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Two years ago the Federal Council published the draft of the partial revision of the Swiss VAT Act. The new provisions primarily intend to eliminate competitive disadvantages that Swiss suppliers face by tightening the rules for foreign suppliers to register for Swiss VAT purposes and to charge Swiss VAT on their supplies within Switzerland. The entry into force was initially planned at the beginning of 2016, but due to the length of internal alignment by the Swiss legislator the entry into force was postponed and is now expected on January 1, 2018.
Registration threshold
Under the current Swiss VAT Act, an entity (irrespective of legal form, purpose and profit intention) that supplies goods or services on Swiss territory becomes liable for Swiss VAT if it exceeds the VAT registration threshold of CHF 100,000 per annum. However, only supplies taking place within Switzerland are relevant for the assessment of the Swiss VAT liability. As such, a foreign supplier that has a total turnover exceeding this amount, but that supplies goods within Switzerland for less than the CHF 100,000 per year is not obliged to register for VAT.
As of January 1, 2018 the registration threshold will be abolished for foreign suppliers and only apply to Swiss based suppliers. Therefore, a foreign entity will have the obligation to register for Swiss VAT purposes by the very first supply on Swiss territory, irrespective of its Swiss turnover. By implementing such a rule, Switzerland levies the playing fields between Swiss based entities and foreign suppliers, and aligns its system to the one applied in the European Union.
Foreign suppliers who are currently below the Swiss registration threshold of CHF 100,000 should re-assess whether they are obliged to register for VAT in Switzerland in autumn 2017 to be compliant with the new provision when they enter into force.
Distinction between supply of goods and supply of services, and force of attraction rules
Even though technically not new, it is important to understand that Switzerland does not have an identical distinction between the supply of goods and of services as the EU. As a result, supplies might be treated as differently, and double or non-taxation might result.
Furthermore, the Swiss VAT system foresees that if a foreign supplier is registered for VAT purposes in Switzerland, that the obligation to charge VAT on its local supplies cannot be shifted to the recipient. In other words the reverse-charge does not apply if the supplier has a Swiss VAT registration. The VAT registration is thus “attracting” the obligation to charge VAT on all local supplies, without exceptions. This is something that is not in line with EU legislation where the VAT registration of a company in an EU Member State does not automatically lead to the obligation to charge VAT on the supply in this Member State.
Low Value Consignment Relief (LVCR)
In contradiction to the LVCR rules applicable in the EU, the Swiss LVCR rules are based on the value of import VAT and apply when import VAT does not exceed the amount of CHF 5. Hence, neither import VAT nor customs duty are levied in case the import VAT due on the value of the goods (including the shipping costs to the customer) is below CHF 5. Due to the low Swiss VAT rates of 8% and 2.5% respectively, this scheme is of great importance for foreign distance selling companies. Considering the applicable VAT rates, shipments from abroad subject to the standard rate of 8% for an amount of up to CHF 62.50 or CHF 200 if the reduced rate of 2.5% applies (e.g. on books or dietary supplement) can be imported free of Swiss VAT.
As of 2018 the place of LVCR supplies will be shifted into Switzerland in case the annual turnover resulting from such sales exceeds CHF 100,000 per annum. Consequently, foreign distance selling companies are obliged to register for Swiss VAT purposes and the sales made to Swiss clients will be subject to Swiss VAT. Currently, it is yet unclear if once a foreign distance selling entity needs to register for VAT as a result of exceeding the registration threshold needs to subject all subsequent supplies to Swiss VAT or not. As regards the LVCR rules, they will remain in place with the result that a supplier may end up not paying VAT on the import, but having the obligation to charge Swiss VAT on its sales.
Even though it is unclear how the new provision regarding the place of supply rule will be implemented and how the excess of the threshold will be verified by the Swiss Tax Authorities, foreign distance selling companies who currently benefit from the LVCR rules are well advised to re-assess their business model with Swiss clients and initiate the VAT registration process in late 2017 if needed.
Supply of e-books and e-papers
As of January 2018, the currently applicable standard VAT rate of e-books and e-papers will be reduced to 2.5%. The existing provisions state that only books, newspapers and journals on paper can benefit from the reduced VAT rate of 2.5%, while the equivalent content provided electronically is considered being subject to the standard VAT rate of 8%. These changes are welcomed since this will not only significantly simplify the VAT calculation and collection of suppliers offering both formats, but will also eliminate a systematic distortion. The new rules are not compatible with those applicable in the EU where different tax rates will continue to apply for the paper and the electronic format.
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With the implementation of the new provisions it is to be expected that most of the foreign suppliers of goods as well as of electronic services will become obliged to register for Swiss VAT purposes as of January 1, 2018 irrespective what the turnover with Swiss based clients will be. Foreign suppliers are well advised to re-assess their business models with regard to the expected changes. It is highly recommended monitoring the development in order to be ready to initiate the registration proces