2020 Tax Reform – Switzerland Introduces Patent Box Regime
5 August 2019
From 1 January 2020, all companies involved in developing patents (generally corporations, but independent entities may also avail themselves of the new regime) may apply to the tax authority for their income linked to patents (royalties) or to the sale of patented products to be treated separately. Using this “box” could exempt a taxable entity from up to 90% of cantonal and municipal tax, although the cantons may legislate for a less generous exemption. While most cantons have adopted this 90% exemption rate, some, including Geneva, have limited it to just 10%.
The new regime applies to both patents and rights comparable to patents. In particular, patents defined as such by the Federal Patents Act of 25 June 1954, as well as equivalent foreign ones, are considered patents under the new regime. Rights comparable to patents include protected topographies, protected plant varieties and data protected under the Therapeutic Products Act, as well as foreign rights equivalent to these. Software in and of itself cannot be patented, and will therefore not be included in the “box” in principle. However, if a piece of software is part of an invention, it may be patented as a computer-implemented invention (for example, if it is integrated into an appliance that drives industrial processes). To reflect the ever-growing role of these inventions across a wide range of sectors, this type of software should also be eligible for the Swiss patent box regime.
As an aside, it should be noted that in addition to this separate tax regime, the cantons have been given the power to allow companies that have recorded expenditure in research and development to apply in their tax returns for an additional deduction of up to 50% of their actual expenditure. Most cantons have taken up this option, setting the additional deduction rate at 50%. This additional deduction is calculated by taking staff costs directly linked to R&D activities performed in Switzerland by the company in question, then adding a 35% supplement for other R&D expenditure, or an 80% supplement for expenditure relating to R&D undertaken and invoiced by third parties in Switzerland. Thus, the additional deduction does not apply to R&D activities carried out abroad.
Profit subject to the patent box regime will be determined according to a method known as the residual method. Firstly, you take the company’s total profit, then deduct all income unrelated to patents, such as financial income (interest and dividends), income from other assets that are not intellectual property assets, and trademark income.
Income defined as patent income can only then fall under the patent box regime to the amount of the ratio of R&D expenses incurred in Switzerland or subcontracted to third parties abroad, in relation to the total R&D expenses incurred by the company (the Modified Nexus Approach). The company’s own expenses in Switzerland may also come into the equation, as well as charges invoiced by a third party located either in Switzerland or abroad. Other expenses that fall under the regime include those incurred by the Swiss company’s foreign branches and by foreign-domiciled companies in the same group.
A company records an annual profit of CHF 6,000,000. Its annual R&D expenditure amounted to CHF 4,800,000, of which CHF 1,200,000 was incurred by the company itself in Switzerland. The profit from patents, as determined by the residual method, is CHF 2,000,000. The exemption rate granted by the canton in which the company’s registered office is located is 90%. The same canton has set the additional deduction rate for R&D expenditure at 50%.
The exemption ratio according to the Modified Nexus Approach is 25% (CHF 1,200,000 : CHF 4,800,000). Consequently, the profit eligible for the patent box (CHF 2,000,000) must be reduced to CHF 500,000 (CHF 2,000,000 x 25%). Taking into account the cantonal exemption rate of 90%, this leaves an amount of CHF 450,000 (CHF 500,000 x 90%) to be exempt from cantonal and municipal tax, to which CHF 2,400,000 (CHF 4,800,000 x 50%) in additional R&D expenses is added. Therefore, the final taxable profit at cantonal level is CHF 3,150,000 (CHF 6,000,000 – CHF 450,000 – CHF 2,400,000). Meanwhile, the taxable profit at federal level remains CHF 6,000,000, as the new rules in force from 2020 do not apply to tax levied by the Confederation.
In order to limit the benefits that some companies may be able to access by cumulating the various measures brought in by the new legislation (especially relating to R&D), the cantons have had to introduce into their own regulations a limit to the reduction permitted when calculating the tax base. Each canton is free to set its own maximum reduction rate as it sees fit, although it cannot exceed 70%. Most cantons have indeed opted for the 70% rate.
The scenario is identical to the one in the earlier example. The canton in which the company’s registered office is located has decided to limit the total reduction available to the taxable company to 20% of its tax base.
Therefore, the maximum tax deduction is CHF 1,200,000 (CHF 6,000,000 x 20%), meaning that the company must in any event declare a profit of CHF 4,800,000 (CHF 6,000,000 – CHF 1,200,000) on its cantonal and municipal tax returns. It should be noted that the taxable profit reached thanks to the patent box relief and the additional deduction for R&D is only CHF 3,150,000 (see the example above). Thus, the company will have to make an upward revision of CHF 1,650,000 (CHF 3,150,000 + CHF 1,650,000 = CHF 4,800,000).
Do not hesitate to contact us if you would like us to assess your situation in relation to your R&D activities or if you have any questions about the new corporation-tax reform.
Avocat – Expert fiscal diplômé