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VAT deduction for holding companies – the Swiss approach
Status quo and outlook in the EU
Based on the current regulations, holding companies throughout Europe suffer from a reduced VAT deduction right. The reason for this is that the holding of shares, if not actively managed by the holding (eg through management services rendered to its subsidiaries), is principally not considered an economic activity and does not allow for an input VAT deduction on the expenses incurred.
As it was described by Taxand Poland, Taxand Germany and Taxand UK, VAT authorities in various Member States are trying to further limit the right to claim input VAT for holding companies. This will not only increase the costs for the holding companies, but also increase the uncertainty around which input VAT can be claimed and which not.
Based on the current VAT rules and the recent developments within the EU it is unlikely that the situation will significantly improve for holding companies within a reasonable time. The question is whether other jurisdictions offer a substantially better environment for entities exercising such activities.
Switzerland’s VAT position from 1995 to 2009
The development of the rules for holding companies within the European Union reminds one of the situation that Swiss based holding entities were facing for almost 15 years. Since the introduction of VAT in Switzerland, holding companies were only allowed to claim input VAT if they were actively managing their Swiss or foreign subsidiaries. The right to claim input VAT was also calculated on a pro-rata basis. In the past, a dividend which does not qualify as consideration for a supply and should have been eliminated from the pro-rata calculation, was taken into consideration. This resulted in a relatively low recovery rate for holding companies.
VAT on costs that were allocated to the purchase or the disposal of shares or other financial activities (such as the granting of inter-company loans) were considered as directly allocated to an exempt share transaction and could not be claimed as such. However, the non-recoverable VAT amount was relatively low compared to holding entities established in the EU as a result of the very low VAT rates (standard rate was 6.5% in 1995 and is now 8%).
Rules since 2010
When Switzerland adopted the existing VAT act in 2009, which was enacted on 1 January 2010, the rules of the game completely changed. The new VAT act and the corresponding VAT ordinance contains a provision according to which the holding of a participation of 10% or more qualifies as an entrepreneurial activity, and leads to a full input tax deduction entitlement. Companies directly or indirectly holding 10% or more in subsidiaries can therefore claim their input tax in full. Only minority stakes, i.e.below the 10% threshold, do not lead to an input tax deduction right. Such investments are treated as investments in shares, and VAT on attributable costs cannot be claimed.
As a matter of course, Swiss based holding entities also need to apply a pro-rata calculation if they hold participations below the 10% threshold. However, in the case where a holding company only has stakes of more than 10% and does not exercise another exempt activity, the company will be able to claim Swiss input VAT in full. Despite being of minor relevance, it needs to be noted that this rule basically applies to foreign holding entities incurring Swiss VAT (eg on costs for an acquisition in Switzerland) and that this VAT can be claimed through the refund procedure for foreign companies. It is unlikely that the Swiss VAT authority would refuse to fully refund the foreign company due to the lack of reciprocal provisions if the applicant is established in the EU.
Last but not least it is noteworthy that the Swiss VAT rates are still amongst the lowest in the world. In case of non-recoverable input VAT, the non-recoverable VAT for a holding entity will therefore be significantly lower than in the EU or in other jurisdictions in which restrictions on the input tax right were implemented. Depending on the applicable VAT rate in other jurisdictions, the pro-rata deduction would have to be at least 50% (Luxemburg) and 70% (Hungary) in order to achieve a similar result to Switzerland. If the right to claim input VAT is lower, a re-domiciliation of the holding to Switzerland may result in significant VAT savings.
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Holding companies in the EU will have to face another cut of their input VAT in the near future. They should closely monitor the respective developments in their country and evaluate alternatives in order to not suffer more non-recoverable VAT than strictly necessary. Switzerland’s approach on the possibility to claim input VAT on holding activities works very different from the EU rules. Swiss holding companies benefit from an attractive and quite unique rule in the sense that such activities qualify as entrepreneurial, and therefore allow companies to claim the incurred input VAT in full.
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