VAT treatment of fiscal and other financial incentives to promote business locations

In recent decades, Switzerland's success as a business location has been largely based on its low corporate taxes compared to other countries, in addition to various other locational advantages such as political stability and a highly qualified workforce. However, these were not only due to generally low tax rates in the cantons, but also to fiscal incentives (e.g. special R&D deduction, patent box).

On January 1, 2024, Switzerland introduced the OECD/G20-driven project of a global minimum tax. However, the way the Swiss supplementary tax works means that the benefits of these fiscal incentives "evaporate" to a certain extent for the groups affected: If the effective tax rate falls below 15% as a result of fiscal incentives, the difference is immediately taxed again by means of the supplementary tax. As a result, various cantons are considering the introduction of new incentives, which are provided for in the OECD rules on the global minimum tax. The focus is on the Qualified Refundable Tax Credit and state subsidies. The question is how these should be approached from a VAT perspective.

Based on the cantons' initial draft legislation, the qualification of these new instruments as subsidies under Art. 18 para. 2 lit. a MWSTG cannot be wiped off the table. On the one hand, these instruments do not have their basis in a tax law, but in a location or economic promotion law. Furthermore, some of them are explicitly referred to in the law as state "promotion contributions", which is contrary to the new Art. 18 para. 3 nMWSTG. Finally, the cantons also refer to these instruments as "subsidies" or "subsidy-like instruments" in the messages. As a result of this qualification, an input tax reduction would have to be made in principle, which would be objectionable. On the one hand, the cantons are trying to use new instruments to make their location attractive; on the other hand, the federal government is destroying this intention with input tax reductions. This is not in the interests of Switzerland as a business location.

A far-reaching interest in protection, comparable to the special situation status of coronavirus benefits and the previous practice of tax relief, must be declared in order to compensate for input tax reductions and the associated competitive disadvantages. In any case, a clarifying practice by the tax authorities would be highly desirable.