The tax law environment of the patent box in Switzerland
Basics and assertion of a patent box solution
Introduction of a patent box
The TRAF obliges the cantons to introduce the new instrument of the patent box at the level of cantonal and municipal taxes (no patent box will be introduced at the level of direct federal tax). This allows the cantons to offer internationally attractive taxation for qualifying patents and similar rights in line with the OECD standard. The patent box acts on the taxation of income (so-called "output promotion") and is basically accessible to legal entities (such as companies limited by shares or limited liability companies) as well as to self-employed natural persons. However, it is important that the taxpayer is well and sufficiently documented with a view to the information required for the patent box ("tracking and tracing").
Determination of the box profit
The patent box specifically provides that the profit originating from qualifying patents and similar rights will be taxed at a lower rate. The reduction results from a partial exemption of the qualifying profit (reduction of the assessment basis, i.e. no tax is levied on the privileged share of the "box profit").
The first step is to determine the so-called "box profit". In this context, transfer pricing considerations should also be addressed ("DEMPE" functions or sufficient economic substance for the allocation of the relevant profits). The box profit is calculated on the basis of the residual method ("box profit") adjusted by the modified nexus approach, which may be applied to patents or products (or even "product families"). From a mathematical perspective, the nexus approach relies on the so-called nexus factor, which results from the percentage ratio between the qualifying R&D expenses (incl. "uplift" within the specified limits) and the overall R&D expenses (non-qualifying costs such as, for example, costs for the financing/control of research and development activities carried out by group companies domiciled abroad).
The amount of the reduction granted in a second step on the calculated "box profit" may, within the statutory limits, be defined independently by each canton. The maximum reduction amounts to 90% (i.e. at least 10% of the "box profits" are subject to ordinary taxation). The patent box has no direct impact on the profit reported in accordance with commercial law.
Cantonal limitation of tax relief
The patent box is one of the measures that must be considered in the context of the (cantonal) limitation of the tax relief, which is equally to be set up through the TRAF and which is to guarantee a certain minimum taxation.
Entering the patent box
The taxpayer must apply for taxation according to the patent box. Entering the patent box as a matter of principle requires that set-off is made via the R&D expenses on qualifying patents and similar rights that have previously been subject to taxation (the special tax relief for R&D expenses must equally be taken into account). As a result, the expenses must in principle be added to the taxable profit at the time when entering the patent box, thereby creating an (amortisable) already taxed hidden reserve. However, within 5 years after the introduction of the reduced taxation, the cantons are free to make set-off of taxes more attractive in other ways (e.g. by means of an «IP loss recapture mechanism»).
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