In practice, only the mandatory tax liability based on the turnover threshold of CHF 100,000 from taxable supplies is considered. However, it is essential to analyze not only the turnover from provided supplies, but also the expenses in connection with the services received from abroad. If a holding company receives services from foreign subsidiaries or third parties, or if licenses or patents are transferred to a Swiss holding company, a lack of VAT registration can result in a final VAT burden.

This tax burden can, in some cases, have a devastating effect on the financial health of the holding company.

The following analysis is based on case law and examines selected aspects of the reverse charge mechanism in the context of holding activities. It shows how common mistakes can be avoided and tax risks minimized.

I. Reverse Charge in Connection with Purchase and Sale of Investments

1. Consulting Services Received from Abroad

In its recent decision, the Swiss Federal Supreme Court (BGer 9C_154/2023 of January 3, 2024) confirmed that consulting services received from abroad in connection with the sale of investment prior to the entry of a holding company in the VAT register are not eligible for input tax deduction.

Facts

A holding company registered as a VAT payer approximately 3 years after its registration in the commercial register. Prior to its VAT registration, the company concluded contracts with various foreign consultants with the aim to sell its investment in a foreign company. The sale of the investment took place shortly after the company's VAT registration. Upon completion of the project, the foreign consultants issued invoices for their services. Based on this, the holding company declared the reverse charge and deducted it as input tax in the same declaration.

The Swiss Federal Tax Administration (FTA) corrected part of the input tax, arguing that consulting services received prior to the company’s VAT registration were not eligible for input tax deduction. The FTA allocated these services pro rata temporis for the period from the conclusion of the contract to the sale of the investment. The FTA allowed input tax deduction only for the reverse charge incurred pro rata temporis for the tax period after the holding company was registered for VAT.

The taxpayer argued that most of the services were rendered at the time the sale purchase agreement ("SPA") was concluded and thus after the VAT registration. However, the Federal Supreme Court upheld the FTA's position and rejected the company's request for subsequent input tax deduction. It stated that there is a presumption that the consultancy services were consumed at the time they were received. It did not object to the FTA's allocation of the expenses on a pro rata temporis basis. The company failed to provide sufficient evidence to prove otherwise.

The practice of the Swiss Federal Supreme Court shows that timely VAT registration is crucial for input tax deduction. Holding companies planning to receive consulting or other services from abroad, to which the place-of-receipt principle applies, should ensure that they register for VAT before purchasing such services.

2. Costs Related to the Acquisition of an Investment

The application of the reverse charge depends on whether the place of supply is in Switzerland. In most cases, except for the services listed in Art. 8 para. 2 of the Swiss Value Added Tax Act (VAT Act), the recipient principle applies. However, there are cases where the place of supply of services is abroad. The practice of the Swiss Federal Administrative Court (BVGer A-3285/2017 of June 21, 2018) provides insights on what holding companies should be aware of when they refer to the place of supply of services abroad in accordance with Art. 8 para. 2 of the VAT Act.

Facts

A Swiss VAT-registered holding company intended to acquire a 60% interest in a target company. As the target held exploitation rights, the holding company carried out extensive drilling and testing in the project area in order to assess whether it wanted to proceed with the acquisition. To carry out these activities, the holding company engaged other group companies under various service contracts.

The FTA argued that all supplies related to the acquisition of the target—including drilling and testing work on the construction project performed abroad—should be qualified as an aggregate supply within the meaning of Art.  19 para. 3 of the VAT Act. According to Art. 8 para. 1 of the VAT Act, the place of this aggregate supply was Switzerland, which leads to the application of the reverse charge mechanism. However, the holding company claimed that only legal and tax advisory costs were subject to reverse charge, while the place of supply for other services was abroad according to Art. 8 para. 2 (f) of the VAT Act (i.e., the property location).

The Swiss Federal Administrative Court stated that the services received should not be treated as an aggregate supply. Each supply of services had to be assessed separately. However, where the place-of-recipient principle does not apply and special provisions under Art. 8 para. 2 of the VAT Act are invoked, the burden of proof rests with the taxpayer. If a company cannot provide sufficient evidence, it must bear the consequences of the lack of evidence.

Holding companies that claim the place of supply under Art. 8 para. 2 of the VAT Act must therefore ensure that they have sufficient documentation to prove that the place of supply is abroad. It should be noted that this evidence must meet high standards.

II. Reverse Charge in Connection with the Transfer of Intangible Assets to a Swiss Company

In practice, intangible assets are often transferred within a group to a Swiss holding company. However, many companies do not realize that such transfers are subject to reverse charge. The reverse charge is often overlooked in the case of contributions in kind of patents or licenses from foreign group companies to the equity of a Swiss holding company.

According to the published practice of the Swiss Federal Tax Administration (FTA), a contribution in kind is deemed to be a taxable supply from the contributor’s perspective, unless the transfer is tax exempt. Since foreign group companies are not registered for VAT in Switzerland, the notification procedure does not apply, meaning that the contribution of patents or licenses is subject to reverse charge. The amount subject to tax is the fair market value of the contributed assets (Art. 3 (h) in conjunction with Art. 24 para. 2 of the VAT Act). This also applies if the contribution in kind is made without any consideration.

If the Swiss company is not registered for VAT, it must pay the reverse charge but cannot reclaim it as input tax. As a result, this type of transaction can have serious financial consequences, since the value of the transferred patents and licenses often amounts to millions. It is therefore crucial for a holding company to register for VAT before receiving a contribution in-kind of intellectual property rights from a foreign group company.

Summary

Reverse charge plays a crucial role in the activities of a holding company, especially when assessing the question of voluntary VAT registration. In practice, it is often assumed that no reverse charge is due as long as there is no VAT registration. However, it can be beneficial to register for VAT as soon as the company has been entered in the commercial register, as supplies received before registration are usually not eligible for input tax deduction.

The transfer of patents or licenses from a foreign group company to a Swiss holding company are subject to reverse charge. The tax base is the fair market value of the transferred patents or licenses. If a holding company is not registered for VAT, it cannot deduct the reverse charge as input tax, which leads to a final tax burden and significant financial disadvantages.

Case law shows that detailed invoices and records of the services received are essential to prove the qualification of the services, the time and the place of supply. If a holding company claims that the place of supply is abroad under Art. 8 para. 2 of the VAT Act, it must carefully consider the high standard of proof required.

Timely VAT registration and careful documentation are therefore essential to minimize tax risks and avoid financial disadvantages.