Tax deductions in Switzerland

Tax deductions offer financial relief by allowing companies to reduce their taxable income. In Switzerland, these deductions are available to both individuals and corporations, subject to specific conditions. The rules for corporate tax deductions are primarily outlined in the Federal Act on Direct Federal Taxation (LIFD) and the Federal Act on the Harmonization of Direct Cantonal and Communal Taxes (LHID).

Types of tax deductions for companies in Switzerland

Swiss businesses can benefit from a variety of tax deductions. All expenses justified by commercial use are deductible (Art. 59 LIFD; 13 LIPM). Key types of deductions include:

1. Professional Expenses (Art. 26 ff LIFD): These are fundamental expenses necessary for the company’s operation, including passive interest, salaries, and rent.
2. Depreciation (Art. 28 LIFD): This allows companies to reduce the value of fixed assets over time due to wear and tear, obsolescence, or other valid reasons.
3. Provisions (Art. 29 LIFD): These are deductible expenses set aside to cover probable future losses or liabilities, whose exact amount or impact cannot be determined with certainty.
4. Research and Development (R&D) Expenses (Art. 63 al. 1 let. d LIFD): Costs incurred for R&D outsourced to third parties are generally deductible. Certain cantonal laws may offer additional deductions for these expenses (Art. 25a LHID).
5. Notional Interest Deduction: Under certain conditions, notional interest on safety equity can be deductible at the cantonal level.
6. Carryforward of Tax Losses (Art. 31 and 67 LIFD): Companies can deduct current taxable income with past tax losses incurred within the preceding seven fiscal years, provided they haven’t been previously accounted for.
7. Taxes (Art. 59 LIFD): Federal, cantonal, and communal taxes paid by the company are deductible, except for tax fines.

How companies can benefit from tax deductions in Switzerland

To benefit from tax deductions, companies must meet specific criteria. They must be registered in Switzerland and subject to corporate tax. Additionally, companies must comply with the conditions for each type of deduction:

• Professional Expenses: Companies need to show that these expenses are necessary for their operations and proportionate to the income generated. They must also keep evidence and receipts for the expenses incurred.
• Depreciation: Calculated based on the economic life of each fixed asset, following the methods accepted by Swiss accounting standards (Art. 62 LIFD). Companies must maintain a depreciation schedule and include it in their annual tax returns.
• Provisions: Calculated based on the estimated extent of probable future losses or expenses, not covering losses or expenses already incurred or known at the time of provision establishment. Specific conditions are listed in Art. 63 LIFD.
• Carryforward of Tax Losses: Companies can deduct losses from the previous seven fiscal years if not already utilized (Art. 67 LIFD).

Practical examples of tax deductions for companies in Switzerland

• Professional Expenses: A marketing company can deduct advertising costs for a client and travel expenses for client visits.
• Depreciation: A company purchasing a machine for CHF 100,000 with a useful life of 10 years and a residual value of CHF 10,000 can deduct an annual depreciation of CHF 9,000 (CHF 90,000 / 10 years).
• Provisions: A company selling products can set aside a provision for potential product recalls due to quality defects. If the recall probability is 5% and the estimated cost is CHF 50,000, the company can create a CHF 2,500 provision (5% of CHF 50,000).

Tips for maximizing tax deductions for companies in Switzerland

To maximize tax deductions, companies should:

1. Keep Detailed Records: Maintain thorough documentation for all business expenses, including invoices, receipts, and contracts.
2. Tax Planning: Consider deferring income or expenses to optimize the tax position. This can help in taking full advantage of available deductions.
3. Consult a Tax Advisor: Regularly consult with a tax advisor to stay informed about changes in tax laws and ensure compliance with all conditions for tax deductions.
4. Continuous Evaluation: Regularly review the company’s tax situation and available deductions to ensure they are being maximized. This might reveal opportunities for new deductions or adjustments to existing tax strategies.

By following these steps, companies can effectively manage their tax liabilities and maximize their financial efficiency.