Tax Partner AG

A Swiss resident corporation is subject to various taxes which are administered by different tax authorities. The Swiss Federal Tax Administration (SFTA) is responsible for VAT, withholding tax and stamp taxes. The cantonal tax authorities are responsible for corporate income tax and the OECD top-up tax. A tax audit is usually limited to one tax but can also be expanded to other taxes.   Secondary tax audits A tax audit that is closed without any adjustments, does normally not trigger other tax audits. However, if the tax inspector is of the view that there are circumstances which are relevant for other taxes, the tax inspector will notify the division or tax authority in charge of that tax. A tax audit can result in adjustments which are limited to one tax, only. For example, in case of excessive depreciation or provisions without commercial justification, the adjustment would be limited to corporate income tax. Also, most adjustments in VAT audits are not relevant for other taxes. As such adjustments do not impact other taxes, no other tax audits would be triggered by the first tax audit, even if this first tax audit is closed with adjustments. However, if a tax audit ends in adjustments which are relevant also for other taxes, this is regularly communicated to the division in charge of the other tax or to the competent tax authority. It may be that the report of the first tax audit is used for the other tax or that a separate comprehensive tax audit is conducted. Any adjustment concerning related party transactions including transfer pricing results in secondary adjustments or tax audits because it affects corporate income tax, withholding tax, possibly VAT, possibly issuance stamp tax and in certain instances, also payroll tax and social security contributions. As the OECD minimum tax has only been introduced, there is no experience with tax audits. However, the regulations for the Swiss top-up tax apply the same mechanism to tax adjustments as corporate income tax by referring to the Federal Income Tax Act.   Most common adjustments in Swiss tax audits The most common adjustments in tax audits concern related party transactions with group companies or shareholders. Goods or services are under- or overpriced or no consideration at all is provided by the counterparty. In these instances, any missing income or unjustified expense is imputed for purposes of corporate income tax, withholding tax, possibly VAT and social security contributions. If a company is subject to the top-up tax, most adjustments for corporate income tax will also trigger an adjustment for top-up tax.   Additional tax liabilities Adjustments in tax audits result in additional tax liabilities for the audited company. Certain taxes have to be borne by the company, such as corporate income tax or issuance stamp tax, whilst others have to be charged to the counterparty or beneficiary such as withholding tax and payroll tax. With regard to VAT, it depends on the contract between the parties and social security contributions have to be shared by the company and the employee. All taxes that have to be charged to the counterparty such as withholding tax, payroll tax and social security contributions, are grossed up if they cannot be charged to the counterparty and the company ends up bearing the cost. In such instances, the tax authorities assume that the monetary benefit provided to the counterparty is the benefit after deduction of the tax which entails substantial tax liabilities. For purposes of corporate income tax, taxes, except the top-up tax, are considered tax deductible expense. This includes taxes concerning previous years. This fact should always be taken into account when calculating the overall cost of adjustments in a tax audit.   Late payment interest A tax audit usually covers several tax years and happens significantly after the legal due date of the taxes concerned. Adjustments, therefore, not only lead to additional tax liabilities but also to late payment interest. Particularly, if the adjustments are contested, interest amounts can be substantial. The applicable interest rate in 2026 is 4% for VAT, withholding tax, stamp taxes, federal income tax and top-up tax. For cantonal taxes, each canton determines its own rates. Social security contributions bear an interest of 5%. Interest is only charged on the tax amount. There is no compound interest. For purposes of corporate income tax, any late payment, default or debit interest is treated as a tax-deductible expense.   Statute of limitation Because the different taxes have different statutes of limitations, a secondary audit may cover fewer years than the original tax audit. Inversely, a secondary audit can also cover additional tax years. Most Swiss taxes have a statute of limitation of five years. As a special rule, the relative statute of limitation for withholding tax and stamp taxes is the same as for the criminal prosecution of the tax evasion which means an extension of the statute of limitation to seven years. Certain actions by the tax authorities such as assessments, tax audits or announcements of tax audits, interrupt the statute of limitation. The absolute statute of limitation lies between ten and fifteen years, depending on the tax. For withholding tax, there is no absolute statute of limitation. As corporate income tax is assessed annually by the cantonal tax authorities, an audit is only possible, as long as no assessment has been rendered, yet. An exception to that is a reassessment which can be initiated based on new facts within ten years of the concerned tax year. Circumstances detected in an original tax audit of a different tax will often result in such a reassessment because the detected circumstances qualify as new facts. In practice, this can lead to substantial additional tax liabilities which should be taken into account when calculating the overall cost of the original tax audit. Any audit or adjustment does not interrupt the statute of limitation of another tax. An explicit interruption of the statute of limitations is required. If a tax audit takes a long time, it can happen that the division or tax authorities responsible for other taxes are not notified and some or all the tax years concerned are time-barred.   Penalties Penalties are imposed in case of a criminal offense which can be anything from a minor misdemeanor to a qualified crime. Penalties range from fines to a prison sentence up to five years and may only be imposed in a separate criminal procedure. The penalties are imposed on the offenders, which are the individuals who have committed the criminal acts, or to a certain extent, the company itself. For corporate income tax, any fine for tax evasion is based on the amount of tax evaded. The standard fine corresponds to the amount of the evaded tax. For slight negligence, the amount is lower, at least one third of the evaded tax, and in severe cases, up to three times the evaded tax. The same rule applies to the top-up tax. Withholding tax and stamp taxes use the evaded tax as alternative to determine the maximum penalty (three times the evaded tax) and VAT uses an absolute amount as maximum penalty. Adjustments in tax audits regularly result in criminal proceedings for tax evasion, unless the reason for the adjustment is an incorrect transfer pricing within a certain tolerance. The charging of private expenses of the shareholder to the company is commonly viewed as willful or negligent tax evasion by the tax authorities and fined correspondingly. Involved individuals such as company officers or the shareholder can be fined as accessory to the tax evasion of the company.   Joint liability for other taxpayers’ tax Persons other than the taxpayer can be liable for taxes, for example the company liquidators for the tax on the liquidation or an accessory to a tax evasion for the evaded tax. In practice, it is often the company officers who are liable for taxes of the company in case of a tax evasion or a de facto liquidation. For unpaid social security contributions, there is general liability of company officers. Therefore, an individual cannot only be fined as an accessory to a tax evasion of a company, he or she may also be liable for the evaded tax.   Corresponding adjustment There is no automatic corresponding adjustment based on the primary adjustment in a tax audit, in Switzerland. The counterparty has to formally ask for the corresponding adjustment. Based on domestic law, it will be granted only if the tax year concerned is not yet assessed and final. Particularly, when a tax audit takes a long time to close, double taxation is not uncommon. A non-Swiss counterparty can claim a corresponding adjustment based on a tax treaty, provided the counterparty resides in a treaty jurisdiction or based on local legislation of the jurisdiction it is resident in.   Withholding tax refund If because of a tax audit, withholding tax was levied, it may be possible to obtain a full or partial refund of such withholding tax. Swiss resident beneficiaries of a monetary benefit can obtain a full refund of withholding tax. A corporation is entitled to a withholding tax refund if it has recorded the benefit as income in its accounts. As this requirement is typically met in case of incorrect transfer pricing, a refund is usually possible. The refund requirement for Swiss resident individuals is the declaration of the benefit as income. A late declaration or even a retroactive taxation by the competent tax authority, will not result in the forfeiture of the refund claim as long as the non-declaration was only negligent. In practice, the tax authorities often assume eventual intent, which leads to forfeiture of the refund claim. Any refund claim of non-Swiss resident beneficiaries resides on the possibility to claim a tax treaty. The applicable treaty also determines the amount of the refund. Unlike for Swiss resident beneficiaries, no additional requirements have to be met beyond the status as beneficial owner of the income subject to withholding tax and the recognised tax residence in the treaty jurisdiction. Formally, however, the beneficiary has to file a refund form with the SFTA which mentions not only the relevant income and withholding tax but also requires the stamp of the tax authority of the jurisdiction of residence. Indirectly, this ensures knowledge about the income concerned by tax authority of the jurisdiction of residence. In fact, this makes a declaration in the jurisdiction of residence a refund requirement. In addition to the above conditions for a withholding tax refund, there is a three-year filing deadline after the end of the calendar year in which the withholding tax was triggered. As tax audits typically lead to retroactive adjustments, a withholding tax refund would not be possible in many cases. For that reason, there is an exception which provides for a withholding tax refund in case of adjustments due to tax audits if the refund claim is filed within 60 days of the tax payment. For Swiss tax residents, this deadline is easy to maintain. For non-Swiss residents, this may pose practical difficulties as obtaining the necessary stamp by the tax authority of the jurisdiction of residence on the refund form is not within the control of the claimant. In order to be able to meet this formal requirement, the payment of the withholding tax may have to be deferred which entails additional late payment interest and necessitates negotiation with the SFTA for the suspension of debt collection proceedings.   Conclusion A tax audit in Switzerland can have wide-ranging and expensive consequences for the corporation and the involved individuals. In a worst case scenario, various taxes are levied retroactively at company level, covering a long period of time, late payment interest is owed, heavy fines for tax evasion of various taxes are imposed, corresponding adjustments are not possible and withholding tax refunds are forfeited. In addition to that, company officers or other involved individuals face imprisonment and fines as well as joint liability for company taxes. Therefore, in any Swiss tax audit, the possible consequences should be considered from the beginning, and the potential exposure should be tracked throughout the tax audit. The reflex to quickly settle a tax audit with as little discussion as possible, if the adjustments seem acceptable at a first glance, should be resisted. Only after careful consideration of all the likely consequences, a settlement should be agreed to and if relevant for a withholding tax refund, the timing should be negotiated with the tax authority in charge of the audit. In international settings, it should be ascertained that the line of argumentation in a Swiss tax audit does not contradict the group transfer pricing policy and does not otherwise put the tax position of the group at risk. Even if litigation rarely leads to a satisfactory result in such cases, it may be necessary to maintain a position for other taxes, in other jurisdictions or in future tax years.   Victoria Riep Senior Advisor [email protected]   Stephanie Eichenberger Partner [email protected]

After a slight increase in VAT rates at the beginning of this year and the abolition of customs duties on industrial products, the next round of changes in the area of VAT is around the corner. Although the Federal Council has not yet confirmed the official enactment date, it is expected that the VAT changes will become effective January 1st, 2025. The partial revision does not contain groundbreaking developments, and the Swiss VAT system will continue to tax the local supplies of goods and services like any consumption tax around the world. Nevertheless, some of the changes are worth being explained and analyzed in more detail, as they will for sure impact foreign suppliers selling to Swiss customers, but also local transactions are affected by some of the new rules. Like every country in the world, Switzerland is also trying to get to grips with the increasing distance selling business as a result of globalization and digitalization. Back in 2019, Switzerland changed its VAT rules to require foreign-based distance sellers selling into Switzerland and making use of the Low Value Consignment Relief (LVCR) in the context of the importation to register for VAT. Instead of abolishing the LVCR rules, it decided to implement guidelines according to which foreign suppliers have to register if the supplies made to Swiss based clients falling under the LVCR rules exceeded CHF 100,000 per year (approx. USD 110,000 or € 103,000). Has this attempt led to an increase in the number of foreign VAT payers in Switzerland? Yes, it did, but it was hardly noticeable. Today, Swiss customs is still struggling with the sheer volume of consignments, and often such consignments do not even lead to taxation since either the value declared is too low and falls under the LVCR threshold, or the foreign supplier does simply not comply with local tax regulations and does not register for VAT purposes in Switzerland.   The new provisions for sales through electronic platforms Looking at the new provisions that will come into force on January 1, 2025, one inevitably concludes that Switzerland has been closely following developments in the EU with regard to the role of electronic platforms, distance selling regulations, and the recently introduced Import-One-Stop-Shop (IOSS) provisions. However, it has decided not to introduce identical rules but has opted for the "Swiss" way, which is a bit of a mix of all these tools. In practice, the new provisions work as follows: The commercial and legal sale between the seller and the buyer is replaced for VAT purposes by two notional supplies. The first notional supply takes place between the seller and the electronic platform. This transaction is zero-rated. The second notional supply is the one between the electronic platform and the buyer. This one is, in any case, subject to VAT. The electronic platform is held liable for the VAT due on the sales transaction, but the seller remains subsidiarily liable for the VAT due. So instead of obliging the electronic platforms to collect and transmit data to the tax authorities, which would then have to analyze and evaluate the data and contact the seller to collect the VAT owed – and at the same time abolish the provisions of the LVCR – has decided to shift the obligation to collect and pay VAT entirely to the electronic platforms. The provisions will, however, not only apply to electronic platforms operated by Swiss established entities but also to foreign-based operators.   Example 1 Company A, established in Switzerland, is a regular VAT payer. It sells its products through its own web shop, but also through an electronic platform specializing in similar products. The operator of the electronic platform B is also a Swiss company. Client C purchases goods from A directly using the web shop, while client D purchases the goods through the electronic platform run by B. Company A establishes two invoices, one for the sale made to client C and one for the sale made to client D. It is clear that the invoice issued to client C has to contain Swiss VAT at the applicable rate. How the invoice issued to D has to look like, or if A has to issue a second invoice for VAT purposes only to B, will have to be clarified by the SFTA. A is, however, only liable for the VAT mentioned on the invoice sent to client C, while the electronic platform is responsible for the payment of the VAT due on the sale to client D. What sounds simple in theory is not so easy to implement in practice. The seller acknowledges a turnover from the sales to C and D. Both sales transactions must be recorded in his accounting system with a corresponding VAT code in order to create a VAT-compliant invoice. But only the VAT amount of the invoice issued to C is actually received and is to be settled by the seller. However, the technical treatment of the VAT amount owed by D is somehow unclear and depends on the facts and circumstances: If the electronic platform is involved in processing customer D's payment, it can retain the VAT amount and forward the net amount to seller A. Though, if the electronic platform is not involved in processing the payment, the question arises as to how the VAT due is passed on to the platform operator. Platform operators that offer a complete package, including billing and payment processing, are in a much better position than those that do not. Unsurprisingly, these new rules apply to both domestic and cross-border transactions, with a particular focus on inbound transactions. Today, these remain largely untaxed because foreign operators of electronic platforms often declare incorrect values that are too low for the import VAT being levied, thus making unauthorized use of the LVCR regulations.   Example 2 Company U, established in the US, is not registered as a VAT payer in Switzerland. It sells its products (with a value above the LVCR threshold) through its own web shop, but also through an electronic platform specializing in similar products. The operator of the electronic platform is V, a company established in the UK. Client C purchases goods from U directly using the web shop, while client D purchases through platform V. Company U establishes two invoices, one for the sale made to client C, one for the sale made to client D. Since U is not registered for Swiss VAT purposes, it does not refer to any Swiss VAT in its invoice. As U is selling on a customs uncleared basis, it is client C that has to bear the Swiss import VAT on the import of the goods. Assuming that U has declared the correct value of the goods, C will have to bear VAT in the same amount as if he had purchased the goods locally. All fine, and seller U does not have to fulfill any obligations in Switzerland. The operator V may be liable for VAT in Switzerland on the transactions carried out by company U on its electronic platform. The obligation to register for VAT in Switzerland depends on whether the electronic platform sells goods below the LVCR threshold and generates turnover exceeding the registration threshold of CHF 100,000 or, if the consignments do not fall under the LVCR rules, whether it wishes to customs clear the goods using the subordination license or not. If V wishes to register for VAT in Switzerland, it is obliged to pay VAT on all sales to Swiss customers. It is, however, no longer important whether company U, which sells the goods to D, is already registered for Swiss VAT purposes or not. V is stepping in, and is responsible for all VAT compliance and payment obligations resulting from the sales made by U to D. The new rules will for sure cause confusion, especially for foreign suppliers who have their goods delivered to Switzerland through several distribution channels. Which deliveries to Swiss customers are subject to Swiss VAT and which are not? Who must act as the importer of record at the border, the foreign supplier, the operator of the electronic platform, or the customer in Switzerland? What should be done if the foreign supplier grants a full or partial refund to the Swiss customer who purchased the goods via the electronic platform? To make matters worse, with regard to supplies that are subject to the LVCR regulations, the legislator has now also given the SFTA the legal tools to confiscate imported goods and, in the worst case, to destroy them without compensation in the event of offences or non-compliance with tax obligations by the electronic platform. This is therefore not just a legal change to be taken lightly, but one in which the SFTA could actually have the upper hand. Even if the possibilities of enforcing financial claims are limited to electronic platforms operated by EU companies, the possibility of confiscating and destroying the goods alone is reason enough to follow the Swiss rules of the game. Of course, it cannot be ruled out that foreign operators of electronic platforms will no longer serve Switzerland due to its size, despite the existing purchasing power. In that case, the legislator would have scored a goal of his own.   Changes for Swiss based tour operators Another change that will come into force is that local travel services will no longer be taxable but will become VAT-exempt without the right to claim back input VAT. The reason for this change lies mainly in the current obligation for foreign tour operators to register for VAT purposes for their sales of local travel arrangements. Since this obligation could not be enforced in the past and led to competitive distortions between Swiss and foreign based tour operators, the Swiss legislator decided to exclude local travel services entirely from the application of VAT. Unlike the EU, Switzerland does not have a Tour Operating Margin Scheme (TOMS). Instead, local travel arrangements are taxed on inbound transactions at the applicable rate, which is currently 8.1% standard and 3.8% special for accommodation services. Input VAT incurred on local expenses is fully recoverable. Outbound travels, i.e., cross-border trips or trips that take place entirely outside Switzerland, are treated as zero-rated services. The different approach, in combination with the applicable TOMS legislation in the EU, attracted in the past a lot of EU-based tour operators to operate from Switzerland. As such, they could benefit from the non-applicability of the TOMS rules while benefiting of a full input VAT recovery rate in Switzerland. As of January 1, 2025, tour operators’ activities will no longer be subject to Swiss VAT. However, travel activities taking place outside of Switzerland will nevertheless be entitled to input tax credit, similar to other VAT exempt activities carried out outside of Switzerland, enabling the service supplier to claim Swiss input VAT incurred on general expenses. This change will result in additional complexity for Swiss based tour operators, as they will no longer be entitled to a full input tax credit, but will see their recovery rate drop while foreign tour operators might cancel their Swiss VAT registration with effect from January 1, 2025.   Changes related to emission rights and certificate trading Quiet and almost imperceptible are the changes introduced by the partial revision to the taxation of emission allowances and emission rights. For the first time ever, Switzerland extends the reverse-charge mechanism to one particular local transaction. This is a novum, and it cannot be predicted if the local application of the reverse-charge mechanism will further be extended, similar to the application in other jurisdictions. In practice, this means that foreign suppliers registered for VAT in Switzerland – and even companies with their place of business in Switzerland – are no longer required to charge local VAT on their sales of such certificates to their Swiss counterparties. As you may know, the Swiss VAT system provides that a foreign supplier registered for VAT in Switzerland cannot pass on to the recipient the obligation to account for the local VAT under the reverse-charge mechanism. The Swiss VAT registration therefore entails the obligation to charge VAT on all local supplies without exception, so far. This principle is known as the force of attraction and refers to the consequences of VAT registration in Switzerland. Starting January 2025, this force of attraction will no longer apply to the trading of emission rights and certificates. However, as the Swiss approach provides that even if the VAT is incorrectly invoiced by the supplier, it can be deducted as input VAT, neither the seller nor the buyer of such certificates will bear any risk if VAT is nevertheless invoiced by the seller.   Conclusions The amendments to the existing VAT law will not revolutionize the VAT landscape in Switzerland, as mentioned in the introduction. But the changes related to the transactions carried out by means of an electronic platform have the potential to complicate sales, invoicing, reporting, and payment obligations in many ways for Swiss-based and foreign platform operators. It cannot be ruled out that this is exactly what the Swiss legislator wants to achieve. It might have been easier just to abolish the LVCR rules, in particular after having abolished customs duties on industrial products earlier this year. The other changes may also impact foreign entrepreneurs being registered in Switzerland for VAT purposes, and, therefore, assessments and proactive measures in the course of this year are recommended.   Laurent Lattmann Partner VAT [email protected]   Urs Kipfer Senior Advisor VAT [email protected]