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VAT in Switzerland – what applies to new sole proprietorships and corporations?

We all pay VAT, that's clear. But what about when you run your own business? What rules apply to founders? In this article, you will find all the information you need on the subject of VAT for sole proprietorships, LLCs and limited companies. 

Value added tax is levied on all products and services sold in Switzerland. As an end consumer, you pay this tax on everything you consume – for example in the supermarket, in a restaurant, when you buy a car or at the hairdressers. That is why this type of tax is also called a consumption tax.

The good news for you as a founder is that if your company is subject to VAT, you can reclaim the VAT you paid on purchases such as your new laptop – via what is known as input tax deduction.

Voluntary VAT registration?

By law, you only have to pay VAT if your annual turnover exceeds CHF 100,000, regardless of whether you have founded a sole proprietorship, a limited liability company (LLC) or a limited company (AG).

Is your company below this limit? Then it can still make sense to voluntarily register your sole proprietorship, LLC or limited company for VAT. This is because you can also deduct input tax each quarter and thus quickly get back the VAT you paid for your new laptop. Of course, this requires clean bookkeeping.

What are the VAT rates in Switzerland?

Value added tax is generally levied on all products and services (with a few exceptions). The following tax rates apply:

  • Standard rate: 8.1 %
    You pay the standard rate for all products and services that do not benefit from the reduced rate or the special rate for accommodation.
  • Reduced rate: 2.6 %
    The reduced rate applies to the sale of some essential goods such as food, water, agricultural products and medicines.
  • Special rate for accommodation: 3.8 %
    This extremely low VAT rate applies to hotel accommodation in Switzerland. Good to know: people who use platforms like Airbnb pay the standard rate of 8.1 %.
  • No VAT: All products in the health, education and culture sectors, as well as the sale and rental of real estate, are exempt from VAT.
GmbH AG Gruenden Sacheinlage

When do I have to start paying VAT?

First of all: Swiss law requires that every sole proprietorship, LLC, and limited company – and of course all other possible corporate legal forms – be subject to VAT.

But as is well known, where there is a rule, there is also always an exception. If your annual turnover is less than CHF 100,000, you are exempt from VAT. So you don't have to register your company for VAT.

The Foundera tip: If you decide not to charge VAT at the start, then be careful how you calculate your products or services. Because as soon as you exceed the CHF 100,000 limit, VAT will be due. You will then have to immediately increase your prices by 8.1%, or your margin will suffer.

That's why we recommend that you include VAT in your prices from the outset. And think carefully about whether you should register for VAT when you set up, even if you don't immediately reach the CHF 100,000 threshold.

When does it make sense to voluntarily register for VAT?

Only companies that pay VAT themselves can also claim back the VAT they have paid on products or services via the input tax deduction. As you can see, there is a potential savings of up to 8.1% on every purchase.

If you are planning major investments for your company and, for example,

  • want to purchase vehicles,
  • develop your own software or
  • set up a materials warehouse,

then it may well make sense to voluntarily register for VAT even with a small annual turnover.

An example: Mark sets up as a part-time self-employed driving instructor with a sole proprietorship. He estimates his turnover in the first year at CHF 50,000. He estimates that his driving school car, including the necessary conversion, will cost him CHF 70,000. If he voluntarily registers his sole proprietorship for VAT, he will have to pay VAT on his turnover of CHF 50,000 in the amount of CHF 4,050 (8.1% of CHF 50,000). At the same time, however, he can reclaim the CHF 5,670 in VAT that he paid for the car. Added to this is the VAT on petrol, repairs and other purchases, which he can also reclaim. As you can see, by voluntarily registering for VAT, he gets more money back from the tax authorities than he has to pay!

What is the net tax method?

The type of VAT described in this article is the so-called effective method. Here you pay VAT on your sold products and services to the tax office and deduct the VAT you have already paid as input tax from the total amount.

Alternatively, you can also use the net tax method: Here, the VAT owed is calculated directly on the turnover at a reduced rate that is specific to your industry. On the one hand, this makes your accounting easier, but on the other hand, you can no longer deduct input tax. To be allowed to use this method, you must also meet high requirements, such as being active in certain industries. These industries range from A for demolition companies (4.5% net tax rate) to Z for twisting mills (3.0% net tax rate).

Mehrwertsteuer Schweiz

The difference between agreed and collected value added tax

Okay, that wasn't that easy. But now it sounds really complicated – with the agreed and collected method for settling VAT. But it's actually quite simple. The only difference between these two methods is when the VAT is paid:

The agreed method: VAT is due immediately

With the agreed method, you pay VAT as soon as you issue an invoice. If the payment does not arrive until the next quarter, you still have to pay the agreed VAT immediately. This method is the standard in Switzerland.

The received method: VAT is only due when the invoice has been

paid

If you pay VAT using the cash basis method, you only owe VAT once your invoice has been paid and the money has arrived in your account.

Which method is better for you depends on your business model:
For example, if you run an online store and receive the sales made from the integrated payment provider (e.g. Stripe) once a month, then it is recommended to bill using the collected method. This is because you then only have to enter this one payment correctly in your accounting. If you bill agreed, then you would have to enter each individual purchase from customers accordingly in your accounting and always bill the VAT in the correct quarter.

This is how Foundera supports you with regard to VAT

Tax issues can take up a lot of time and also cost a lot of nerves. In the worst case, you may even pay a lot of money for mistakes! However, when you found your company with Foundera, we will provide you with comprehensive advice. Of course, we will also point out your obligations and the many options for structuring your VAT. As described in this article, depending on your business model, it makes sense to approach the topic of VAT differently. Foundera will ask you the right questions and help you with this decision.

We are happy to register you for VAT for CHF 160.

FAQ «How does VAT work for founders?»

Who is exempt from VAT?

If your company's annual turnover is less than CHF 100,000, you are exempt from VAT.

Can I voluntarily register for VAT?

That is generally possible! And it even makes sense if, for example, you are planning larger purchases for which you would like to reclaim the input tax promptly and not just with the next tax return.

What are the rates of value added tax?

The effective method of VAT has three rates: the standard rate (8.1%), the reduced rate (2.6%), the special rate for accommodation (3.8%) and areas where no VAT is due.

The net tax method has hundreds of industry-specific tax rates. It's best to talk to Foundera or your tax advisor about this.

Which services and products are exempt from VAT?

There are very few services in Switzerland that are exempt from VAT. These include, in particular, health, culture, the rental/sale of real estate and education.

Is a sole proprietorship also subject to VAT liability?

Yes – as long as you generate more than CHF 100,000 in revenue per year. However, in some cases it makes sense to voluntarily register your sole proprietorship for VAT even if your annual turnover is lower.

Found your company and check your rights and obligations regarding VAT!

Do you want to found a company and need help with VAT? Foundera provides comprehensive advice on the foundation – including on this important tax issue.
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