BACKGROUND

Electronic services follow the general rules for determining the place of supply for VAT purposes. This means that, as a rule, they are taxable where the recipient of the service is resident or domiciled ("recipient location principle"). What distinguishes electronic services from other services is primarily that they lead to a registration obligation for the foreign service provider if customers are domestic consumers (b2c). If a foreign supplier who is not VAT-registered in Switzerland provides a "normal" service to a domestic recipient and this service is subject to the recipient location principle, the domestic recipient is liable for acquisition tax if he is either liable for tax (b2b) or receives such services for more than CHF 10,000 per year (b2c). Due to this situation, the foreign supplier is not liable for VAT in Switzerland.

The situation is different if the foreign supplier provides a so-called electronic service. In this case, the foreign supplier remains liable for tax and must register in Switzerland for VAT purposes in order to settle the VAT with the FTA.

According to FTA practice, a service is deemed to be an electronic service if the following conditions are cumulatively met:

• It is provided via the Internet or another electronic network
• it is provided automatically and human involvement on the part of the service provider is minimal
• the provision of services is not possible without information technology.

In individual cases, questions of demarcation arise as to whether a service qualifies as an electronic service in a specific case. The Federal Supreme Court recently had to deal with such a demarcation question (judgement of 25 October 2024, 9C_482/2024). The main focus was on the question of "minimal human involvement on the part of the service provider". 

Facts of the case

9C_482/2024 BG
A is domiciled abroad and operates online sports betting. The FTA retroactively entered A in the VAT register and assessed an additional tax claim, as A provides electronic services to non-taxable persons in Switzerland, reaches the turnover limit and is therefore liable to pay tax. A disputed both the provision of electronic services and the tax liability.

DECISION 

The disputed question in this case was whether the service provided by A was automated and only performed with a minimum of human involvement.

The FTA and the Federal Administrative Court assumed that the disputed service consisted of the granting of a conditional opportunity to realise an agreed profit. The human influence in A's offer was limited to the determination of the betting odds and other preparatory acts aimed at the conclusion of future bets, but was not itself part of the service relevant for VAT purposes. A countered this by arguing that significant activities of the employees took place as part of the provision of the service: In the case of live betting, the betting odds had to be constantly processed manually. Customers also have access to a support team that they can contact if they have any questions or problems.

In its decision, the Federal Supreme Court referred to the essential core of the service relationship and followed the reasoning of the lower court. Although the human interventions claimed by A were of considerable importance, they were limited to the design of a product that was the subject of the offer (and not the service itself). According to the administrative practice of the FTA, human intervention in the context of preparation, development and maintenance work is not taken into account

In the context of the provision of the service itself, human intervention is always to be considered "minimal" if it does not serve to respond to individual customer requests. The court refers to the human croupier in an online casino or the lecturer in an online course who does not offer participants the opportunity to interact before, during or after the seminar. Although service and support are indispensable for A's offering, they are not an integral part of the actual electronic service. Rather, they are services that merely fulfil an assigned function. This distinguishes them from activities with more than minimal human involvement, such as counselling, evaluating, providing individual feedback or answering questions.

CONCLUSION

The judgement makes it clear that, from a Swiss perspective, services can be assessed as electronic services more quickly than some entrepreneurs may realise. The fact that a real person is involved before, during or after the provision of the service is sometimes of little help here. It should also be noted that electronic services in the b2c sector are also subject to special regulations in other (European) countries, which may make it necessary for Swiss companies to charge foreign VAT. Anyone who no longer makes their services available to foreign customers only by letter is therefore well advised to have their services qualified by a VAT expert. Failure to do so may result in considerable VAT risks.

DEFINITIVE ABOLISHMENT OF UK NON-DOM REGIME

As announced, the UK will definitively abolish the so-called "non-dom regime" with the 2025 Budget. This regime will no longer be available from 6 April 2025 and will be replaced by a residence-based regime, whereby UK residents will be taxed on their worldwide income. In addition, in future assets held outside the UK will also be subject to UK inheritance tax.

A short transitional period is planned for persons who have previously made use of the non-dom regime, which will gradually increase the tax burden when repatriating foreign sourced income to the UK. In addition, new residents in the UK can elect not to pay UK tax on foreign income and gains in their first four years of UK tax residence. This provision, however, will only be available for a limited number of persons previously taxed under the non-dom regime since this option is only applicable for first time UK residents or new residents who return to the UK after a ten-year absence of residency in the UK.

The abolition of the non-dom regime will make it necessary for affected persons to examine alternatives and adapt their current tax strategy. In this respect, Switzerland can offer an attractive alternative with its lump-sum taxation and advantageous inheritance tax system, which is characterized by a low tax burden and a high degree of stability.

LUMP-SUM TAXATION IN SWITZERLAND

The lump-sum taxation or taxation based on living expenditure in Switzerland or the cantons which apply this tax regime is aimed at foreign nationals who wish to relocate to Switzerland for the first time or after an absence of ten years and who do not pursue any gainful activity in Switzerland. In case of a married couple, these conditions currently have to be met by both spouses.

A major advantage of lump-sum taxation in Switzerland is of course that considerable tax advantages can be achieved through a well-coordinated structuring of income-generating assets, while at the same time achieving a high degree of stability in the annual tax burden. In addition, under lump-sum taxation or taxation according to living expenditure, income from foreign sources and foreign assets generally do not have to be declared.

Specifically, lump-sum taxation replaces ordinary income tax by determining the taxable income of the person concerned on the basis of their annual worldwide living expenses. In addition, the wealth tax payable at cantonal level is also replaced by the lump sum taxation. Taxable assets are generally calculated using a mid-single-digit multiplier of the income tax base. This means that the basis for the lump-sum settlement of wealth tax is often considerably lower than the assets actually held.

As lump-sum taxation is in tension with ordinary taxation, guidelines have been defined to ensure a minimum level of taxation and a certain degree of control over the basis of taxation. For example, the lump-sum income tax must in any case at least correspond to the gross income from Swiss sources (so-called control calculation). In addition, the following minimum figures must be observed for the taxable income to be determined as a lump sum at federal level:

• Legally defined minimum income of CHF 429,100;
• For taxpayers with their own household: seven times the rent or (in the case of property) seven times the imputed rental value:
• For taxpayers without their own household: three times the annual pension price for board and lodging at the place of residence.

In principle, the same thresholds apply at cantonal level, although the level of these thresholds varies from canton to canton. For example, the canton of Valais has a minimum income of CHF 250,000, while the canton of Schwyz has a minimum income of CHF 600,000. In addition to the different minimum income thresholds, it is also important to consider the cantonal tax rates, which can vary considerably. Taking into account the flat-rate taxable assets, the tax burden calculated on the statutory minimum income, for example, in Verbier in the canton of Valais and that, for example, in Freienbach in the canton of Schwyz are roughly the same at just over CHF 100,000 (including federal tax in each case). In addition, social security contributions for non-employed persons who have not yet reached retirement age is levied in all Swiss cantons, which amount to a maximum of CHF 25,700 per person with assets of CHF 8.74 million or more.

EXAMPLE

Assumptions: A married couple with UK citizenship move to Verbier, Canton Valais, with their own household. The annual worldwide living expenses amount to CHF 300,000, with gross income from foreign sources totaling CHF 750,000 and gross income from domestic sources totaling CHF 100,000. The couple's assets amount to CHF 30,000,000.

As the living costs of CHF 300,000 are higher than the minimum income applicable in the canton of Valais (CHF 250,000) and the extrapolated rental costs do not exceed the actual living costs, the living costs of CHF 300’000 represent the taxable income. At federal level, the minimum income of CHF 429,100 is to be considered, since the living costs are lower than this threshold. In the canton of Valais, wealth tax is set at four times the assessment basis for income tax, in this case CHF 1,200,000. This results in an effective tax burden of around CHF 108,000. In comparison, applying ordinary income and wealth tax would result in a tax burden of around CHF 215,000.

INHERITANCE TAXES 

In addition to lump-sum taxation, Switzerland is also characterized by an attractive inheritance tax system, which – depending on the canton – provides for full tax exemption for spouses and direct descendants. Some cantons have abolished inheritance tax altogether. It should be noted that an initiative to introduce a new inheritance tax is currently pending a vote by the Swiss population. However, it is generally agreed that this initiative will almost certainly not be accepted.

CONCLUSION

With lump-sum taxation, Switzerland offers an attractive and stable taxation system for people who are gainfully employed outside Switzerland or who do not pursue any gainful employment. In combination with the favorable structure of the inheritance tax system, Switzerland is not only suitable for short- to medium-term tax planning, but also for long-term, intergenerational wealth planning.