Change of practice in value added tax law (VAT)
As of January 1, 2021, the Swiss Federal Tax Administration (SFTA) amended its practice on the place of supply for services in the field of international development cooperation and humanitarian aid. In practice, this change means that internationally active non-profit organizations will be granted a considerable relief from Swiss value added tax going forward and will be able to reclaim reverse charge VAT paid for the past.
Tax relief for non-profit organizations
Background: final VAT burden
The tax exemption for non-profit institutions (primarily foundations and associations) only covers income and capital tax, but not VAT. Since non-profit institutions are in many cases also not registered as taxpayers for VAT purposes, they cannot reclaim VAT charged to them as input tax. Consequently, any VAT results in a final tax burden for such non-profit institutions.
Service procurement from abroad
In recent years, there has been a strong professionalization of the non-profit sector, especially in the evaluation of projects to be funded, project coordination and accountability vis-à-vis donors and governmental authorities. If these service providers are located abroad (e.g. at the place of the funded activity) and if the services provided by them exceed an amount of CHF 10,000 per year, the non-profit institution as the recipient of the services is obliged to declare and pay VAT to the FTA (in the form of reverse charge VAT). If the service providers are located in Switzerland, they invoice VAT directly to the non-profit institution.
Example: «Charity Foundation», a non-profit organization based in Switzerland and not registered as a VAT taxpayer, looks at supporting aid projects in Somalia. For this purpose, «Charity Foundation» mandates UK based «Evaluation Ltd.» to evaluate various local aid projects with a view to efficiency, impact and sustainability, and to provide support after the start of the project. «Evaluation Ltd.» invoices services fees of CHF 280,000. Based on former administrative practice, «Charity Foundation» is required to declare VAT (in the form of reverse charge VAT) of CHF 21,560 on this amount and to remit such amount to the FTA. This is a tax cost of the Charity Foundation, which it has to finance entirely out of its donation funds.
Former administrative practice of the FTA
VAT is only payable where the place of supply is deemed to be in Swiss territory. Generally, the place-of-receipt principle (Empfängerortsprinzip) applies to general services. As a result, the place of supply for a Swiss recipient is Switzerland. However, as an exception to such general rule, the destination principle (Bestimmungslandprinzip) is relevant for services in the area of international development cooperation and humanitarian aid (article 8 para. 2 letter g Swiss VAT Act). Hence, the place of supply is at the destination of such aid (usually abroad). Until now, the FTA has interpreted this exception in a rather restrictive manner and thus levied VAT on a large number of services in the non-profit sector (cf. former paras. 5.3.1 and 5.3.2 of VAT Sector Info 22).
Change in practice since January 1, 2021
According to the amended practice of the FTA, the following prerequisites need to be met in order for services to fall within the scope of international development cooperation and humanitarian aid (art. 8 para. 2 letter g Swiss VAT Act):
1. The recipient meets the requirements for non-profit status within the meaning of article 56 letter g Federal Direct Tax Act and article 3 lit. j Swiss VAT Act;
2. the services provided to the recipient relate to or cover a specific project and are connected to a predefined region or country;
3. the project meets the definition of development cooperation and humanitarian aid according to the Federal Act on International Development Cooperation and Humanitarian Aid;
4. the project must not directly or indirectly promote or support the entrepreneurial area of the founder or a recurring donor (e.g. opening up new sales markets, launching products or providing advertising services). In this respect, pure publicity services (naming of the founder or donor in a neutral form, possibly with a logo, cf. article 21 para. 2 no. 27 Swiss VAT Act) are not of relevance.
The amended section 5.3.3 of VAT Sector Info 22 (aid organizations, social welfare and charitable institutions) may be accessed here.
Subject to the aforementioned conditions, no Swiss VAT is payable for the respective services if the place of supply is abroad. As result of such change in the FTA’s administrative practice, «Charity Foundation», in the example mentioned above, would not have to account for any reverse charge VAT on the services it receives from «Evaluation Ltd.» In addition and subject to the aforementioned conditions, domestic service providers (e.g. strategy and legal advice as well as consulting services in connection with project evaluation or the project as such etc.) are covered as well and may now invoice their services free of VAT.
In particular, the rapidly growing field of «impact investing» and «angel investments» may also benefit from the change in the administrative practice. If, for any reasons, a return on investment results from a successful project, these funds do not flow back to the founder, but the non-profit institution may use such funds for other charitable projects. Hence, such activities do not spoil the application of prerequisite number 4. above. We recommend, however, to have this confirmed by the FTA on a case-by-case basis by way of a tax ruling request.
Finally (and probably most importantly at this stage), any reverse charge VAT already paid in the past can be reclaimed retroactively from the SFTA for the tax periods that are not yet time-barred (usually the last five years), subject, however, to the forgoing four conditions.
In summary, the change in the administrative practice represents a welcome and long-awaited relief for internationally active non-profit organizations based in Switzerland. As a result, non-profit organizations can now use their funds entirely for its charitable purposes.
This Bulletin expresses general views of the authors as of the date of this Bulletin, without considering any particular fact pattern or circumstances. It does not constitute legal advice. Any liability for the accuracy, correctness, completeness or fairness of the contents of this Bulletin is explicitly excluded.