In Switzerland, non-profit legal entities are in principle subject to ordinary corporate taxes levied at the federal, cantonal and municipal levels. Legal entities pursuing non-profit purposes may obtain full exemption from federal, cantonal and municipal taxes if certain requirements are met. Furthermore, non-profit entities benefit from special treatment for VAT purposes.
1. Corporate tax
In Switzerland, legal entities are subject to taxes at federal, cantonal and municipal levels. Profit tax is levied at all three levels, whereas capital tax is levied at cantonal and municipal levels only. Legal entities pursuing purposes that qualify as non-profit are exempt from profit and capital taxes at all levels for profits and capital that are exclusively and irrevocably dedicated to such purposes.
1.1 Legal entities
In theory, any legal entity may benefit from the tax exemption. In practice however, the most common legal forms for pursuing non-profit purposes are the foundation (German: Stiftung; French: fondation) and the association (German: Verein; French: association).
Corporations such as companies limited by shares (German: Aktiengesellschaft; French: société anonyme), limited liability companies (German: Gesellschaft mit beschränkter Haftung; French: société à responsabilité limitée) or cooperatives (German: Genossenschaft; French: société coopérative) may also benefit from a tax exemption. However, in order to obtain a tax exemption, the articles of incorporation of these corporations must provide that the corporation waives the distribution of dividends and shares of profits.
1.2 Non-profit purposes
Swiss law does not provide for a proper definition of the term “non-profit purposes” and only mentions that business purposes may not be regarded as non-profit purposes. The term “non-profit purposes” has been defined by the Swiss Federal Tax Administration in a circular letter. According to this circular letter, non-profit purposes are purposes which serve the general public interest. For instance, protection of the environment, education, social care, art, science, promotion of human rights or development assistance are in the general public interest.
A non-profit purpose requires that the circle of potential beneficiaries is not too close. A circle of beneficiaries is too close if it includes only members of the family, members of an association or members of a particular profession. Thus, legal entities whose purpose only consists in supporting their own members do not qualify for tax exemption.
Furthermore, another requirement for the tax exemption is altruistic nature of the activities. This requirement implies that certain “sacrifices” are made by the legal entity (through its members, employees or third persons acting for the legal entity) in the public interest. For this reason, the members of the governing bodies of the legal entity are only entitled to the reimbursement of their expenses but are not allowed to be remunerated for their duties.
The definition of “non-profit purposes” is not limited to activities performed in Switzerland, i.e. legal entities that perform activities exclusively outside of Switzerland may also benefit from a tax exemption.
1.3 Auxiliary business activities
Auxiliary business activities are permitted as long as they serve to achieve the non-profit purpose, are clearly subordinated to the non-profit purpose and are of minor importance in light of the legal entity’s global assets and income.
Even the acquisition and administration of a majority participation in a company carrying out business activities is allowed, provided however that this participation does not enable the non-profit legal entity to exercise control over the management of the company (for instance if the legal entity does not have majority voting rights) and provided that no management functions are performed by the non-profit legal entity.
Legal entities that dedicate only a portion of their funds exclusively and irrevocably to non-profit purposes, may be eligible for a partial tax exemption provided that their tax exempt activity is important and that their accounting provides for a clear separation between the assets and income that are eligible for the tax exemption and the other assets and income.
2. value added tax
Non-profit entities are exempted from Swiss VAT if they generate on Swiss territory an annual turnover from taxable supplies of less than CHF 150,000. The requirements for being qualified as a “non-profit” entity are exactly the same as those for corporate income tax purposes. The tax exemption granted by the competent tax authority for the corporate income taxes is also accepted for VAT purposes.
Exempted supplies shall not be included in the calculation of the CHF 150,000 threshold. Supplies that non-profit entities with political, trade union, economic, religious, patriotic, philosophical, philanthropic, ecological, sporting, cultural or civic objectives provide to their members against a contribution laid down in statutes or regulations are exempted supplies.
A non-profit entity may opt for voluntary taxation of its exempted supplies in order to deduct its input taxation. A non-profit entity, however, may opt for taxation only if it carries out a business. An entity carries out a business if that entity independently performs a professional or commercial activity with the aim of sustainably earning income from supplies. In most situations these requirements are not fulfilled by a non-profit entity.
Donations are qualified as exempted turnover that does not result in a reduction of the input tax deduction. The differentiation between exempted donations and taxable sponsorships may in some case be tricky.
3. Taxation of donors
Donations made by natural person to non-profit legal entities having their registered seat in Switzerland are deductible from the taxable income of the donor, whereas the maximum deductible amount for federal tax purposes is 20% of the net taxable income. The maximum deductible amount at cantonal and municipal levels is determined by each canton. Membership contributions paid to associations do not qualify as donations and, therefore, are not deductible.
Donations made by legal entities to non-profit legal entities having their registered seat in Switzerland are deductible from the taxable net profit of the donor, whereas the maximum deductible amount for federal tax purposes is 20% of the net profit. The maximum deductible amount at cantonal and municipal levels is determined by the legislation of each canton.
The legal entity has to submit its request for tax exemption to tax authority of the canton in which it has its registered seat. This authority is competent for granting the tax exemption at federal, cantonal and municipal levels. The tax exemption request must describe the activities, financial resources and projects of the legal entity. The founding documents (statutes, articles of association, regulations or similar) of the legal entity must be attached to the request. The procedure generally lasts between 2 weeks and 2 months depending on the case and the canton. Tax exemption may also be granted for past years, i.e. with retroactive effect.
If the request is accepted, the tax exemption is granted for an undetermined period of time. The tax exempt legal entity is obliged to report any changes of its factual situation, statute or activities to the tax authority. Furthermore, in some cantons, tax exempt legal entities have to file an annual tax return with copy of their annual financial statements.
5. Final remarks
The Swiss Parliament plans to introduce a new law regarding the exemption of legal entities from corporate taxes. According to this draft new legislation, each legal entity that pursues non-business purposes would benefit from a tax exemption provided that its yearly net profit does not exceed CHF 20,000 (for federal tax purposes) or a minimum amount determined by the canton (for cantonal and municipal tax purposes).
The term “non-business purposes” is defined in a broader way than the term “non-profit purposes” because a non-business purpose shall be given even if the requirements relating to the unlimited circle of beneficiaries and to the altruistic nature of the activities (as described above) are not met. This draft new legislation is not intended to replace the current rules regarding the exemption of non-profit entities but aims at complementing the current rules. This means that legal entities whose annual net profit exceed the relevant threshold may still benefit from a tax exemption if they pursue non-profit purposes as defined above. It should be noted that is currently not certain whether the new legislation will entry into force or not.
Attorney at law and certified tax expert
BCCC AVOCATS SARL – BCCC ATTORNEYS-AT-LAW LLC*
*Swiss law firm BCCC cooperates with Bird & Bird.