Governmental Funding – Incentives lead to input VAT reductions

• Businesses that are eligible for public incentives should carefully consider the impact on their input VAT deduction right.
  
  
• VAT optimization opportunities need to be considered on an individual basis and require early planning – before applying for government support and well before incentives are received.
  
   

Its economic attractiveness is an asset for Switzerland. Where necessary, the government seeks to protect this condition through appropriate measures. The cantonal council of Basel-Stadt, for example, recently put together a package connected to OECD Pillar II measurements of incentives to protect national and international competitiveness. The cantons of Zug and Graubünden have also announced the introduction of incentives. Zug is targeting subsidies, while Graubünden plans to introduce a QRTC (Qualified Refundable Tax Credit). The federal government, cantons and municipalities also offer numerous environmental and social support programs that provide businesses with financial support, for example to phase out fossil fuels, increase energy efficiency or promote social innovation. The structure of support programs is highly individual and multifaceted. Conceivable are, for instance,

1. support of personnel costs for innovative activities (research, development, innovation) to facilitate local innovation activities;
   
   
2. recognition of local commitment by funding retention and relocation of technical facilities for research, development and innovation;
   
   
3. financial support for businesses that provide parental leave beyond the legal minimum;
   
   
4. investment grants for the construction of renewable energy plants, the renovation of buildings to improve thermal insulation, etc.

VAT classification of local incentives

For VAT purposes, governmental incentives such as investment contributions or cost sharing (unless these are contractual or statutory cost compensation payments from a “fund”) qualify as subsidies. In the absence of a supply, businesses do not owe VAT on the subsidies they receive. However, subsidies may regularly limit the business’ input VAT deduction right. It is therefore necessary to check on a case-by-case basis whether and to what extent an input VAT reduction is required. Optimization opportunities need to be individually examined. 

Classification of subsidies and public contributions

For VAT purposes, a distinction is made between subsidies that can be allocated to a specific activity or object and subsidies to cover operating deficits or other subsidies that cannot be allocated to a specific activity. The scope of the relevant input VAT reduction is significantly affected by this categorization. For example, object-related subsidies do not require a reduction in input VAT if they are allocated to an area where no input VAT is incurred. Otherwise, object-related subsidies only affect the deduction of input VAT on expenditure that can be attributed to the relevant activity or object. For other – i.e. not object-related – subsidies, the total input VAT incurred must generally be reduced proportionately.

Public incentives and their impact on input VAT reduction

Public incentives therefore affect the input VAT deduction right of the recipient in different ways. While financial support for voluntary parental leave through a public contribution to labor costs should not impact the entitlement to recover input VAT, subsidies granted for the acquisition of new innovative technology result in a pro-rata reduction of input VAT on the investment costs.

Input VAT reductions (repayments) are to be made at the time the subsidies are received or at the time they are offset against other public claims. However, input VAT amounts from previous years, i.e. the tax periods for which the subsidies were assessed, usually form the basis for the reductions. If input VAT deductions are to be examined and optimized, action must be taken well in advance of applying for public incentives and particularly well in advance of receiving the funding.