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Switzerland implements a completely new VAT Act
With the implementation of the 2010 European VAT Package Switzerland have implemented a new VAT Act which entered into force on 1 January 2010. Taxand Switzerland details the key elements of the new VAT Act and how these changes will impact multinationals and taxpayers.
The new rules foresee that every entrepreneur can register immediately, even if his taxable turnover is below the registration threshold which was slightly increased to CHF 100,000 (approx EUR 65,000). However, for the registration of companies with their business domicile abroad the performance of local supplies is crucial.
Under the old VAT Act companies with their business domiciled abroad are liable to register for VAT in cases where they execute local supplies of goods or render local services. In cases where their business in Switzerland is limited to supplies falling under the reverse-charge mechanism, VAT registration is not mandatory. Foreign suppliers of telecommunication services, electronic services, electricity or natural gas transported in pipelines are now liable for VAT if the recipients are non-taxable persons.
According to a new rule, the holding of participations is considered a business activity which allows the reclaim of input VAT. In this context, shares of at least 10% of the capital are deemed participations. Consequently, under the new law a holding company shall be entitled to an input tax deduction based on the taxable activity of its subsidiaries, irrespective as to whether these companies are Swiss or foreign. Swiss based holding companies therefore benefit from a higher input tax recovery rate as of 1 January 2010 and are also entitled to deduct input tax incurred in connection with the purchase or the sale of participations.
Concept of VAT neutrality for entrepreneurs
The pioneering change in the new VAT Act concerns the basic right to deduct input tax. Contrary to the former law, entrepreneurs are no longer obliged to prove that the goods/services are used for taxable or zero-rated purposes. This is being assumed and only in the case of exempt activities or the receipt of subsidies will entrepreneurs have to bear non-recoverable input VAT.
As a fundamental change to the old practice the only required proof, with respect to input VAT deduction, is the evidence that VAT has been paid. Of course, such proof will also require an invoice showing what VAT amount was due, but the overall importance of the formal requirements is considerably reduced.
Place of supply of services
The rules for the place of supply of services have been amended in order to remain, as far as possible, compatible with EU rules. Unlike the EU, Switzerland basically draws no distinction between B2B and B2C transactions. By default, the place of supply is where the recipient of the services is located; exceptions to this rule are only applicable to the following categories of services:
i) Place in which the supplier has its business domicile or a permanent establishment:
- Services which are usually rendered to individuals (e.g. medical services, beauty treatment, child care etc.):
- Services of travel agencies and event organisation
ii) Place where the services are physically carried out:
- Cultural, educational and scientific services
- Restaurant services
iii) Place where the transport effectively takes place, proportionately in terms of distances covered:
- Passenger transportation
iv) Place where the property is located:
- Services rendered in connection with real estate (including accommodation services)
v) Place for which the service is intended:
- Services rendered in connection with the International Development Cooperation
The new rules will simplify the categorisation. Since most of the services rendered cross-border will fall under the default rule, they will either be zero-rated (outbound) or subject to the reverse-charge mechanism (inbound).
Supply of goods - ongoing Swiss peculiarity
The treatment of the leasing of and the work on goods as a supply of goods and not as a supply of services is being continued under the new Swiss VAT Act.
Place of supply of goods
The rules regulating the place of supply of electricity or natural gas transported in pipelines were - according to the EU rules - adapted to the place where the supply's recipient has a registered business address or a permanent establishment, for which the supply is carried out.
Extension of the reverse-charge mechanism
The former reverse-charge rules only applied to the supply of certain types of services such as most of the intangible services mentioned in Article 55 of the EU VAT directive, excluding the hiring out of movable goods (such supplies are deemed to be treated as a supply of goods, see above) and services of intermediaries, but including management services. Such services, rendered by foreign, non-registered entrepreneurs, must be accounted for by the Swiss based recipient.
According to the new Act, the reverse-charge mechanism is extended to local supplies of goods made by foreign entrepreneurs, provided that i) the supplier is not registered in Switzerland and ii) that its supplies have not been subject to import VAT. However, it is apparently clearly not the intention to implement an extensive reverse-charge for local supplies of goods rendered by foreign non-registered suppliers. The extension of the reverse-charge rules targets the taxation of installation supplies made by foreign suppliers who do not reach the registration threshold (see above).
Foreign entrepreneurs who are registered for VAT purposes in Switzerland and render services that fall under the default rule to Swiss recipients have the continuing obligation to charge local VAT. As a result, the Swiss based recipient of such services has no obligation to account the VAT under the reverse-charge mechanism if the foreign supplier is registered for VAT in Switzerland. This rule is being maintained under the new VAT Act.
Option for exempt supplies
According to the new provisions exempt supplies can be voluntarily opted for by raising an invoice which contains VAT. The possibility to opt has been extended to all categories with the exception of financial and insurance activities as well as for betting, lottery and gambling. In case of letting or selling of real estate the option is barred if the property is used for private purposes only.
Under the new VAT Act the option can be exercised for every single transaction without any restriction as of 1 January 2010. For exempt supplies taking place outside of Switzerland exercise of the option is assumed automatically which may result in an increase of the pro-rata.
VAT grouping and joint liability
The new Act limits joint liability only for the time during which a company is a member of a VAT-group. In the event of a sale of a company which has been a member of a VAT-group, the joint liability ends and the company may only be held responsible for the payment of its own VAT liability. As a result, the liability of a target company will be reduced as if the company had never been a member of a group.
Transfer of a going concern
The transfer of assets in the course of a going concern remains a taxable event under the new VAT Act. The application of the so-called notification or reporting procedure will become mandatory if the VAT due exceeds CHF 10,000 (approx. EUR 6,400) or if the assets are transferred to related parties in the case of restructuring (i.e. establishment, liquidation or reorganisation).
The rule by which the transfer of real estate can benefit from the reporting procedure remains in force. As a further innovation under the new VAT Law, taxpayers are entitled to assign and pledge the tax claim according to the civil law provisions.
Supply within a legal entity - cross-border transactions
The peculiarity that Switzerland does not apply the single entity principle finds a legal foundation under the new VAT Act. Therefore, services rendered from a foreign head office to a Swiss based branch or vice-versa are still deemed to be taxable (i.e. either zero-rated in an outbound scenario or subject to the reverse-charge mechanism in inbound situations).
In the new VAT Act, it has now been codified that the Swiss head office and Swiss based branches are to be treated as one single taxpayer and thus as supplies taking place within the same legal entity. Conversely, supplies rendered between a Swiss head office and a foreign branch (or vice-versa) will remain taxable in the future. On the other hand, the cross-border secondment of personnel within a multinational company is outside the scope of VAT, provided that certain conditions are met.
The former margin scheme, under which a loss resulting from the sale of one item could not be offset against the margin resulting from the sale of other items, is replaced by a deemed input tax deduction for the purchase of used goods. As a result, the sale of used goods in any case is taxable and entitles the entrepreneur to claim back the input VAT on the purchase price paid, irrespective of whether his supplier is an entrepreneur or an individual. As a consequence, the purchaser of used goods will basically be entitled to an input tax deduction. The input tax deduction is however not possible if the goods are exported.
The pioneering changes in the new VAT Act concern the reduction of formal requirements (which in the past have been overstretched by the Swiss VAT authorities) as well as the significantly improved possibilities of input VAT deduction. Under the new VAT act entrepreneurs should have to bear non-recoverable input VAT only in the case of exempt activities or the receipt of subsidies.
We recommend multinationals who are doing business in Switzerland or have a Swiss domiciled entity to reassess the VAT situation of their business(es), particularly with respect to the following:
- Swiss based holding companies should check whether they can benefit from a higher input tax recovery rate.
- The extended possibilities to opt for exempt supplies should be checked as well as the input VAT deduction, especially in case of exempt supplies taking place outside of Switzerland.
- Foreign suppliers of electronic services, electricity or natural gas transported in pipelines might become liable for VAT in Switzerland.
Your Taxand contact for further queries is:
T. +41 44 215 77 77