Tax deductions

Tax allowances are tax benefits that enable companies to reduce their tax burden. In Switzerland, these deductions are available to both individuals and companies, subject to certain conditions. The rules governing tax deductions for companies are mainly set out in the Federal Act on Direct Federal Taxation (LIFD) and the Act on the Harmonization of Direct Taxes of the Cantons and Communes (LHID).

The different types of tax deductions for companies in Switzerland

In Switzerland, tax deductions for companies are many and varied. All expenses justified by business usage are deductible (art. 59 LIFD; 13 LIPM). First and foremost are professional expenses (art. 26 ff LIFD). These are basic expenses incurred to ensure the smooth running of the company. Business expenses are one of the most common types of tax deduction for companies. They include interest, salaries and rent. Then there are depreciation allowances (art. 28 LIFD) and provisions (art. 29 LIFD). Depreciation is a tax deduction that allows companies to reduce the value of their fixed assets over time, due to wear and tear, obsolescence or any other valid reason. Provisions are expenses deductible from a company’s taxable income to cover probable future losses or expenses, the extent or exact impact of which cannot be determined with certainty. Research and development costs entrusted to third parties are generally deductible, subject to certain conditions (art. 63 al. 1 let. d LIFD). Under cantonal law, there may be an additional deduction for these costs (art. 25a L. 1 LHID). In addition, notional interest on security capital may, under certain conditions, be deductible under cantonal law. Previous tax losses are also deductible from a company’s current taxable income (art. 31 and 67 LIFD). Tax losses incurred in previous years can be deducted from current taxable income. Finally, other deductions are admissible, such as federal, cantonal and municipal taxes (art. 59 LIFD). Tax fines, however, are not included. All taxes incurred by a company, whether direct or indirect, are deductible.

How companies can benefit from tax breaks in Switzerland

To benefit from tax deductions in Switzerland, companies must meet certain conditions. Firstly, they must be registered in Switzerland and subject to corporate income tax. Secondly, they must meet the specific conditions for each type of tax deduction. To benefit from deductions for business expenses, companies must demonstrate that the expenses are necessary for their business. The expenses must be reasonably proportional to the income generated by the company’s activity. Companies must also keep evidence and receipts for these expenses. Depreciation is calculated on the basis of the economic life of each fixed asset, in accordance with the calculation methods accepted by Swiss accounting standards (art. 62 LIFD). Companies must keep a record of their depreciation and include it in their annual tax returns. Provisions are calculated on the basis of an estimate of the extent of probable future losses or expenses, but cannot be used to cover losses or expenses that have already occurred or are known at the date the provision is set up. The various conditions governing provisions are listed in art. 63 LIFD. Finally, losses from the seven years preceding the tax period may be deducted, if they have not already been taken into account (art. 67 LIFD).

Concrete examples of tax deductions for companies in Switzerland

As far as deductions for business expenses are concerned, a marketing company can deduct the costs of advertising it has carried out for a customer, as well as the travel expenses incurred in visiting the customer. An example of depreciation might be a company purchasing a machine for CHF 100,000, with a useful life of 10 years and a residual value of CHF 10,000. The company can take an annual depreciation charge of CHF 9,000 (i.e. CHF 90,000 / 10 years), which will be deducted from its taxable income every year for 10 years. Finally, an example of a provision would be a company selling products. It must set aside a provision for products that may be recalled due to a quality defect. The company estimates that the probability of recall is 5% and that the probable cost is CHF 50,000. It can therefore set aside a provision of CHF 2,500 (i.e. 5% of CHF 50,000) and deduct it from its taxable income for the current year.

Tips for maximizing tax deductions for companies in Switzerland

To maximize tax deductions for companies in Switzerland, here are a few useful tips. First of all, it’s important to keep proof of all business-related expenses. This can include invoices, receipts and contracts. Secondly, tax planning is crucial. Indeed, a company may consider deferring income or expenses, in order to optimize its tax situation. In addition, it may be wise to consult a tax advisor on a regular basis, to keep abreast of changes in tax laws. It is important to be aware of current tax regulations, to ensure that the company meets all the conditions required to benefit from tax deductions. Finally, it is necessary to continually assess the company’s tax situation and review the tax deductions available, to ensure that they are still appropriate and maximized. This can help to identify opportunities for new tax deductions or to adjust existing tax strategies.