What is VAT?
Value Added Tax (VAT) is an indirect tax on consumption that is applied to most goods and services provided by businesses. Unlike other taxes, VAT is collected at each stage of the production and distribution chain, from production to the final sale to the consumer. Businesses collect VAT on their sales and remit it to the tax authorities after deducting the VAT they have paid on goods and services purchased for their business activities.
Who is subject to VAT?
In Switzerland, VAT applies to most businesses that provide goods or services in the course of their commercial activities. Specifically, subject to VAT in Switzerland are:
- Companies with an annual turnover exceeding CHF 100,000 are subject to VAT. Companies whose turnover exceeds this threshold are required to register with the Swiss tax authorities and collect VAT on their sales.
- Foreign companies providing goods or services in Switzerland and not established in the country, but with a turnover exceeding CHF 100,000, are also required to register with the Swiss tax authorities and collect VAT on their sales in Switzerland.
- It should be noted that certain activities are exempt from VAT in Switzerland, such as financial services, medical and social services, as well as cultural and educational activities. However, companies engaging in exempt activities may choose to voluntarily register for VAT to recover the VAT paid on their purchases.
When creating my company, am I required to register for VAT?
No, unless certain criteria are met:
- Exceeding a turnover of more than CHF 100,000.
- To project the turnover for the first 3 months of activity and to use this as the turnover base. If for the next 3 quarters this base exceeds CHF 100,000 in turnover, registration with the AFC is required.
- One can also register for VAT voluntarily.
What are the VAT rates?
In Switzerland, there are three different VAT rates:
Normal Rate 8,1 %
It applies to most goods and services, including everyday consumer products such as clothing, electronics, catering services, etc.
Special Rate 3,8 %
The special rate for accommodation services applies to accommodation with breakfast, even if it is billed separately.
Reduced Rate 2,6 %
This rate is applied to certain goods and services considered essential, such as basic food products, prescription drugs, newspapers and magazines, as well as public transportation.
Exemption from VAT 0,0 %
In Switzerland, certain products and services benefit from an exemption from value added tax (VAT). This exemption includes insurance and reinsurance operations, financial transactions, medical services, educational services, sales and rentals of building land, real estate transactions, as well as postal and telecommunication services provided by Swiss Post. Social and cultural services provided by non-profit organizations are also exempt. Swiss companies that export goods can thus benefit from this VAT exemption, allowing them to remain competitive in international markets.
VAT calculation methods
There are several methods of VAT calculation. On one hand, there are those calculated based on VAT issued and received, namely the standard calculation and the effective calculation. On the other hand, there are those calculated based on a fixed rate, namely net tax debt rates and flat rates. These latter two are specific tax rates for certain sectors which significantly simplify the calculation of value added tax, as the input tax does not need to be determined.
Net Tax Debt Rates (NTDRs)
Taxpayers who meet the following two conditions can in principle establish their VAT returns using the NTDRs:
- The annual turnover from taxable supplies (including VAT) does not exceed 5.024 million francs.
- The tax due does not exceed 108,000 francs per year. The tax is determined by multiplying the total taxable turnover by the applicable NTDR for the relevant sector or activity.
Flat Rates (TaF)
Public authorities and related areas (such as private schools and hospitals, public transport companies, etc.), as well as associations and foundations, may apply the flat rate method, regardless of their turnover amount. However, using the NTDR method is not allowed.
Effective Calculation
Unlike the standard method, where VAT is calculated based on issued and received invoices, the effective VAT calculation records VAT at the time payments are received from customers or made to suppliers. Under this method, VAT is accounted for when cash flows are real, which can better reflect the actual financial situation of a business, especially for small businesses with irregular income or variable payment terms. This can simplify cash flow management and reduce the administrative burden associated with VAT.
Standard Calculation
The VAT due is calculated based on issued and received invoices.