The processing and handling of withholding tax repeatedly raises questions, especially with foundations and trusts. We have compiled some essential aspects below, which should be taken into account.
Subscription tax in general
According to Art. 45 MWSTG, the purchase tax is due for
- services provided according to the place-of-receipt principle by foreign companies that are not registered in the domestic VAT register;
- the import of data carriers without market value;
- supplies of immovable property not subject to import tax ( e.g. a supply under a contract for work and services without import of materials by a foreign company;
- supplies of electricity and gas by foreign enterprises to domestic taxable recipients.
There are no contribution limits for the supply tax liability of companies registered in the register of taxable persons. – all supplies are subject to VAT.
For companies not registered in the VAT register and for foundations & trusts, reference tax is due if services of more than CHF 10,000 per year are received from companies not subject to VAT.
In the case of a pure tax liability due to reference tax, the taxable person has no right to deduct input tax. In this case, a voluntary or ordinary VAT registration must be considered. However, this is only possible at the beginning of the current tax period.
In the case of foundations and trusts, it is necessary to check whether the foundation or trust qualifies as a taxable entity in Switzerland or abroad. This is the only way to assess whether a service is provided in Switzerland and whether reference tax must be paid on it. For the sake of form, it is noted that Switzerland and the Principality of Liechtenstein are considered domestic for VAT purposes.
Reference tax for foundations
If a foundation exists in Switzerland, the services rendered to it are taxable, irrespective of the domicile of the beneficiaries. If a foundation exists abroad and the dedication of the assets can be revoked, services rendered to the foundation are deemed to be rendered domestically if the founder has his domicile in Liechtenstein.
If a foundation exists abroad, the dedication of the assets cannot be revoked and at least half of the beneficiaries are domiciled in Germany (head principle), the benefits to the foundation are deemed to be provided in Germany.
If a foundation exists abroad, if the dedication of the assets cannot be revoked and if the beneficiaries are not known and also cannot be determined, benefits to the foundation are deemed to have been paid at the domicile of the foundation, i.e. abroad. The tax treatment depends on the type of benefit in question.
In the case of Liechtenstein foundations, the registered office is in Liechtenstein. Consequently, the benefits to the foundation are deemed to have been rendered domestically. In this case, a voluntary or ordinary subordination must be checked at an early stage or it must be clarified whether there is a compulsory tax liability due to possible benefits. In order to avoid interest on arrears, the reference tax risk must be analyzed on an ongoing basis. The determination of the place of performance of the service is also decisive for domestic service providers in Switzerland, so that the VAT on the own service can be correctly reported.
Special rule for trusts
Regarding the question of whether a trust is considered domestically or foreign controlled, the following distinction must be made whereby trusts can be divided into the following categories :
Revocable Trust:
If the settlor reserves the right to revoke the trust during his lifetime at a later date, he is not definitely discharged upon its creation. He still has access to the trust assets. The assets and income are therefore attributed to the settlor for tax purposes. If the settlor dies, the revocable trust becomes an irrevocable trust.
Irrevocable fixed interest trust:
If the settlor establishes an irrevocable trust and names the beneficiaries in the trust instrument, he is definitely discharged. In principle, he no longer has any rights or obligations with respect to the trust assets. The trustee has no discretion as to which income and assets he wishes to distribute to the beneficiaries, since the extent and nature of the distribution to the beneficiaries is fixed. The beneficiaries have an actionable claim against the trustee.
Irrevocable discretionary trust:
Here, the trustee has the decision-making power to allocate the income and/or assets of the trust to a certain group of abstract, i.e. not individually determined, beneficiaries (e.g. descendants who are in need). The effective beneficiaries are not designated in advance and have a mere expectant claim.
Tax consequences:
If a revocable trust exists and at least half of the settlor is domiciled in Germany, the services rendered to the trust are deemed to be rendered in Germany.
The tax treatment depends on the type of service in question. If the trust is an irrevocable fixed interest trust or an irrevocable discretionary trust as defined above and at least half of the beneficiaries or the trustees (if the beneficiaries are not known and cannot be determined) are domiciled in Germany (head principle), the services rendered to the trust are deemed to be rendered in Germany. The tax treatment depends on the type of the respective benefit.
It should be noted that the trust is not a taxable entity for VAT purposes. In the Principality of Liechtenstein, the tax administration sometimes requires a deposit or registration with the Office of Justice in order for the trust relationship to be accepted. The evidence must always be brought in by the taxpayer. In October 2021, the FTA published a first draft on the amendment of the practice on trusts and foundations. The consultation period ran until November 4, 2021, but the adjustments are largely editorial in nature. Until the new practice is finalized, the existing practice remains applicable.
The most important points at a glance:
- Purchase tax is levied primarily on services purchased from companies abroad that are not registered in the domestic VAT register.
- In the case of ordinary tax liability, the reference tax can be claimed within the taxable quota; if a trust or foundation is not registered in the VAT register, the reference tax to be paid cannot be reclaimed.
- In the case of trusts and foundations, it must be clarified whether they are considered domestically or foreign controlled. If they are foreign-controlled, a service is provided abroad, which is why no reference tax is due.