New set of rules when to become VAT liable in Switzerland

As of 1 January 2018, companies with a worldwide generated turnover of more than CHF 100‘000 can constitute a mandatory VAT liability in Switzerland. Authors: Romy Müller, Silke Hildebrandt-Stürmer
Male winemakers with digital tablet checking wood casks
Under the prior Value Added Tax (VAT) Act, in effect until 31 December 2017, a company in Switzerland became mandatorily liable to register for Swiss VAT if it generated turnover in excess of CHF100’000 from taxable supplies in Switzerland within a one year period. Under the revised VAT Act, in force as off 1 January 2018, the annual turnover threshold in excess of CHF100’000 remains unchanged[1] but the amended reference is to worldwide generated turnover. In other words, turnover of CHF1 from supplies in Switzerland can now constitute a VAT liability if the worldwide turnover is in excess of CHF100’000.

VAT liability of companies domiciled in Switzerland
The text of Art. (10)(1)(b) in connection with Art. 10(2)(a) of the amended VAT Act links a company’s tax liability to the characteristics of being domiciled in Switzerland (registered office, domicile or permanent establishment in Switzerland) and the generation of annual turnover of more than CHF100,000, in either the Swiss territory or abroad.

Whether the Swiss company also provides supplies, i.e., goods or service offerings, with Switzerland as the place of supply is no longer a decisive criterion for its tax liability. Thus, it is irrelevant whether taxable supplies are carried out in Switzerland. A Swiss company must register for Swiss VAT purposes, even if it only provides supplies that are exempt from VAT with credit (e.g., exports) if it also generates annual global turnover in excess of CHF100’000 per year. Only the sole supply of VAT-exempt without credit transactions (according to Art. 21(2), VAT Act), such as interest income, is not included.

VAT liability of companies domiciled abroad
For the determination of the tax liability of companies domiciled abroad, Art. 10(1)(a), VAT Act stipulates that in addition to reaching the worldwide turnover limit of CHF100’000 per year, it is relevant whether turnover is actually generated in connection with a taxable supply in Switzerland. In other words, a foreign company only becomes subject to mandatory registration in Switzerland if it generates annual global turnover of more than CHF100’000, from which at least turnover of CHF1 is generated by taxable supplies in the Swiss territory.

Exemption from VAT liability
The partially revised VAT Act also allows exemption from VAT liability, although its scope of application is now severely restricted.

First, a company is exempt from VAT liability as long as its annual turnover does not exceed the amount of CHF100’000, whether it is domiciled in Switzerland or abroad. Furthermore, a foreign company can make use of the exemption if it only provides supplies that are exempt from VAT with credit (e.g., exports) or without credit (e.g., return on investment).

The exemption from tax liability for companies abroad applies if services are provided to recipients established in Switzerland, which are taxable for the recipient of the service (Art. 8(1), VAT Act). In line with the logic of the reverse charge regulations, the recipient of the service reports VAT on the corresponding services within the scope of the reverse charge.

Companies domiciled abroad that provide telecommunications and/or electronic services to non-taxable recipients as well as services in accordance with Art. 8(2), VAT Act, are still not exempt from the obligation to register. Likewise, work on movable goods which does not qualify as a provision of services in Switzerland but rather as a supply of goods, lead to mandatory VAT liability for foreign companies if they generate worldwide turnover of more than CHF100’000 per year.

For the sake of completeness, it should also be mentioned that the supply of electricity in pipelines, gas, via the natural gas distribution network and district heating through foreign companies, does not trigger Swiss VAT liability as long as these services are provided to persons subject to VAT who are based in Switzerland.

Commencement of tax liability
According to Art. 14(1)(a), VAT Act, the VAT liability for Swiss companies starts once they commence their business activities.

Art. 14(1)(b), VAT Act stipulates that the mandatory tax liability for foreign companies shall commence when a supply is provided for the first time on Swiss territory, if at this point in time it can already be expected that the worldwide turnover threshold of CHF100’000 per year will be exceeded within the next 12 months.

If a Swiss or foreign company has not yet been subject to VAT (including 2017) due to the fact that it has not met the turnover thresholds, registration with the Swiss VAT registry must be assessed at the beginning of a new financial year (e.g., 2018) and, if required, made.

Implications
The introduction of the worldwide turnover as a base for determining the tax liability of both national and foreign companies represents a significant change of the VAT system. The impact is extensive and has not yet been adequately assessed in all the companies concerned. It is of critical importance to emphasize the re-charging of supplies rendered on domestic territory, but also the performance of work in movable goods in Switzerland. In the course of adapting its practice to the partially revised VAT Act, the Swiss Federal Tax Administration has also published a series of reforms concerning certain sector regulations. A representative example for this is the regulation for package tour providers. Companies based abroad, exclusively offering such package tours and combined services in Switzerland, were able to be exempt from VAT liability until 2017. In the VAT-industry-leaflet 12 (travel agencies, health resort and tourist offices), it is now stated that there is a tax liability for these supplies (provided that the corresponding turnover thresholds are reached). Since the Swiss Federal Tax Administration is still in the process of adapting its practice, further reforms are expected. The vigilance of companies will therefore continue to be called for.

[1] For non-profit, voluntary sports or cultural associations or non-profit institutions, the threshold is worldwide turnover in excess of CHF150‘000.