The change will have a significant impact on organizations affected as the new rules apply immediately and limit the right of input VAT deduction.
The new rule is outlined in the SFTA booklet Info VAT 04. It is presented as clarifications about VAT registration, but also affects input VAT deduction. For organizations where at least some business activities are not intended to realize income, input VAT deduction will no longer be accepted, even if other parts of the business have taxable activities.
Previously, the existence of entrepreneurial activity covered the whole organization. Now, the same organization can have part of its activity considered as non-entrepreneurial. Consequently, input VAT will not be deductible for this part.
Organizations which undertake some activities where the consideration received is not the main source of income will have to segment their activities into operational units, the goal being to determine which units are covered by the VAT registration and might allow input VAT deduction, and which units are not.
For enterprises with a mixed financing structure of costs through income and other revenues (e.g. grant or subsidy), a minimum of 25 percent of the costs have to be covered via income based on the new SFTA practice. If this is not the case, the organization will have to prove there is an entrepreneurial reason behind this operational unit.
An example of an entrepreneurial reason might be a company producing watches that also maintains a museum covering the history of the brand. If the company can prove that the museum has been created to promote the brand, the operational unit will be included in the VAT registration and will be able to deduct input VAT.
Organizations which generate income only from supplies against consideration for each business unit should not be concerned by these new rules. Other enterprises should be cautious and analyze their situation carefully. Typically, organizations such as international not-for-profit groups financed by donations but also by various other sources of income (e.g. boutiques, eshops or services) should verify their Swiss VAT registration and input VAT deduction right.
This change adds complexity and there are doubts about its legal basis. However, the change has now been published and the SFTA wants to apply it. Therefore, it should be taken into consideration by concerned organizations. As the practice is new and its scope of interpretation is broad, we recommend filing a ruling request in case of doubts.
Finally, due to the fact that the SFTA plans to apply this change with a retroactive effect as of 1 January 2010, an analysis of potential retrospective risks is also recommended.