Employee Gifts and Benefits in Kind: What to Consider from a Tax Perspective

The culture of showing appreciation towards employees through gifts and added benefits is on the rise in Switzerland. More companies are realizing the great potential of these practices in motivating their employees, enhancing satisfaction, and nurturing a positive work environment.

However, if you are planning to gift your employees, you need to understand the income tax and VAT implications. In this article, we explore the topic of employee gifts and benefits in kind. We examine the differences between them, their advantages, and importantly, the various tax implications involved.

Fringe benefits: gifts and benefits in kind

Employee gifts and benefits in kind are examples of so-called “fringe benefits”. That is, additional value that employers provide to their employees which enhance their overall satisfaction, encourage loyalty, and show appreciation beyond their ordinary remuneration.

These types of benefits are typically non-cash in nature which means they do not involve a transfer of actual money; however, they tend to have a calculable monetary value which becomes important from a tax perspective. Bonuses and other cash benefits are not defined as benefits in kind or gifts, and the question of VAT treatment does not arise with them.

Differences between benefits in kind and tax-free employee gifts

Before delving into the tax considerations of fringe benefits, it’s important to distinguish between benefits in kind and tax-free employee gifts.

Benefits in kind

Benefits in kind constitute a wide range of non-cash benefits that a company can provide to its employees as a supplement to their overall compensation package. These benefits can take the form of tangible goods and products, or services.

They can include anything from company cars and housing allowances to healthcare and childcare facilities. While employee gifts are typically one-time gestures, benefits in kind are often ongoing provisions meant to enhance the employee’s standard of living.

Examples of benefits in kind include:

• Company car
• Accommodation or housing allowance
• Health insurance
• Meals or restaurant vouchers
• Gym memberships and other subscriptions
• Childcare subsidies
• Store vouchers
• Employee discounts

Benefits in kind are generally viewed as part of an employee’s remuneration package from a tax and social security perspective. We will explore in more detail the tax implications of this later.

Employee gifts

Employee gifts are typically tangible items given by an employer to their employee, usually on special occasions such as birthdays, work anniversaries, or holidays. Employee gifts can range from personalized items to gift vouchers, and are usually one-time gestures which show the employer’s appreciation for the employee’s contribution.

In Switzerland, the market value of an employee gift is crucial from a tax perspective. Gifts with a market value of less than CHF 500 are tax free.

When are gifts defined as contributions in kind?

While gifts with a value under CHF 500 are tax free, those with a higher value form part of an employee’s wage statement for tax purposes. Therefore, these higher value gifts are, in fact, identical to benefits in kind from a tax perspective.

While benefits in kind are a much broader set of benefits than employee gifts alone, we can actually define gifts with a value greater than CHF 500 as one example of a benefit in kind. In that sense, it is more useful and accurate to distinguish between “tax-free employee gifts” and benefits in kind. In doing so, we can include taxable gifts as part of our definition of benefits in kind.

Advantages of giving gifts and benefits in kind

Providing added value and appreciation to your employees in the form of gifts and benefits in kind offers many advantages for both employer and employees:

1.    Improved workplace environment

Gifts and added benefits for your employees tend to contribute to a positive and appreciative atmosphere within the company. It also helps create a sense of loyalty and gratitude among employees.

2.    Greater employee satisfaction

It is difficult to ensure real satisfaction and encourage loyalty among employees just by offering ever-higher salaries. Fringe benefits go beyond monetary compensation alone and help to improve employees’ overall sense of well-being and satisfaction. This not only improves the atmosphere of the workplace, but also motivates employees to perform at their best and stay committed.

3.    Long-term employee retention and loyalty

Gifts and benefits in kind are incredibly effective at fostering loyalty and a sense of belonging among employees. Employees that feel that their employer genuinely recognizes and values their efforts are more likely to stay with the company for longer and feel positive and content while doing so.

4.    Increased motivation and productivity

Gifts serve as a tangible acknowledgment of employees’ contributions and achievements. This type of recognition motivates employees to perform at their best and therefore leads to a more productive and well-functioning workforce.

5.    Enhanced company reputation

Employee gifts and benefits can have a direct positive impact on your company’s brand and reputation. Employees who feel appreciated are likely to speak positively about the company, whether on rating platforms like Glassdoor, social media like LinkedIn and Twitter, or simply by word-of-mouth. All this becomes an authentic and organic branding tool without any direct expenditure on marketing efforts.

6.    Aids recruitment efforts

Attractive benefits packages, including gifts and perks, can set a company apart in the job market. When it becomes known that a company offers additional benefits and incentives, recruitment becomes easier and top talent is more drawn to the company.

Tax considerations for employee gifts

The value of an employee gift per instance of giving (e.g., birthday or Christmas gift) is the primary factor in determining the associated tax obligations.

Income tax

Gifts with a market value of less than CHF 500 don’t have to be declared on the employee’s wage statement and are therefore not subject to income tax for the employee.

On the other hand, gifts with a market value exceeding CHF 500 must be declared on the employee’s wage statement under section 2.3 and are therefore subject to income tax. In that sense, they are seen as part of the employee’s total remuneration and are thus classified as benefits in kind.

VAT

As mentioned, employee gifts with a market value of less than CHF 500 do not have to be declared on the wage statement, and are therefore not subject to VAT in the sense that the employer does not need to declare and pay VAT on their market value.

However, the employer may still be able to deduct the input tax paid when purchasing the gifts if the expenses can be said to be incurred as part of the costs of business operations. This is typically assumed to be the case with employee gifts.

On the other hand, gifts with a higher value of CHF 500 or more must be declared in the employee’s wage statement and are therefore subject to VAT for the employer. These gifts can be thought of as benefits in kind, which effectively makes them remuneration in exchange for the services provided by the employee, and thus it makes sense that VAT must be declared on their market value.

The value of the gift listed in the wage statement is typically inclusive of VAT, the amount of which must be declared and paid to the Swiss tax authorities. In turn, the employer can deduct the input tax incurred when purchasing the gift.

Tax considerations for benefits in kind

Benefits in kind represent a wide range of non-cash benefits that employees receive as part of their total remuneration package. As such, they are usually declared in the employee’s wage statement (subject to certain exceptions), and therefore incur income tax.

From a VAT perspective, benefits in kind in the form of both services and tangible items that are declared in the wage statement are subject to VAT. The company must declare and pay the output VAT and may, in turn, deduct the input VAT incurred in purchasing or providing the service or item.

It should be noted that the Federal Tax Administration (FTA) has listed specific fringe benefits that are considered non-remunerative. These benefits do not need to be declared on the employee’s wage statement and are, therefore, not subject to income tax or VAT. Depending on the nature of such benefits, and whether it can be said that the input expense is part of the costs of business operations, the employer may still be able to deduct input tax for the purchase of such goods or services.

Cash benefits such as performance or Christmas bonuses are purely monetary and are therefore not considered for VAT purposes, nor are they defined as benefits in kind.

What else do you need to know?

Companies providing tax exempt services

So far, we have discussed the typical situation of companies that provide taxable services. In these cases, the company is always able to claim input tax deductions provided the expense is related to business activities, as is assumed to be the case for employee gifts.

However, the situation is a little different for companies that provide services that are exempt from VAT. In this case, input tax cannot be deducted, including the tax incurred when purchasing employee gifts. Companies that provide both taxable and VAT-exempt services can claim input tax by direct allocation or through an input tax correction.

Taxation of company events

Company events such as a Christmas or New Years party can generally be declared as expenses incurred as part of normal business activity. Provided the company provides taxable services (not exempt from VAT), they are entitled to deduct the costs associated with the organization of these events as input tax deductions. Additionally, the cost of gifts given during these events may also be deducted as input tax.

Private consumption of gifts by a sole proprietor

There is a special case for sole proprietors which warrants consideration. If a sole proprietor purchases items intended as gifts (i.e., as part of its business activities), either for their employees or for customers, they are generally entitled to deduct the input tax costs.

However, if after claiming the input tax deduction, the sole proprietor decides to instead take some or all the items purchased for their own private consumption, there needs to be an input tax correction.

The input tax deducted must be corrected in the VAT statement according to the proportion of the items used for private consumption compared to business consumption. The sole proprietor must, therefore, pay the difference to the tax authorities.