Taxation of intangible property under Swiss tax law

Case 1: Different entry taxation models Start-up AG

1. facts of the case

Start-up AG was founded five years ago by an engineer and his business partner. In the first 3 years, they researched a new type of technology and brought a new type of product to market, which enjoys patent protection for 20 years. The development costs totalled CHF 600,000. Since then, the company has sold the product exclusively through online trading and broke even last year. However, the company still has losses of CHF 500,000 from the previous year and expects a pre-tax profit of CHF 200,000 in the first year with the patent box. The relief for the patent box is 90 % and the maximum permitted STAF relief is 70 %.

Questions

1. Can the previous year's losses be taken into account when entering the patent box if the domiciliary canton settles completely for the previous R&D costs when entering the box?
2. How is the box entry calculated according to the various cantonal models.
   a. Canton Bern with special tax for the simple tax of 0.5 % (investment canton/city Bern 4.5485 %)
   b. Canton NW with offsetting solution in the patent box
   c. Canton Solothurn with immediate settlement
3. How is the box profit calculated in the above-mentioned cantons in the first year if the start-up AG expects a turnover of CHF 1,000,000, d with the patented product and a profit before tax of CHF 200,000. Assumption: trademark fee 1 %, all cantons grant the max. relief in the patent box of 90 % and 70 % relief limit, nexus quotient CH 100 %.
   a. Canton Bern with special tax
   b. Canton NW with offsetting solution in the patent box
   c. Canton Solothurn with immediate settlement

Case 2: Use of an additional R&D deduction vs. patent box

1. facts of the case

A AG has its registered office in Canton A and sells various products worldwide which it has manufactured by a group company abroad. The products were developed by the group's sister company B AG, based in the same canton, on the basis of a contract research agreement. The R&D costs are charged in full by company B to company A with a cost mark-up of 5%. A AG has only registered a patent on one product, which accounts for 50 % of sales. Since the group only conducts R&D in Switzerland, the nexus ratio is 100%. A AG has annual sales of CHF 50 million and annual R&D costs of CHF 2.5 million (offset by B) and realises a profit of CHF 5 million (of which CHF 2.5 million on the patented product). In the canton of domicile, an R&D deduction of 50 % and a relief in the patent box of 90 % is possible. The maximum permissible deduction for all STAF measures is 70 %. The deduction for previous R&D costs when entering the patent box is a special tax of 2.5 % on 70 % of the R&D expenditure of the last 10 years (CHF 1.25 million p.a. is for the patented product and the rest is for R&D for other novel products). Canton A applies a tax rate of 15 % before tax.

Questions

1. Which of the companies could use the R&D additional deduction or the patent box? Please indicate the legal basis.
2. Determine the taxes owed as well as the tax savings from claiming the R&D additional deduction or the patent box over a period of 10 years.
3. What would the tax calculation look like if the two companies A and B were merged?
4. What would have to be taken into account if A AG was a mixed company that was taxed at a rate of 30 % on the foreign quota (assumption 100 %) until the end of the 2019 tax period and had hidden reserves on the patent totalling CHF 5 million. Basis of facts according to section 2 (without merger).

Case 3: Entry taxation in case of transfer of registered office

1. facts of the case

Tax period 2020

MUSTER AG, which is domiciled in the canton of NW, will change its status from mixed company to ordinary taxation as of 31 December 2019. It applies for the patent box for the 2020 tax period. The financial year corresponds to the calendar year.

As of 31 December 2019, MUSTER AG discloses hidden reserves of CHF 1 million in its tax balance sheet, which it can depreciate over 5 years in accordance with the practice of the Canton NW.

Research and development expenses recognised for tax purposes in previous tax periods amount to CHF 3 million.

In the 2020 financial year, the company generates a net profit of CHF 5 million and a box profit of CHF 1 million (nexus 100%; before cantonal reduction), which is taxed at a reduction of 90%. For the taxation of the box income, the company chooses the offsetting solution offered in the canton of Nidwalden. In the event of a departure, the tax law in the canton of Nidwalden provides for the settlement of research and development expenses not yet settled in the year of departure.

Tax period 2021

As of 1 January 2021, MUSTER AG will move its registered office to the canton of Basel-Stadt. The canton of Basel-Stadt does not have a clearing solution for the taxation of box entry, but a special rate solution.

The net profit in the 2021 financial year amounts to CHF 5.0 million. The box profit amounts to CHF 1 million and is taxed at a reduction of 90%.

Questions

• How will MUSTER AG be taxed for the 2020 tax period? What happens when I move away on 1 January 2021?
• How will the company be taxed in 2021?

Case 4: Patent on "the wheel

1. facts of the case

SCHLAUMEIER GmbH, based in Canton X, has applied for a patent on a "circular instrument for facilitating transport". According to the patent application, the "circular instrument" is to be attached to a container via a linkage in such a way that heavy objects can be transported more easily in this container.

SCHLAUMEIER GmbH wants to use the patent box. The critical tax auditor Nötzli, who is examining the company's 2020 tax return in 2022, suspects that SCHLAUMEIER GmbH has patented "the wheel".

Questions

• Is it conceivable that a registered patent is not innovative at all?
• How does the Swiss patent box regulation ensure that pseudo patents do not. lead to a tax deduction?
• What happens if the patent is declared invalid for lack of novelty in 2022?

Case 5: Patent Box and OECD/BEPS Pillar 2

1. facts of the case

UMBRELLA CORP is a globally active group with its headquarters in Canton NW. It keeps its accounts in accordance with IFRS. The pre-tax profit under commercial law for the 2023 financial year, which corresponds to the calendar year, is CHF 500 million, as is the profit for the 2024 financial year.

UMBRELLA CORP applies the patent box (patent-related approach) and the research and development expenses have already been fully settled. The proceeds from the sale of machines with patents amount to 400 million, the direct expenses to 100 million.

For the purposes of the GloBE profit calculation, it has tangible fixed assets of CHF1 billion and personnel expenses of CHF300 million.

The statutory tax rates are 5.1% for cantonal and municipal taxes and 8.5% for direct federal tax. The reduction for the patent box is 90%, the relief limit 70%. The nexus quotient 100% and the patent box gain CHF 300 million.

Questions

• How big is the tax burden for 2023?
• What is the tax burden for 2024 assuming that a minimum tax of 15% is introduced?
• Is the patent box still worthwhile after the introduction of a minimum tax? What speaks in favour, what against?

Case 6: Component patent

1. facts of the case

AUTO AG, based in the canton of NW, develops and builds sports cars in small series. It buys the components of the vehicles from suppliers or has them manufactured for it by contract manufacturers. AUTO AG has developed a new windscreen wiper and - for time and financial reasons - registered it as a utility model. The utility model is an unexamined property right under German law that is easier, faster and cheaper to obtain than a patent. The windscreen wiper is the only component for which AUTO AG has registered an intellectual property right. The sales price of a sports car is CHF 300,000.

In the tax period 2021, AUTO AG achieves a turnover of CHF 9.6 million, of which CHF 600,000 is attributable to the repair and maintenance of previously sold cars and CHF 9 million to the sale of new cars. R&D costs of CHF 150'000 and other costs of CHF 3'000'000 can be directly allocated to the cars. The nexus quotient is 100%, and the box entry has already been fully accounted for. The annual profit of AUTO AG in the tax period 2021 amounts to CHF 3 million, the tax expense to CHF 299,638. The financial income amounts to CHF 50,000, the other income to CHF 30,000. The profit tax rate in NW for cantonal and communal tax is 5.1%.

Questions

• Does the utility model qualify for the patent box?
• What methods can AUTO AG use to determine the pit gain?
• How high is the tax burden in the 2021 tax period when applying the patent box with the residual method based on company profits?
• Is such an application of the patent box in conformity with the StHG?