VAT in Switzerland in detail: How it works, current rates and upcoming changes in 2024
Value added tax (VAT) is an essential part of the Swiss tax system, a source of government revenue and an important factor for companies and consumers. This article gives you a comprehensive insight into VAT in Switzerland, including current rates and upcoming changes.
The development of VAT in Switzerland
A historical overview of value added tax in Switzerland
The history of value added tax (VAT) in Switzerland is particularly interesting because it shows how the country developed its tax system to meet changing economic and social conditions.
Until December 31, 1994, a sales tax (WUSt) was levied in Switzerland. This system, which was primarily aimed at wholesaling, was less efficient and comprehensive than today's VAT. It focused on selling goods and not on the entire value creation process.
Introduction of value added tax
The introduction of value added tax on January 1, 1995 marked an important turning point: From now on, the surplus value added at each stage of production and distribution will be taxed, leading to a fairer and more comprehensive tax collection. This change reflects the transition to a more modern and efficient tax system that meets the increased demands placed on the Swiss economic system.
The introduction of VAT also had far-reaching effects on businesses and consumers. Companies had to adapt their accounting systems to correctly calculate and pay the new tax. For end consumers, this meant a change in prices in many cases, as VAT is charged on almost all goods and services.
This historic change is also an example of how the Swiss government has responded to globalization and the growing complexity of the economy. The adjustment of the tax system was a necessary step to maintain the country's competitiveness and to contribute to a fair and transparent tax system.
The development of VAT in Switzerland shows that tax legislation is not static, but is constantly evolving to meet the needs of a changing society and economy. This flexibility and adaptability is a key feature of the Swiss financial system and one reason why Switzerland is considered one of the most stable and innovative economic locations in the world.
VAT rates up to 2023
Until the end of 2023, the following VAT rates apply in Switzerland: The standard rate is 7.7%, the reduced rate is 2.5% and the special rate for accommodation is 3.7% [Source: ESTV]. The reduced VAT rate applies to essential goods such as food and medicines, i.e. consumer goods that directly influence people's everyday lives.
Changes in VAT from 2024
New VAT rates from 2024
From January 1, 2024, new VAT rates will come into force: The standard rate will be increased to 8.1%, the reduced rate to 2.6% and the special rate for accommodation to 3.8% [Source: ESTV]. This change reflects adjustment to economic conditions and inflation rates.
VAT on food and services
VAT rate for food
Interestingly enough, the VAT on food in Switzerland is comparatively low at the reduced rate of 2.5%, which supports basic supplies for the population. This is a good example of how VAT is used politically to promote specific sectors.
Application of VAT to other services
The standard rate of VAT applies to most services. This concerns a wide range of activities, from IT services to leisure activities, and thus influences numerous aspects of daily life.
The essentials of VAT: An insight into the basics and mechanisms of VAT
How does VAT work?
Value added tax (VAT) is an indirect tax that is levied on the increase in the value of goods and services at every stage of their production and distribution. This means that VAT is charged for every transaction in which a product or service changes hands. This includes the entire process — from production to final sale. It is important for B2B entrepreneurs to understand that although they must collect and remit VAT on their sales, they can also claim the VAT paid on purchases and operating costs as input tax. This system ensures that the tax is ultimately borne by the end user and not by companies along the supply chain.
Example of VAT in a domestic transaction:
Let's say your company buys raw materials for CHF 10,000, which is subject to 7.7% VAT, i.e. CHF 770. You process these materials and sell the finished product for CHF 20,000 plus 7.7% VAT, i.e. CHF 1,540. Here, you can deduct the CHF 770 paid as input tax from the CHF 1,540 VAT that you owe to the tax office, so that you finally have to pay CHF 770.
VAT calculation and settlement
A value added tax calculator (VAT calculator) is a crucial tool, especially for smaller companies that manage their accounting independently. The calculator helps to precisely determine the VAT to be paid or paid by calculating the input tax deductions and the amount of tax owed based on the turnover made.
Example of VAT for a foreign service:
Let's say your Swiss company buys a service from a company abroad for CHF 5,000. The principle of so-called “reverse charge processes” is used here. This means that your company calculates and pays VAT itself as the recipient of the service. They charge 7.7% to CHF 5,000, i.e. CHF 385, and transfer this amount to the tax office. At the same time, you can deduct this amount as input tax if you are entitled to make input tax deductions.
These examples show that VAT is not only a tax that is collected and remitted, but also an important element in a company's financial management. A correct understanding of VAT and how it is calculated is therefore essential to ensure compliance and avoid financial surprises.
VAT exemptions and exemptions
Exemptions and exemptions from VAT
Not all companies are subject to VAT. There are various situations in which companies are exempt from VAT. This applies in particular to small companies whose annual turnover is less than CHF 100,000. This regulation makes it easier for small businesses to conduct their business without the additional burden of VAT. There are also specific activities and services that are exempt from VAT, such as medical services provided by doctors and certain educational services.
Conclusion
Value added tax (VAT) in Switzerland is a complex issue that directly affects both the average consumer and companies. With the upcoming changes in 2024, VAT will remain a discussed topic in the Swiss economy and society. It is important that both citizens and companies are well informed and prepare for the changes.
Further resources
For more information about VAT in Switzerland, I recommend the Federal Tax Administration (FTA) website, where you can find detailed information and resources, as well as various online VAT calculators that can help calculate the tax burden.
Concluding thoughts
The adjustment of VAT rates shows that the Swiss tax system is adapting well to economic conditions. It is therefore all the more important to be well informed as an entrepreneur in Switzerland. In this way, you not only remain compliant with the laws, but can also make optimal use of financial benefits.
Overall, I think VAT in Switzerland is a good prime example of how Switzerland generally taxes: (Comparatively) little on economic success (income and capital tax, etc.), but taxes many individual things depending on consumption and only the individual consumer. A great example of this is that every officially usable garbage bag costs 2.50 CHF (35L charge bag), which means a direct tax on every purchase for the respective buyer.
With this in mind, I hope that this article was helpful for you and gave you a deeper insight into the topic of VAT in Switzerland. The Office Group Zug team is at your disposal and will be happy to help you with VAT registration and periodic VAT returns. Contact us at any time.