Switzerland: Tax incentives for innovation and R&D

Taxpayers considering a claim for the R&D deduction for the 2020 tax period need to make an application with their 2020 income tax returns.

Taxpayers considering a claim for the R&D deduction for the 2020 tax period

Innovation-related tax incentives—in the form of additional research and development (R&D) tax deductions and a “patent box” regime—are among tax relief measures in Switzerland.

Taxpayers considering a claim for the R&D deduction for the 2020 tax period need to make an application with their 2020 income tax returns, to be filed in 2021.

R&D tax incentive

The Swiss R&D tax incentive focuses on additional R&D tax deductions and is designed to recognize and reward companies investing in R&D projects. An additional R&D deduction is available as of 1 January 2020 for R&D conducted in Switzerland. The level of the additional R&D tax deduction varies from Swiss canton to canton but could provide up to an additional 50% deduction against taxable income on qualifying R&D expenses (calculated as follows):

  • Qualifying personnel expenses considered an additional “lift-up” of 35% (to cover other R&D costs)
  • Third-party costs (contract R&D with a related or third party) 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. Eligible R&D activities generally need to meet certain criteria (i.e., novelty, creativity, uncertainty, systematic approach, and transferability and/or reproducibility) of the Organisation for Economic Cooperation and Development (OECD).

Qualifying activities in manufacturing sector

The following activities in the 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 produced 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—such as the development of systems to create by-products, to separate or absorb emissions or recycle energy and effluents
  • Value engineering and process improvement activities intended to reduce cost, failure rates, and energy consumption or increase throughput and quality
  • Experimental trials to test and improve modifications or prototypes
  • Progressive software development for manufacturing control systems

*For Swiss tax purposes, the definition of R&D is much broader than the list provided.

Example

A company in Zurich with R&D activities has CHF 1 million of qualifying R&D expenses. The company can benefit from an additional tax deduction for R&D of CHF 500,000—thereby resulting in an annual tax benefit of approximately CHF 72,000 per CHF 1 million of qualifying expenses resulting in 7.2% cost savings for R&D.


Read a June 2021 report prepared by the KPMG member firm in Switzerland

 

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