Under Swiss VAT law, the VAT registration of a business may occur if the legal requirements for a compulsory VAT liability have been met. However, a business that do not meet these requirements may choose a voluntary VAT registration. In that case, the VAT registration has an economic impact and, more precisely, a cost-effective choice. Indeed, the VAT registration involves that all supplies of goods and services provided by the registered business are subject to VAT. It also involves, if all the legal requirements are met, that the registered business can recover the VAT paid on its acquisitions (the input tax). On the other hand, a non-registered business will not submit its supplies of goods and services to VAT and will not recover any input tax. The VAT charged by its service providers will therefore represent definitive costs. A non-registered business could therefore be subject to higher costs as a registered business.
In view of the potential legal and economic issues arising from VAT registration, this article is meant to highlight the legal requirements and the economic opportunities that a business could seek by registering itself to VAT and be able to recover its input tax.
VAT liability and concept of carrying out a business
The VAT registration of a business, subject to certain specific exceptions, is mainly evaluated on its only activities considered as « carrying out a business ». This concept involves that a business is liable to VAT if it independently performs a professional or commercial activity and has the aim of sustainably earning income from supplies of goods and services. In other words, the business leads to the supplies of goods and services against remuneration, with the intention to execute, over time, regular transactions. Any person, regardless the legal form or the intention to make a profit (or not), may therefore be registered to the VAT. These may include a private individual or a legal entity such as a partnership, corporation, capital company and not-for-profit foundation or association.
When talking about the remuneration, it is important to differentiate the revenue and the profit of a business. Indeed, for the VAT registration, only the revenue count. This means that a loss-making business could register to the VAT. However, the remuneration received by the business needs to be set at an appropriate amount. If the remuneration paid is too low, it will be considered as a symbolic remuneration and the business won’t be considered as « carrying out a business ». In that respect, if a business is solely funded by donation and has no other income, it won’t be either considered as carrying out a business.
If a business is considered as carrying out a business, it is then necessary to review the Swiss VAT law in order to determine if it is subject to a compulsory or a voluntary VAT liability. In that respect, the type of supplies of goods and services and the annual turnover are decisive. More precisely, the VAT registration in no longer compulsory if the business turnover is, in one calendar year, lower than CHF 150’000 for a non-profit sporting or cultural association or lower than CHF 100’000 for other VAT subjects. In case of voluntary VAT liability, the VAT registration will depend on the economic issues that the business is facing. In that respect, the requirements driving the input tax must be understood, subject of the following chapter.
Input tax and concept of business activity
Subject to certain specific exceptions, if a business is considered as only carrying out a business, it will be able to recover all of the VAT charged by its service providers. However, it is usual that a business is as well considered as carrying out a business (« business activities ») and as not carrying out a business (« non-business activities »). Even if it is not relevant for the VAT registration, the business (or non-business) activities will directly impact the deduction of the input tax. As only the input VAT related to the business activities will be recovered from the tax authorities, it is important to differentiate both activities.
The remuneration for the supplies of goods and services will help us to determine whether there are business activities or not. Indeed, if there is no remuneration (or symbolic remuneration), the supplies of goods and services will be considered as non-business activities. For example, a non-profit foundation which supports homeless person thanks to donation from third parties is considered to have a non-business activity. Indeed, the foundation does not realize income with this activity. If the only activity of this foundation is to support homeless person, it has only a non-business activity and won’t be able to recover any input tax.
If the same foundation (besides its non-business activity) provides services such as selling clothes against remuneration, it will be able to deduct part of the VAT charged by its service providers on its acquisitions. Indeed, selling clothes for remuneration is considered as a business activity. In that case, the foundation has a business activity and a non-business activity. The foundation will therefore be able to deduct the input VAT related to its business activity, in that case, the VAT attributed to the sales of clothes.
Nevertheless, receiving donation does not necessarily mean that all, or part of, the activity is considered as a non-business activity. For example, a foundation that runs a museum (open to the public) has revenues with entry tickets. In this example, the revenues do not allow the foundation to cover all its expenses and, in order to cover them, the foundation receives donation from third parties. In that case, even if the foundation receives donation, its sole activity is the sale of entry tickets. As this activity is considered as a business activity and as the foundation does not provide other services, the foundation has only a business activity and the donations are part of the business activity. In that case, the foundation will be able to recover all of the VAT charged by its suppliers.
It is important to note that the deduction of the input tax is impacted by the nature of the services provided, such as services that are VAT-exempt or VAT-excluded.
Specific case of the acquisition tax
In addition to the VAT liability that may occur if a business is considered as « carrying out a business », the VAT liability of a business may also occur depending on its purchase services. Indeed, when a foreign entity which is not registered to Swiss VAT provides services to a Swiss recipient, the legal requirements to report and pay any Swiss VAT falls on the recipient. It is the acquisition tax which is notably a tax levied on supplies of services from abroad, such as advertising services or consultation services (including legal services and asset management). In such case, the recipient is required to self-declare and pay the acquisition tax if he purchases more than CHF 10’000 of these foreign services in one calendar year.
With the acquisition tax, the legal requirements for the deduction of the input tax are the same as the requirements described above. This means that a business that is not considered as carrying out a business (and therefore has no business activity) has to self-declare to the Swiss VAT because of its acquisitions. In that case, the input VAT charged by its suppliers is not deductible and will represent a final cost. If the business which is required to pay acquisition tax is considered as carrying out a business, it would then be able to deduct the input VAT related to this activity if it is registered to VAT.
Specific case of not-for-profit companies
The legal requirements for the VAT registration as well as the deduction of the input tax are applicable for all VATable person, including not-for-profit foundation or association. It is therefore important to emphasis that the tax treatment for direct tax purpose is not significant for VAT purpose. Indeed, under Swiss direct tax law, subject to certain specific exceptions, a not-for-profit foundation or association may be exempted. This is particularly true in the case of a not-for-profit foundation or association having a public purpose or cultural purpose. However, the exemption of such companies is not significant under Swiss VAT law. The VAT liability does therefore solely depend on the business activity and the input tax is deducted according to how the VAT is allocated between the activities of the business.
Risk and regularization
In addition of the economic issues that may occur with the VAT liability, there is also financial risks. Indeed, when a business is subject to a compulsory VAT liability but is not registered to the VAT, the amount of VAT due will be claimed by the Administration and additional interest will be owed. In some cases, penalties may be ordered against the business which did not meet its legal obligations. Furthermore, the lack of compliance with legal obligation provides a negative image and may put the business’ reputation at risk.
RSM at your disposal
Although from a VAT perspective the situation of the business might be rectified, we recommend any business to qualify its activities and take appropriate actions accordingly. We will be delighted to assist any business in this process and offer our assistance with the following services:
- Identification of the business activities;
- Fiscal representation upon VAT authorities;
- VAT registration;
- Annual reconciliation between the turnover of the company and the VAT forms filed.
In order to assist you with the various actions and obligations relating to your VAT situation, we kindly invite you to contact one of our partners : for romandie: [email protected], for German part: [email protected].
Mr. Daniel Spitz, Certified Tax Expert, Head of tax Switzerland.