Draft practice specification: Input VAT reduction in connection with COVID-19 contributions

Thomas Patt Director Indirect Taxes, PwC Switzerland 09 Apr 2021

Last Thursday, the FTA published a draft of a practice specification [1] in order to mitigate the financial impact of COVID-19 contributions granted by the public sector that qualify as subsidies.

If the contributions can be assigned to a specific activity or expenses, only the input VAT on the expenses for this area or activity has to be reduced. This would be the case, for example, if subsidies are granted in relation to opted rental agreements. If the activity is exempt from VAT without credit or no input VAT incurred on the expenses, for example in the case of a non-opted rent, no reduction would have to be made.

But if the subsidies are granted to cover the general operating loss and if the input VAT reduction based on the ratio of subsidies to total revenue does not provide a fair and reasonable result, it could alternatively be made according to the ratio of the subsidy to the financed expenses. This should particularly provide a benefit to companies whose sales have collapsed due to the pandemic and for which the expenses significantly exceed the sum of revenue and subsidies.

Provided that the ratio between the financing of expenses and investments with subsidies is adequately taken into account, the following simplifications could be used:

  • No input VAT reduction required on the input VAT incurred on the cost of goods/materials as well as capitalised investments.
  • As an alternative to the revenue-based determination of the reduction ratio, this could be done based on the ratio of the subsidies to the total expenses excluding VAT but including depreciation. The cost of goods/materials would not be taken into account, as no reductions need to be made on this.

The practice specification proposed by the FTA is very complex, although it is supposed to contain simplifications. In addition, terms that require interpretation, such as ‘cost of goods/materials’, are used. These should be precisely defined in the final version. The consultation expires on 13 April 2021. It therefore remains to be seen how the FTA's definitive practice specification will look.


Contact us

In case of any questions, please do not hesitate to contact Thomas Patt, VAT Director 

[1] https://www.estv.admin.ch/dam/estv/de/dokumente/mwst/konsultativgremium/entwurf1-ja/kg-subventionen-spenden-2021.pdf.download.pdf/kg-subventionen-spenden-2021.pdf (German language)

Contact us

Thomas Patt

Thomas Patt

Director Indirect Taxes, PwC Switzerland

Tel: +41 58 792 47 49

Olivier Comment

Olivier Comment

Senior Manager, TLS, PwC Switzerland

Tel: +41 58 792 81 74