonal tax practices influenced commercial dealings.
At Thursday's meeting the Commission's External Relations Directorate-General handed the Swiss side a document clarifying its position.
"We will study this document quickly, but still allow ourselves the necessary time," said Marfurt.
The head of the Swiss Mission said Switzerland would consider the cantonal tax laws in question, looking at how they could be seen to assist holding companies, distort competition and influence trade.
Marfurt said the EU had also asked for clarifications from Switzerland, which would be provided.
Switzerland intends to provide its responses to the Commission at the beginning of next year. If no agreement is then reached within three months and the Commission believes it can prove that Switzerland violated the free-trade agreement, the EU will be entitled to take retaliatory measures.
Marfurt said these could include reversing customs concessions, but added "we are a long way from that point at present".
The dispute dates back to September when the Commission sent a letter to Switzerland alleging that the country's tax system violated the free-trade agreement.
The letter questioned whether low-tax cantons Zug and Schwyz granted unfair advantage to foreign firms by encouraging them to set up holding companies.
In October Swiss Finance Minister Hans-Rudolf Merz made a public and vigorous defence of Switzerland's tax system in a letter to the Commission. Merz also rejected the idea of rigid tax harmonisation with the EU.
Last Sunday, canton Obwalden raised the stakes by voting to dramatically lower its corporate tax rates to 6.6 per cent.
From January Obwalden will offer the lowest corporate tax rates of any Swiss canton, overtaking Zug.
Switzerland's cantons are free to set their own tax levels within the framework of the federal Tax Harmonisation Act, which entered into force in 2001.
swissinfo with agencies
Article 23.iii of the 1972 Free Trade Agreement states that "any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods" is "incompatible with the proper functioning of the Agreement".
Swiss cantons are free to set their own tax rates within the framework of the Tax Harmonisation Act, brought into force in 2001.
Obwalden has stated that it wants to attract companies to the canton with its new low corporate tax rate of 6.6%.
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