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The Effects of Switzerland’s January 2024 VAT Rate Increase

In the referendum of September 2022, Swiss voters approved the reform to stabilize and provide additional financing for the country’s Old-age and Survivors’ Insurance (OASI), Alters- und Hinterlassenenversicherung (AHV), and Assurance-vieillesse et survivants (AVS). Here we look at the reforms and what their effects might be.

As of January 1, 2024, the three value added tax (VAT) rates applicable in Switzerland will be increased as follows:

 Until December 31, 2023From January 2024
Standard rate7.7%8.1%
Reduced rate2.5%2.6%
Special rate for accommodation3.7%3.8%

Along with the increase in VAT rates, the previous balance tax rates (BTR) will also be increased. In addition, the turnover limits for accounting according to the BTR method will also be adjusted upwards.

 Until December 31, 2023From January 2024
Sales limit for the application of the BTR methodCHF 5,005,000CHF 5,024,000
Tax payment burden for the application of the BTR methodCHF 103,000CHF 108,000

Nevertheless, the increase in VAT rates does not authorize a premature change from effective accounting to accounting according to the BTR method, or vice versa. For this purpose, the deadlines provided by law must continue to be observed.

Determining the applicable tax rate

VAT liability continues to occur at invoicing or upon prior receipt of payment. For the determination of the applicable tax rate, however, it is the date or period of service that is relevant, rather than the date of invoice or payment.

The time that service is undertaken must be considered when looking at the VAT rate increase. It determines whether the taxable party can invoice their services at the lower rate or whether they have to apply the new rate. Services provided before January 1, 2024 are taxable at the previous tax rates, while services provided after December 31, 2023 will incur tax at the new rates.

For periodic services that are partially rendered after the tax rate increase—such as subscriptions, service and maintenance contracts, licensing agreements, etc.—tax is allocated proportionally, depending on which side of the rate rise the services were carried out. The same applies to advance payments for services that will be provided in part after December 31, 2023.

For orders that have not yet been completed by the end of the year, the Federal Tax Authority (FTA) recommends issuing a partial invoice at the current tax rate as of the end of 2023, or delimiting services already rendered in situational budgets in detail so that the services rendered before January 1, 2024 can still be invoiced at the previous tax rate at a later date. If no pro rata temporis apportionment is made, the entire service across reporting dates is subject to the new, higher tax rate.

On the other hand, reductions in remuneration, returns, and sales bonuses for services rendered before January 1, 2024 must be recorded at the previous tax rates and settled with the FTA.

For incoming invoices regarding services from January 1, 2024 with the old tax rates, Swiss VAT law does not provide for any restriction and allows the input tax deduction. On the other hand, an invoice must be corrected if requested by the invoice recipient.

Special caution is required for contracts with long terms. If future services have already been invoiced here, these invoices may have to be cancelled and reissued considering the new tax rates and the tax difference subsequently invoiced.

The enterprise resource planning (ERP) and invoicing processes must be converted in good time. Likewise, affected contracts and other documents such as offers should be checked for the need for action.

Abolition of municipal business tax in Geneva

Earlier this year it was decided to abolish the Geneva municipal business tax (MBT). The canton of Geneva is alone in Switzerland in applying this tax, which stems from the Napoleonic era. In simple terms, the basis of taxation is the turnover of the company, its employees, and rent paid.

As the revenue generated by the tax leads to approximately CHF 200 million for the Geneva communes (some of them choose not to levy it), it was deemed necessary to compensate. Consequently, it has been proposed to increase the corporate income tax rate from 14% to 14.7%. That being so, the communes in Geneva will have some liberty to divert slightly from the rate.

The abolition will therefore lead to a simplification for all parties concerned. It is not yet clear when this change will come into effect.

Managing implementation

Negotiating Switzerland’s new tax reforms could potentially be a complex process, increasing the administrative burden significantly. Nonetheless it is vital that any business operating in the country stays compliant to avoid penalties and reputational damage. The solution for many companies could lie in outsourcing to a third-party service provider, one with local knowledge and the expertise to navigate the tax landscape with confidence.

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