More and more companies are trying to position themselves on the labor market beyond national borders. However, this often raises the question of how to deal with the goods and services sold abroad – or in this case in Switzerland – in terms of tax and duty law.
Last Updated on 29 October 2020
Switzerland is no exception to this rule and must also be considered a kind of special case, since the state is not represented in the European Union for reasons of political neutrality. Thus, exports to Switzerland are deliveries to a third country. These business relations can therefore be more complicated than trade between EU member states.
Normally, every company in Europe has to pay VAT. The VAT is charged on the net amount of the services or goods sold and is shown as gross amount on the invoice. With the so-called reverse charge procedure it is exactly the other way round.
More articles about Reverse-Charge
What is the reverse charge procedure?
Under the reverse charge procedure, the VAT liability is transferred from the seller to the buyer. The procedure was developed to ensure that, even in transactions with foreign companies, VAT is paid where the product is used or the service is performed.
Thus, if a German company sells goods or services to a foreign company, the foreign company pays the VAT, while the German company only issues a net invoice. The foreign company can then reclaim the VAT from the tax office by means of an input tax deduction.
Why was the reverse charge procedure introduced?
The reverse-charge method results from the international legal regulations of the EU. These were introduced to promote and facilitate trade between the states in Europe. The VAT systems of all member states have been harmonized for this purpose. However, this method is now used worldwide.
It has massively simplified the processes for the responsible authorities and for the companies. Tax fraud and other fiscal offences can thus be largely prevented.
The reverse-charge procedure can also offer advantages for the buyer, as he does not have to pre-finance the VAT amount that is normally offset against the net invoice. The liquidity of the companies is thus protected.
However, not only trade within the EU, but also international business, such as with China, the United States or even with Switzerland, is subject to the reverse charge procedure.
VAT Reverse Charge in Switzerland
The purchase tax in Switzerland works similar to the reverse charge procedure in Germany. However, the field of services, i.e. the services for which a foreign company can apply the subscription tax in Switzerland, is regulated much more strictly. In contrast to Austria and Germany, services such as repairs or assembly are not included in the service field. In these precisely defined business areas, the Swiss tax authorities prohibit the use of the reverse charge procedure.
In addition, there are several exceptions to this rule. In some cases (e.g. architectural services), a company that earns less than CHF 100,000 in Switzerland but exceeds this turnover limit worldwide must register with the Swiss tax authorities and pay VAT.
Switzerland remains a third country for all EU countries. Even if the regulations are basically similar, the practice can be much more difficult. The Swiss VAT law is not based on the uniform legal basis provided by the EU and is therefore not as compatible with the German VAT law as other EU countries are.
VAT law in Switzerland since 1 January 2018
Since January 1, 2018, a lot has changed with regard to value added tax in Switzerland. The regulations for foreign companies doing business in Switzerland have been drastically tightened. The Swiss government aims to eliminate the competitive advantage that foreign companies have over domestic companies.
The basic rule is that a company must tax its goods or services at the place where the recipient has its headquarters. Since 01.01.2018, foreign companies that make deliveries with Switzerland as the place of delivery for VAT purposes may not generate more than CHF 100,000 in taxable turnover per year worldwide.
Whether or not the turnover is exempt from VAT is decided according to Swiss law. If the company exceeds this limit, the reverse charge procedure (purchase tax) may no longer be applied. In order to continue trading with Switzerland, the foreign company must register with the Swiss tax authorities and pay VAT there.
Excluded from this are companies that
- provide services exempted from value added tax under Swiss law or
- provide energy supplies to persons or companies registered with the Fiscal Office and listed in the VAT register.
To put it simply: every foreign company that does business in Switzerland and generates a taxable turnover of more than CHF 100,000 per year is obliged to register for VAT in Switzerland and pay VAT since 01.01.2018.
Advance VAT return for Reverse Charge in Switzerland
The services that are treated according to the reverse charge procedure must be considered separately in the advance VAT return.
If the EU standard was followed in the reverse charge system, in Germany the services concerned must be listed in the advance VAT return in line 40, code number 21 under the description “non-taxable other services”. Check this individually for each and every country.
For services that comply with the laws of a third country with respect to reverse charge (e.g. Swiss purchase tax), the earnings must be entered in line 41, code 21 under “other non-taxable sales”.
Reverse Charge Switzerland-Germany/Switzerland-Austria: an example
A company based in Germany or Austria (EU member state) sells a service to a company based in Switzerland. If the worldwide VAT-liable turnover of the German or Austrian company exceeds CHF 100,000 per year, the company must register with the Swiss tax office and pay VAT there.
However, if the turnover of the company based in the EU is less than 100,000 CHF, the purchase tax applies. The company responsible for the service issues a net invoice. The Swiss company thus deducts the VAT directly from the input tax.
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Notes on the Reverse Charge procedure in Switzerland
Since January 1, 2010, foreign companies operating in Switzerland must expect stricter measures, even though the legal situation has become much clearer as a result of the amendments at the beginning of 2018.
Inform yourself about possible special arrangements. In Switzerland, some business areas are exempt from the 100,000-CHF limit.
The reverse charge procedure can be very complicated and confusing, especially when doing business across the EU border. There are many special regulations to be observed and mistakes can quickly occur.
Good tax consultants will help you to make all bookings and invoices correctly and are a real blessing in cases such as the reverse charge procedure in Switzerland.
Like every time when doing business in the EU, make sure to check for country-specific regulations or give us a call!