Subsidies and VAT: more clarity from 2025
From 1 January 2025, the revised VAT Act (MWSTG) brings clearer rules on how subsidies are treated. The aim of the new rules is to simplify the distinction between non-taxable subsidies and taxable consideration and to provide more legal certainty.
New rules for subsidies under Art. 18 para. 3 MWSTG
The new MWSTG stipulates that funds count as a subsidy if a public authority (federal government, canton or municipality) expressly designates them as a “subsidy” or a “public-law contribution” and communicates this designation individually to the recipient.
Once such a designation has been made, the funds are a non-taxable cash flow. The recipient’s input tax deduction must be reduced proportionately (Art. 33 para. 2 MWSTG). If the subsidy can be allocated to a specific area of activity, only the input tax on that area’s expenses is reduced (Art. 75 para. 2 MWSTV). If it covers an operating deficit, the input tax is reduced as a whole in the ratio of the subsidy to total revenue (Art. 75 para. 3 MWSTV): if a business with total revenue of CHF 1,000,000 receives a subsidy of CHF 200,000, the input tax must be reduced by 20%.
Key points for implementation
The designation as a subsidy must be express and must be communicated to the recipient no later than the end of the finalization deadline for the tax period in which the payment is made. A general announcement, for example in a subsidy database, is not sufficient. Under Art. 72 para. 1 MWSTG, the finalization must be carried out no later than in the reporting period in which the 180th day after the end of the financial year falls; the VAT return for that period must be submitted within 60 days (Art. 71 MWSTG).
The ESTV recommends a written notification in the form of a contract, a ruling or a comparable document with reference to Art. 18 para. 3 MWSTG.
Designations for funds
Depending on the legal basis of the public authority concerned, the funds can also be designated as “financial assistance”, a “state contribution” or with a comparable term, provided the requirements of Art. 18 para. 3 MWSTG are met.
No automatic reversal if the designation is missing
If a cash flow is not expressly designated as a subsidy, it does not automatically count as taxable consideration. The ESTV examines the nature of the cash flow case by case and can classify it as a subsidy, consideration, a fee or another form of non-consideration.
Legal certainty and practical implementation
The clear definition and the rules on deadlines improve legal certainty for companies and public authorities. Subsidies generally lead to a reduction of the recipient’s input tax deduction, so this should be taken into account in the accounts at an early stage.
Recipients should also make sure that the designation of the subsidy is clearly documented, so that they can provide evidence in the event of an ESTV audit.
Timing and recommendations
The new rules apply to subsidies paid out from 1 January 2025. Public authorities and companies should review their existing processes for communicating subsidies, ensure timely designation and check the effects on the input tax deduction.
