R&D – Accounting & tax benefit in Switzerland

This blog summarises the accounting and tax rules applicable for companies engaged in R&D activities in Switzerland. Understanding these rules can significantly enhance your company’s profitability and tax efficiency.

Improve Profitability with Accrual Accounting

One effective strategy to improve profitability is by using accrual accounting to allocate development costs to future periods that benefit from your current R&D efforts. This involves distinguishing between the research stage and the development stage of your R&D activities:

• Research Stage: Costs incurred during the initial investigation phase to gain new knowledge. These costs are typically expensed as incurred.
• Development Stage: Costs related to the application of research findings to a plan or design for new or improved products or processes. These costs can be capitalised and amortised over the useful life of the developed asset.

By capitalising development stage expenses, companies can reduce the immediate impact of R&D costs on profitability and spread these expenses over future periods that benefit from the R&D activities.

Swiss Tax Law Incentives for R&D Expenses

Swiss tax law provides significant incentives for R&D activities, primarily at the canton level. These incentives are designed to promote innovation and economic growth. The provisions should be structured such that at least 30% of the taxable profit is taxed, depending on the canton.

R&D Super Deductions

R&D super deductions are available in addition to the normal tax deduction, allowing for a maximum of 50% of the below-qualified expenses:

1. Qualified Personnel Expenses:
   • A total of 135% of the actual expenditure (actual + 35% markup) is allowed. This means if a company spends CHF 1,000 on qualified personnel for R&D, it can deduct CHF 1,350 from its taxable income.
2. Outsourced Research & Development:
   • For research and development outsourced to third parties, 80% of the invoiced cost can be claimed as a deduction. If a company outsources R&D worth CHF 1,000, it can deduct CHF 800 from its taxable income.

Patent Box Relief

The patent box regime allows companies to claim relief for a maximum of 90% of the income earned from patents, significantly lowering their tax base. This regime applies to:

• Patents registered under domestic or foreign law.
• Rights comparable to patents, which may include certain types of intellectual property.

Practical Application and Examples

Example 1: Capitalising Development Costs

A tech company in Zurich is developing a new software product. The research stage costs amount to CHF 200,000 and are expensed as incurred. The development stage costs, totaling CHF 500,000, are capitalised. Over the next five years, these costs are amortised, reducing the annual impact on profitability.

Example 2: R&D Super Deduction

A biotech firm in Geneva spends CHF 300,000 on qualified personnel for R&D and outsources additional R&D worth CHF 100,000. The company can deduct:

• Qualified Personnel: CHF 300,000 x 135% = CHF 405,000
• Outsourced R&D: CHF 100,000 x 80% = CHF 80,000

Total deduction: CHF 485,000

Example 3: Patent Box Relief

A pharmaceutical company earns CHF 1,000,000 from a patented drug. Under the patent box regime, it can claim relief for up to 90% of this income. Thus, only CHF 100,000 is subject to taxation, significantly lowering the company’s tax liability.

Conclusion

Leveraging accrual accounting and taking advantage of Swiss tax incentives can substantially enhance the financial performance of companies engaged in R&D. By capitalising development costs and utilising super deductions and patent box reliefs, businesses can reduce their taxable income, improve profitability, and reinvest savings into further innovation.