Value-added tax (VAT) in Switzerland – How does it work and when does voluntary registration make sense?

Anyone who buys something in Switzerland pays VAT. In most cases, this amounts to 8.1% of the product price. The rate is lower for everyday goods and some services are exempt from VAT. Once a business has registered for VAT, it can claim input tax deductions on the services and products it buys, which means the business is reimbursed for the VAT it incurs. In this article, we explain more about VAT and discuss the cases where voluntary subordination makes sense for businesses.

What is VAT?

VAT is a consumption tax that is paid by consumers but collected by businesses. VAT is already included in the final price of the product or service. The seller charges the VAT and passes it on to the Federal Tax Administration. If the business purchases inputs for the production of the goods or services, it can deduct the VAT paid and reclaim it from the tax authorities regardless of the quantity sold.

Basics of VAT in Switzerland: standard rate, reduced rate and special rates

There are different VAT rates applied to different products and services. The most important rates are explained below:

• Standard rate: The standard rate is currently 8.1% and is applied to most goods and services. These include electronics, clothing, furniture and motor vehicle services.
• Reduced rate: Some goods and services are subject to a reduced VAT rate of 2.6%. These include food, non-alcoholic beverages, books, newspapers, magazines and medicines.
• Special rates: In certain cases, special rates apply that differ from the above rates. For example, VAT on accommodation services is 3.8%. In addition, some goods and services are exempt from VAT, such as education, health services and cultural events.

It is essential that businesses know the different VAT rates and apply them correctly to their products and services. Errors in applying the correct rates can lead to financial and legal consequences.

Value-added tax in Switzerland: When does the tax liability begin?

Businesses with an annual turnover of CHF 100,000 or more are liable to pay VAT (Art. 10 para. 2 let. a MWSTG). This means you are obliged to register with the Federal Tax Administration (FTA) and collect and pay VAT.

All invoiced services count as “turnover” except services exempt from VAT according to Art. 21 MWSTG. As soon as a company registers for VAT, it can make an input tax deduction on the services and products purchased, i.e., the company is refunded the VAT it incurs during the production process.

Here are the main factors that determine VAT liability:

• Turnover limit: Companies with an annual turnover of more than CHF 100,000 from taxable services are obliged to register for VAT. For non-profit and public-law organisations, the turnover threshold is CHF 150,000.
• Business activity: Companies that are domiciled in Switzerland and provide taxable services are generally liable for VAT, irrespective of whether the business is a sole proprietorship, a partnership, or a corporation.
• Foreign companies: Foreign companies that provide taxable services in Switzerland must also register for VAT. This applies particularly if they have a presence in Switzerland, such as a permanent registered office, a branch, or a permanent local representative.

For start-ups or expansion of entrepreneurial activity:

Each quarter, a company must estimate whether its annual turnover will exceed CHF 100,000. If it is foreseeable that the turnover threshold will be exceeded, they should notify the Federal Tax Administration (FTA) within 30 days without being requested to do so (Art. 66 para. 1 VAT Act).

Example: A new business estimates its annual turnover at CHF 80,000. In the first quarter CHF 20,000 in sales is made. In the second quarter, sales improve, and a turnover of CHF 30,000 is achieved. It is estimated that sales will continue to grow, and therefore annual sales will exceed CHF 100,000. Thus, the business must register with the FTA within 30 days after the second quarter.

Existing companies:

VAT liability begins in the year after the annual turnover exceeds CHF 100,000. (Art. 14 para. 3 VAT Act).

Example: A company achieves a turnover of CHF 109,000 in 2022. It is therefore liable to pay VAT from the year 2023.

Advantages of the VAT obligation

A VAT-registered company can reclaim input VAT on all its business expenses (input tax deduction). If a company has an annual turnover of less than CHF 100,000, they may still voluntarily register for VAT, which may make sense in certain circumstances. 

Voluntary registration for VAT

Businesses with a turnover of less than CHF 100,000 can voluntarily register for VAT (Art. 11 para. 1 MWSTG). This allows them to reclaim VAT on their expenditures.

Voluntary registration is useful in the following situations:

• A company makes a lot of investments and has almost no income.
• A company only does business with other VAT-registered companies. For these, VAT is reclaimable and is therefore not perceived as a price component.
• A company sells many of its goods and services abroad. This is because no VAT is due on exports and on services provided to customers abroad.

It can be assessed anew each year whether voluntary registration is still worthwhile. This is because the waiver of tax exemption must only remain in effect for at least one tax period (Art. 11 para. 2 VAT Act).

VAT registration process: a step-by-step guide

VAT registration is an important procedure for companies providing taxable services in Switzerland. Follow this step-by-step guide to successfully complete the registration process:

1. Check your VAT liability: First determine whether your company is mandatorily liable for VAT, or else, whether voluntary registration should be considered. This is determined by factors such as turnover, business activity and location.
2. Submit your application: To register for VAT, complete the registration form from the Federal Tax Administration (FTA). This can be found online and can be submitted in paper form or electronically. Provide information about your company, your business activity, and your turnover.
3. Wait for processing and confirmation: The FTA will check your application and decide on the registration. This can take a few weeks. If your registration is successful, you will receive a VAT number and information about your tax obligations and deadlines.
4. Adjust your bookkeeping: After successful registration, you must adapt your bookkeeping to the VAT requirements. This includes, among other things, showing VAT on invoices and keeping records of taxable supplies and input tax deductions.
5. Submit your tax statements: As a company subject to VAT, you are obliged to submit a tax statement to the FTA every quarter. In doing so, you compare the VAT collected (turnover tax) and the VAT paid (input tax) and deduct or reclaim the difference.
6. Monitor and update on an ongoing basis: continuously review your VAT obligations and inform the FTA of any changes to your business activity or turnover.

VAT registration is an important aspect of doing business in Switzerland. Therefore, familiarise yourself with the requirements and seek expert advice if you are unsure.

How the VAT system works: input tax deduction and tax settlement

The VAT system in Switzerland is based on the principle of input tax deduction, which shifts the burden of the tax to the end consumer. The following explains how input tax deduction and tax accounting work:

I. Input tax deduction

Businesses that are liable for VAT can deduct the VAT they have paid on their business purchases and investments as input tax. This reduces the company’s tax burden and ensures that the VAT is ultimately borne only by the end consumer.

Businesses must have valid invoices with VAT shown, and properly document their business expenses to be able to claim input tax deductions.

II. Tax Settlement

Companies subject to VAT must submit a tax statement to the Federal Tax Administration (FTA) every quarter. In this statement, they must compare the VAT collected (turnover tax) and the VAT paid (input tax). The difference between the two is the VAT that the company must pay to the FTA (if turnover tax exceeds input tax) or claim as a VAT refund (if input tax exceeds turnover tax).

III. Special regulations

In certain cases, businesses can make use of special regulations such as the balance tax rate method or the flat rate tax. These methods simplify VAT accounting and can be particularly advantageous for smaller businesses. You should contact a tax advisor or the FTA to find out whether such special regulations apply to your company.

Correct handling of input tax deduction and tax accounting is essential to ensure compliance with legal requirements and avoid possible penalties.