Industrial manufacturing in Switzerland has been coming under increasing pressure from overseas competitors and outsourcing. Innovation tax incentives, in the form of additional R&D tax deductions and the patent box, are key tax reliefs for supporting R&D in Switzerland.
How does it work?
The Swiss R&D tax incentive schemes, focusing on additional R&D tax deductions, are designed to recognize and reward companies investing in R&D projects. As of 1 January 2020, qualifying expenditure attracts an additional R&D tax deduction if the R&D is conducted in Switzerland. The level of the additional R&D tax deduction varies from canton to canton but could provide up to an additional 50% deduction against the claimant’s taxable income on qualifying R&D expense calculated as follows:
- qualifying personnel expenses consider an additional lift-up of 35% (to cover other R&D costs), and
- third-party costs (contract R&D with a related or third party) may be eligible based on 80% of invoiced costs.
Scientific research and science-based innovation activities across any sector may qualify for the additional R&D tax deduction. In order to qualify, R&D activity generally needs to meet the respective criteria (i.e. novelty, creativity, uncertainty, systematic approach and transferability and/or reproducibility) of the OECD Frascati Manual.
What types of activities can qualify?
For Swiss tax purposes, the definition of R&D is much broader than the list below. The following activities in manufacturing industry - among others - may qualify for additional R&D tax deduction:
- Development of new manufacturing techniques to be able to manufacture products that are increasingly complex, made from alternative materials and to increasingly tight tolerances.
- Significant enhancement of automation on manufacturing lines to reduce operator involvement and costs.
- Development of new processes to reduce environmental impact by reducing waste or emissions. This could include the development of systems to create by-products, to separate/absorb emissions or recycle energy/effluents.
- Value engineering/process improvement activities intended to reduce cost, failure rates and energy consumption and/or increase throughput and quality
- Experimental trials to test out and improve modifications / prototypes.
- Progressive software development for manufacturing control systems.
What is the benefit of an additional R&D tax deduction?
As an example, a company in Zurich that operates R&D and has CHF 1 million qualifying R&D expenses can benefit from an additional tax deduction for R&D of CHF 500 thousand. This would result in an annual tax benefit of approx. CHF 72 thousand per CHF 1 million of qualifying expense resulting in 7.2% cost saving for R&D.
Why is R&D relevant to industrial manufacturing?
The Swiss industrial manufacturing industry has been coming under increasing pressure from its stakeholders to reduce costs and waste, improve environmental performance while increasing capabilities to manufacture products of increasing complexity. Qualifying R&D activities can be found across a wide range of companies, including aerospace, automotive, food & beverage, chemicals, consumer products, electronics and component manufacturers. Whether the project is developing the manufacturing technology to be able to produce a product or improving the manufacturing process, R&D tax incentives provide significant opportunities to reduce the overall costs of development.