Switzerland: R&D tax incentives for the pharmaceutical, biotechnology and medtech sectors
The Swiss R&D tax incentive regime is designed to recognize and reward companies investing in R&D projects.
Pharmaceutical, biotechnology and MedTech sectors
Research and development (R&D) tax relief is available for businesses in the pharmaceutical, biotechnology and medtech industries primarily for expenses associated with qualifying personnel directly involved in R&D in Switzerland. In addition, contract R&D in Switzerland is available and eligible. The level of additional R&D tax deduction varies from canton to canton but could provide up to an additional 50% deduction against the company’s taxable income at cantonal and municipal levels.
The Swiss R&D tax incentive regime, focusing on additional R&D tax deductions, is designed to recognize and reward companies investing in R&D projects. 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 (for a maximum of 50%) but could provide an additional tax deduction against the company’s taxable income on qualifying R&D expense calculated as follows:
- Qualifying personnel expenses considering an additional “lift-up” of 35% (to cover other R&D costs)
- 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, the R&D activity generally needs to meet certain criteria (such as novelty, creativity, uncertainty, systematic approach, and transferability and/or reproducibility) of the OECD Frascati Manual.
For Swiss income tax purposes, the scope of application of R&D is generally broad. The following activities in the pharmaceutical, biotechnology and medtech sectors may qualify for additional R&D tax deduction:
- Design and development of autonomous diagnostic devices and integrated information technology (IT) and biological solutions for enhanced diagnosis, disease targeting and product delivery
- Design and development of new surgical, restorative and regenerative solutions
- Clinical trials of phases I, II and III; Phase IV activities may qualify if there is further scientific or technological advance
- Design and development of new process platforms and test methods
- Identification and development of new chemical entities, pre-clinical research and development
- Design and development of new production processes for existing medical device products resulting in higher product yield
- Development of new consumer drug formulations and coating techniques
For example, assume a company in Zurich that operates R&D and has CHF 1 million qualifying R&D expenses. The company can benefit from an additional tax deduction for R&D of CHF 500,000. This in turn would result in an annual tax benefit of approx. CHF 72,000 per CHF 1 million of qualifying expense and material cost saving for R&D activities.
In the case of successful R&D in the pharmaceutical, biotechnology and medtech sectors, the patent box is another tax incentive for reduced taxation of profits. The reduction of patent-related profits amounts to a maximum of 90% for cantonal and municipal taxes and depends on the respective canton of domicile. The reduced taxation can be applied to profits from Swiss, European and foreign patents, supplementary protection certificates for medicinal products as well as documents on medicinal products with new active ingredients or new indicators, administration routes and dosages.
Read a May 2022 report prepared by the KPMG member firm in Switzerland
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