A deep dive into subsidies in light of the revised Swiss VAT Law

As part of the revision effective 1 January 2025, the Swiss Value Added Tax Law (hereafter Swiss VAT Law) introduced changes concerning subsidies and other public law contributions, particularly regarding their definition, scope and application. While receiving governmental funds is most welcome for the beneficiaries, subsidies have a direct impact on the VAT position of the receiving company. In addition, government incentives attributable to the global minimum tax rules (Pillar Two), which have already been introduced in multiple cantons, bring up a whole series of potentially challenging VAT questions. This blog addresses the VAT consequences of traditional subsidies, as well as tax and other financial incentives, and whether those should be considered as subsidies.

Subsidies and other public law contributions in the context of the Swiss Value Added Tax Law

Art. 18 para. 2 let. a Swiss VAT Law states that while subsidies are considered as cash flows, they are not regarded as remuneration for services within the meaning of VAT. The term "subsidy" is used synonymously with "public law contribution" under VAT Law. Subsidies are provided by public entities without any corresponding market-based consideration. Such financial flows represent monetary benefits aimed at promoting or maintaining the fulfilment of a task chosen by the recipient or services to recipients outside the public entity to alleviate or compensate for financial burdens arising from the fulfilment of public law tasks, provided there is an absence of exchange of supply.

On January 1, 2025, the Swiss VAT Law introduced art. 18 para. 3, which specifies that if a public entity expressly designates the funds allocated to a recipient as a “subsidy or other public-law contribution”, these funds are to be considered as such. This regulation was introduced to create legal certainty for the recipient of the governmental funds. However, the new regulation does not provide a conclusive list of examples for cases falling into the category of subsidies. It is for instance not specified, if tax or other financial incentives received from the government, for example for location promotion, should be qualified and treated as subsidies.

It is important to note, however, that in the case of an explicit designation as a subsidy by the granting authority, the SFTA is bound by such designation (subject to the prohibition of arbitrariness and manifest abuse). In addition, in the absence of an explicit designation of the funds as a “subsidy”, they might still be materially qualified as a subsidy.
 

VAT consequences of the qualification as a subsidy

Subsidies are considered as so-called non-turnover and are, therefore, not subject to VAT. However, for the taxable recipient, they result in general in a proportional reduction of input VAT. Various input VAT reduction methods can be applied to the advantage of the company, provided that the chosen method leads to a reasonable and correct result. To determine the extent of the input VAT reduction, it is essential to distinguish between directly attributable expenses and non-directly attributable expenses. If the granted contribution pertains to a specific entrepreneurial activity that entitles to an input VAT deduction, only the input VAT relating to costs incurred for that specific activity should be proportionally reduced. If the contribution can be allocated to an activity for which there is no entitlement to an input VAT deduction, no reduction of the input VAT must be performed. If the contribution is used to cover an operating deficit, the reduction of the input VAT is usually in proportion to the funds compared to the total turnover. If a subsidy does not fall under the aforementioned three categories, the input VAT can be reduced in proportion to the subsidy compared to the total expenditures, provided it leads to a reasonable result. The decisive point in time for the input VAT reduction is the time of the subsidy payment.
 

Qualification of economy supporting incentives from a Swiss VAT perspective

There is currently no officially communicated practice from the Swiss Federal Tax Administration (SFTA) regarding the VAT treatment of cantonal economy supporting incentives, e.g. resulting from the introduction of Pillar Two Taxation. Therefore, there are no guidelines on how to specifically deal with these tax incentives under the Swiss VAT rules.

However, according to general applicable rules, Pillar Two incentives do not fulfill the condition of an exchange for a supply. The absence of an exchange of supply is crucial in the qualification of a subsidy or public law contribution and leads to the conclusion that the new cantonal instruments, consisting in financial support, exemption, or other tax relief, granted by a canton to a company within the framework of the cantonal location or economic promotion legislation, likely fall into the category of subsidies and public law contributions according to art. 18 para. 2 let. a Swiss VAT Law.

Thus, even if the Pillar Two incentives are not subject to VAT, they might have an impact on the recoverable VAT position of the company.

In principle, a subsidy presupposes a monetary transfer from the public authority to the recipient. The absence of a monetary transfer (such as a compensation or reduction of the tax base) could therefore be seen as not fulfilling the conditions of a subsidy in the eyes of the SFTA. In addition, it should be noted that, if the recipient can demonstrate that the contribution is linked to an activity or expenditure on which no input VAT was incurred (e.g., wages), no input VAT correction would be required. This is particularly interesting as the Pillar Two incentives may be determined based on various criteria (among which the headcount of a company). Every case requires an in-depth examination of the circumstance leading to the tax incentive or financial support received from the public authority, as the impact can be different depending on each case.
 

Deloitte’s View

Taxable recipients are generally requested to examine whether they should reduce their input VAT. Due to the absence of guidance from the SFTA associated with so-called Pillar 2 incentives, even in cases where the cantonal government does not explicitly refer to the Pillar Two incentive as a “subsidy”, taxable recipients of such contributions must test applicable input VAT consequences. The circumstances and conditions leading to the benefit granted to a company are decisive to establish the potential VAT impact. This is the reason why each case must be examined individually (there is no "one case fits all" solution). Responsible tax departments may reach out within their organization to clarify whether such contributions are received/ applied for and determine next VAT steps on the matter.

Authors

• Romy Mueller – Partner, Swiss Tax & Legal
  
• Katharina Blattner – Director, Swiss Tax & Legal
  
• Sandro Hediger - Consultant, Swiss Tax & Legal
• Mona Bouasria - Senior Consultant, Swiss Tax & Legal