Tax-exempt chari­ties: they may be exempt – but not from every tax

Swiss-based foun­da­ti­ons pursuing public, chari­ta­ble or cultu­ral aims are entit­led to request tax-exempt status in Switz­er­land. This exempts them from paying fede­ral and canto­nal taxes on their income and capi­tal earnings. Howe­ver, they still need to pay other types of tax, such as taxes on the profits made from selling real estate or value-added tax (VAT). Acqui­si­tion tax is levied against advi­sory, legal and tax-rela­ted services, all of which are of parti­cu­lar rele­vance to chari­ties, as well as asset manage­ment services. 

‘What, value-added tax (VAT)? Is that really rele­vant for a chari­ta­ble foun­da­tion? I thought VAT was for services that people paid for, and chari­ties don’t offer that kind of thing, or at least, not often.’ That’s often people’s first reac­tion. The response? ‘That’s not all it’s for.’ VAT is also incur­red when certain services are acqui­red in foreign count­ries, inclu­ding advi­sory services, if the foreign company provi­ding the service is not included on the dome­stic VAT regis­ter. The tax is levied against the Swiss reci­pi­ent of the service, and if this reci­pi­ent is other­wise not obli­ged to pay VAT, they need to pay this tax if they acquire such services to the tune of 10,000 Swiss francs or more a year. This means that VAT needs to be inde­pendently sett­led by the entity recei­ving the service.

Advi­sory services and asset manage­ment services are subject to tax 

For chari­ties, the obli­ga­tion to account for acqui­si­tion tax after acqui­ring advi­sory and asset manage­ment services in foreign count­ries is of para­mount importance. Provi­ded that the foreign company provi­ding the service is not regis­tered for VAT in the dome­stic VAT area, the charity recei­ving the service is subject to this tax, as the service is being provi­ded at the place where the charity under­ta­kes its econo­mic acti­vity. If the charity is head­quar­te­red in Switz­er­land or the Prin­ci­pa­lity of Liech­ten­stein (which is included within the dome­stic VAT area), and under­ta­kes its acti­vi­ties there, the situa­tion is clear: as the subse­quent exam­ple demons­tra­tes, they need to pay acqui­si­tion tax if the thres­hold of 10,000 Swiss francs is excee­ded. If a charity that would other­wise be VAT-exempt seeks legal advice from a German lawyer, say, or asks a Luxem­bourg-based bank to manage its assets, and this costs more than a total of 10,000 Swiss francs a year, the charity is obli­ged to pay acqui­si­tion tax at the appli­ca­ble statu­tory VAT rate (curr­ently 7.7%). NB: the charity only needs to pay this tax if neither the lawyer nor the bank is VAT-regis­tered in Switz­er­land or the Prin­ci­pa­lity of Liechtenstein.

For VAT-exempt persons, the claim for acqui­si­tion tax arises upon payment of the fee for the service that has been acqui­red (Art. 48 (1) (a) VAT Act). The acqui­si­tion tax must be sett­led within 60 days of the end of the calen­dar year (Art. 66 (3) VAT Act). It is recom­men­ded that boards of trus­tees make enqui­ries regar­ding acqui­si­tion tax at the end of the calen­dar year, if not sooner. This does not only apply to larger chari­ties working across borders. Smal­ler ones can be affec­ted, too: the thres­hold of 10,000 Swiss francs is quickly met.