VAT accounting for international service provision / invoicing

Under Swiss VAT regulations, services which (i) are provided by a foreign company not registered for VAT in Switzerland ("service provider") to a Swiss company ("recipient") and (ii) do not fall under a tax exemption, must be settled at the level of the recipient with the acquisition tax (Bezugssteuer).

Acquisition tax and its mechanism

This mechanism is called "reverse charge" and means that the startup as the recipient of the service must declare 7.7% Swiss VAT on the amount paid (remuneration to the service provider) in its VAT statement (declaration in item 382). In the same VAT statement, the startup can deduct this declared acquisition tax again (declaration in item 400), either fully or partially. This full or partial deduction depends on the so-called input tax deduction right (Vorsteuerabzugsrecht) of the startup. If the startup only generates taxable/exempt sales, it has the full right of input tax deduction. If other revenues are generated in addition (e.g. interest income), the scope of the right of input tax deduction might be only a partial one.

Exception for the provision of electronic services

However, if the services of the service provider qualify as so-called electronic services, the service provider must register in Switzerland for Swiss VAT purposes, if its worldwide annual turnover is greater than CHF 100,000. In this case, the invoice of the contractual partner as service provider must be issued to the recipient with Swiss VAT.

Thus, the question arises when the services of the service provider qualify as electronic services.

According to the Ordinance on Value Added Tax (VAT Ordinance), such electronic services may consist of, amongst others:

• the provision of websites, webhosting, and the tele-servicing of programs and equipment;
• the electronic provision of software and its updating; • the electronic provision of images, texts and information and the provision of databases;
• the electronic provision of music, films and games, including gambling.

In contrast, according to the practice of the federal tax administration, for example, the electronic transmission of non-standardized electronic products (e.g. software or apps (individual software) programmed on behalf of the customer) does not qualify as an electronic service.

Whether a service qualifies as an electronic service is determined on the basis and the scope of the contracts.

Procedure and recommendation

The question of tax liability in Switzerland must generally be clarified by the foreign contractual partner (as the service provider) and not by the startup (as the recipient). If the foreign contractual partner does not have a Swiss VAT number (and no clarifications are made in this regard), we recommend that the startup accounts for the acquisition tax and deducts this again as part of its VAT statement (as its right of input tax deduction). This way, a possible VAT risk in case of improper behavior (e.g. no VAT registration of the foreign contractual partner, despite the given prerequisites) does not lie with the startup.

If the startup receives an invoice with Swiss VAT from a foreign service provider, we recommend checking it briefly. This is because the invoice of the foreign service provider forms the basis for the deduction of the VAT claimed on this invoice and it should be ensured that the document meets the relevant requirements so that the startup can make the deduction, without a risk to face later additional claims.