As well as offering an attractive direct tax landscape, Switzerland may also be attractive from an indirect tax perspective especially in regard to VAT. Indeed, although very close to the EU VAT legislation, the Swiss VAT legislation includes some specificities which should be considered when implementing a new business or in case of reorganisations. Let's take two examples: the tax regimes for holding companies and tour operators.
Holding company regime
EU VAT regime
The VAT status of holding companies established in the EU – and hence their input VAT recovery right – actually depend on the nature of their income (for example dividends, loan interest, remuneration of services (management, administrative, consulting) rendered to the subsidiaries). A mix of income may therefore lead to complex situations, discussions with local tax authorities and ultimately to VAT costs.
The Court of Justice of the European Union (CJEU) has ruled on the concept of taxable person on numerous occasions.
The basic principle is that the mere acquisition and holding of equity shares does not qualify as an economic activity. Holding companies that only have dividends as income (passive holding companies) are not deemed to carry out an economic activity and therefore do not qualify as VAT-taxable persons. Passive holding companies are therefore not entitled to recover input VAT which can lead to significant additional cost in case of acquisitions.
A Luxembourg holding company has acquired equity shares in various companies and it is expected that its only income will be in the form of dividends. For the acquisition, the holding company engaged various consultants and law firms established in Luxembourg as well as in other EU member states. Unless a specific VAT exemption is applicable, the Luxembourg advisers have to charge Luxembourg VAT at the rate of 15% on their services. As regards the advisers established in other EU member states, the services are deemed to take place in their own EU member states (this is a general B2C rule as the holding company does not qualify as a VAT-taxable person). The holding company will therefore receive invoices with irrecoverable foreign VAT. This then increases the total acquisition cost of this transaction by approximately 20% (average EU VAT rate) as the VAT is irrecoverable.
Swiss VAT regime
According to the new Swiss VAT Law which entered into force on January 1 2010, the acquisition, holding and sale of equity shares is considered to be an entrepreneurial activity. Equity shares held with the intent of long-term investment are considered to be financial interests and confer significant influence. Equity shares amounting to at least 10% in the capital are deemed to be a financial interest.
If this 10% condition is met, a holding company established in Switzerland having income only from dividends therefore has the possibility to register for VAT, thus being able to recover input VAT (for example, Swiss VAT charged by local advisers as well as Swiss VAT self-accounted for on services supplied by non-Swiss advisers).
Compared with the Luxembourg holding company in the above example, the holding company established in Switzerland would not suffer any additional VAT costs, therefore saving approximately 20% on the acquisition costs.
Of course, if the holding company also generates VAT without financial credit income (for example through loans to its subsidiaries), its input VAT deduction will decrease accordingly.
Finally, although not systematically applied in practice, it must be noted that the Swiss VAT Law also stipulates that the input VAT recovery right of the Swiss holding company may be determined based on the recovery right of the subsidiaries and not the actual activities of the holding company.
Establishing a holding company in Switzerland may lead to significant VAT savings. While an EU-established holding company may not be entitled to recover input VAT as a non-VAT-taxable person, a Swiss-based holding company with the same types of income may be entitled to recover most of it.
Tour operator regime
EU VAT regime
Tour operators are companies specialised in selling travel packages usually made up of various acquired services (for example, flight, transfer, accommodation). Based on the EU place of supply rules, these services are generally deemed to take place in, and are therefore taxable in, the country where they are physically carried out (so accommodation in Belgium will attract Belgian VAT).
When selling a package of services, tour operators would need to charge various local VAT for which a VAT registration is in principle required. As a simplification, the VAT Directive (Council Directive 2006/112/CE) provides a specific regime called the Travel Operators Margin Scheme (TOMS).
TOMS has two aims:
- To avoid that tour operators have to apply different VAT treatment to acquired services; and
- To ensure that the services are taxed at the place of consumption.
- The place of supply for travel packages is deemed to be provided where the tour operator is established; and
- Tour operators have to charge local VAT on their margin only (that is, the difference between the VAT-inclusive purchase price of the package components and the selling price charged to the customers, exclusive of VAT).
The consequences of this regime are that:
- Tour operators are not entitled to recover input VAT except on their overhead costs. The VAT on the acquired services is a direct cost; and
- The VAT incurred by tour operators is included in the final price so that B2B customers are not entitled to recover the input VAT.
Swiss VAT regime
Tour operators established in Switzerland are not subject to a specific regime like in the EU. In other words, the normal VAT rules are applicable, which can be summarised as follows:
- As a general rule, goods and services supplied by a Swiss tour operator are deemed to take place where it is established; that is, in Switzerland. However, the Swiss VAT Law provides specific rules for certain types of services (for example, accommodation) implying that if consumed outside Switzerland, these are not subject to Swiss VAT (supplies deemed to take place and therefore taxable outside Switzerland);
- The same place of supply rules are applicable for both B2B and B2C customers;
- Swiss-established tour operators are entitled to recover Swiss VAT on locally acquired services (accommodation, local transports and so on) via their VAT returns;
- They are entitled to recover Swiss VAT on overhead costs;
- Since TOMS is not applicable to non-EU established tour operators, Swiss tour operators are also entitled to recover – subject to local specific rules – input EU VAT via a VAT refund claim according to the 13th VAT Directive;
- Tour operators not established in Switzerland in principle cannot recover Swiss input VAT on acquired services via a VAT refund claim as they are deemed to supply services on the territory.
As Swiss-established tour operators are subject to the normal VAT rules, they are entitled to recover a significant part of the input VAT, unlike EU tour operators. Knowing that the average VAT rate in the EU is 20%, establishing a tour operator in Switzerland may lead to significant VAT savings. In addition, as Swiss tour operators have to disclose VAT on their services (if applicable), B2B customers can recover it according to their input VAT recovery right.
These two examples clearly illustrate that the Swiss VAT legislation can offer advantages compared with EU legislation. Even if generally not a determinant for relocations to Switzerland, Swiss VAT aspects should be considered when analysing the best place for establishing a business. Of course, there is more to relocating to Switzerland than just a favourable VAT regime: other aspects can tilt the balance in favour of Switzerland (for example, the dual-entity principle for supplies between a head-office and its branches and vice-versa, different definitions of supplying goods/services between Switzerland and the EU which may lead to VAT savings for banks and insurance companies for example, VAT-exempt intra-group cross-border supply of staff under certain conditions).
Senior Manager – Indirect Taxes
Tel: +41 58 249 46 01
Constant is a senior manager with KPMG's indirect taxes services group based in Romandie. He studied Law at the University of Brussels (ULB) and also has also a Master in Tax Management (Solvay Business School). Constant joined KPMG Switzerland in 2011 after 10 years with KPMG Belgium. He has an extensive experience in European VAT advising Swiss-based companies of different sectors (including trading, industries, pharmaceuticals) notably on complex cross-border supply chains and VAT optimisations. He has also a broad experience in the financial services sector (optimisation schemes, cross-border transactions, etc.). He acts as a speaker in indirect tax seminars as well as writing articles.
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