Intellectual property taxation in Switzerland

Qualifying taxpayers

• Resident companies
• Domestic permanent establishments (“PEs”) of foreign companies
• Foreign PEs of resident companies subject to tax in the jurisdiction providing benefits
• Individuals operating enterprises

• Swiss tax resident companies
• Swiss PEs of foreign companies
• Individuals operating enterprises

Qualifying IP

• Patents ;
• Equivalent rights: utility models (e.g. “petty patents”, “innovation patents”, “short term patents”), IP assets that grant protection to plants and genetic material, orphan drug designations, and extensions of patent protection ;
• Software protected by copyright ;
• Non-patented assets owned by SMEs- certified as obvious, useful and novel such by a competent government agency independent from the tax administration, for taxpayers that have no more than EUR 50 in global group-wide turnover and that do not earn more than EUR 7.5 million per year in gross revenues from all IP assets, on average over a five-year period (SMEs)

• Patents (granted by the Swiss or EU Patent Office and equivalent foreign patent)
• Equivalent rights (protection certificates, topographies, plant protection rights, protected documents according to therapeutic products act and foreign rights equivalent to the above)
• NOT software protected by copyright unless
• unless included in a patented “invention”
• or patented abroad
• NO specificity for SMEs

Modified nexus approach (or other approach)

• Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Jurisdictions could treat the nexus ratio as a rebuttable presumption 

• Qualifying income = [(Qualifying expenditure + up-lift) / Overall expenditure] x IP income
• Not rebuttable presumption

Determination of the uplift

• 30% of qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

• 30% of the qualifying expenditures capped at the sum of (i) acquisition costs and (ii) expenditures for foreign related party or PE outsourcing, i.e. nexus ratio cannot exceed 100%

Qualifying expenditure

• Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure for general and speculative R&D taken into account on a pro rata basis
• Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
• Cumulative approach i.e. expenditure incurred all over the life of the IP asset

• Expenses directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
• Expenditure that is not directly attributable to a specific IP, equivalent right or product are taken into account on a pro rata basis
• No specific guidance on moment expenditures should be included in the nexus calculation
• Cumulative approach, i.e. expenditure incurred the current year and the ten previous years

Person carrying on the R&D and the place where the R&D is carried on

R&D carried out by:

• the IP owner (including by a foreign PE provided that it is operating at the time the IP income is earned)
• unrelated parties (outsourcing) irrespective of their location; jurisdictions may narrow the scope scope to certain types of unrelated parties and provide for a cap of unrelated party outsourcing expenditure; jurisdictions outside the EU could include R&D activities undertaken by resident related parties 

R&D carried out by:

• by the IP owner, in Switzerland;
• Swiss group companies as defined by art. 963 of the Code of obligations;
• 3rd parties worldwide;
• exclusion of the R&D carried on by related parties outside of Switzerland

Overall expenditure

• Qualifying expenditure
• + IP asset acquisition costs : include expenditure incurred to obtain rights to research and, in the case of licensing: royalties and license fees (cumulative approach); jurisdictions outside the EU could include R&D expenditure incurred prior to acquisition in case of acquisition of a taxpayer that incurred R&D expenditure in the jurisdiction
• + expenditure for related-party outsourcing (cumulative approach)

• Qualifying expenditure
• Outsourced expenditure from foreign related companies and PEs
• Acquisition costs

Eligible income

• May include royalties, capital gains and other income from the sale of an IP asset, and embedded IP income from the sale of products and the use of processes directly related to the IP asset

• Royalty income;
• Profit arising from the sale of IP assets;
• Profit from embedded IP

Overall income

• Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
• Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis 

Principle

• Net income from the IP asset i.e. gross IP income – (i) IP expenditures allocable to IP income for a given tax year.

Embedded profits (residual method)

• Net income from the IP corresponds to gross income deriving from product  reduced by (i) expenditures allocable to product, (ii) 6% of expenditures allocable to product and (iii) trademark remuneration, if any
• If net income per product cannot be determined, the net income from the IP is based on the total net income reduced by (i) finance income/expenses, (ii) participation income, (iii) property income, (iv) non qualifying IP related income, (v)  6% of expenditures allocable to product and (iii) trademark remuneration, if any

Relief mechanism

• Exemption (implicit), or
• preferential tax rate

• Exemption between of max  90% to be decided by the canton
• Said exemption can be limited by the overall cantonal tax relief

Cost of the entry into the box

• No indication

• Retroactive taxation of R&D cost of qualifying IP for the last 10 years
• Methods to compute retroactive taxation can differ according the cantons practice

Effective tax rate

n/a

• The IP Box is not applied for the federal direct tax but only for the purpose of the cantonal and communal tax
• The ETR should be between 9.15% and 14.45% depending on the canton

Administrative

• Tracking of expenditure, IP assets and income; jurisdictions may allow tracking by products or families of products arising from IP assets if in line with business model
• Documentation requirements 

• Tracking of expenditures, IP assets and income ; to be done for each IP asset, each product or each family of products (depending on the election made)
• Documentation requirements

Other special features of the regime

• Jurisdictions may as a transitional measure allow taxpayers to calculate the nexus ratio based on a 3 or 5-year rolling average
• Jurisdictions may provide for grandfathering rules

• The IP Box will come into force in 2020, subject to the outcome of the popular vote which will probably be held on May 19, 2019