Loyalty Points as Gift Certificates? New Developments in Swiss VAT Law

LOYALTY POINTS IN SWISS VAT LAW: THE EXISTING LOGIC

The FTA’s practice regarding loyalty point systems is set forth in particular in VAT Industry Info 06 (Retail Trade). Among other things, it addresses a specific case: points awarded upon purchase that can later be redeemed for free rewards.

This practice is consistent with a Federal Supreme Court ruling from 2010 (BGE 136 II 441). At the time, the court essentially reached the following conclusion:

• The original purchase and the subsequent redemption of the reward constitute two separate transactions.
• The subsequent reward is economically considered to have been paid for as part of the original purchase.
• If a reward is redeemed that is subject to a different tax rate than the original purchase, a tax rate adjustment must be made.

The underlying logic is that a portion of the consideration paid at the time of purchase is, from an economic perspective, already attributable to the subsequent bonus.

NEW PERSPECTIVE: VOUCHER LOGIC

Although the ECJ ruling concerns a different system, it contains interesting statements regarding the distinction between vouchers and other customer loyalty instruments. The Court emphasizes in particular that an instrument qualifies as a voucher only if it must be accepted upon redemption as consideration for a supply of goods or services. Loyalty points do not necessarily meet this requirement.

These considerations indirectly lead to a question that is also relevant under Swiss law: When exactly does a voucher exist?

It is precisely this question that Swiss case law has clarified in recent years. The Federal Administrative Court now distinguishes between:

• Service vouchers – taxation upon issuance
• Value vouchers – taxation only upon redemption

The decisive factor here is whether it is already clear at the time of issuance:

• what service will be provided
• where this service is taxable
• what tax rate applies

If this certainty is lacking, this indicates a gift certificate.

IMPLICATIONS FOR LOYALTY POINTS

Against this backdrop, the question arises as to whether certain loyalty point systems might not be closer to the logic of a gift certificate.

In many modern programs, the following applies:

• Points can be redeemed for various goods or services
• These are sometimes subject to different tax rates
• At the time of the original purchase, it is not known for which service the points will later be used

In such cases, the future service cannot be determined at the time the points are awarded.

From the perspective of today’s voucher logic, it could therefore be argued that points are economically more akin to a gift certificate:

• At the time of purchase, part of the payment is made for the points.
• However, the specific service has not yet been determined.
• VAT would therefore only be triggered upon redemption of the points.

WHEN DOES THE CURRENT PRACTICE REMAIN CONVINCING?

The existing practice continues to appear plausible if

• points can only be redeemed for clearly defined rewards, or
• all possible rewards are subject to the same tax rate.

In such scenarios, the subsequent supply is in fact already sufficiently determinable.

PRACTICAL SIGNIFICANCE OF THE DISCUSSION

In many cases, the discussion is likely to remain largely theoretical.

The reason is that VAT is generally shown on the original sales receipts. A tax shown on the receipt is, in principle, due—regardless of whether it would actually be owed.

Nevertheless, the classification can become relevant, particularly in connection with unredeemed points (so-called “breakage”).

Under current practice, a portion of the original sales revenue is effectively already allocated to the subsequent reward. Points that are never redeemed can thus indirectly lead to taxation.

Under a gift certificate logic, however, the following would apply: Unredeemed points could generally be “tax-exempted.”

CONCLUSION

Although the ECJ rulings concern different factual situations, they serve as a reminder that the distinction between vouchers, discounts, and other customer loyalty tools must always be made based on the specific economic structure of the arrangement.

Against this backdrop, it seems at least worth discussing whether the current Swiss practice regarding the treatment of loyalty points remains convincing in all scenarios. Particularly in the case of open loyalty point systems, where points can be redeemed for services subject to different tax rates, the question arises as to whether a closer alignment with the logic of a value voucher would be appropriate.

Even though this discussion is often overshadowed in practice by the tax statement on sales receipts, it nevertheless shows that the VAT classification of modern customer loyalty programs still has room for development.