Super-deduction for R&D; a little-noticed incentive instrument
Thanks to Art. 25a StHG, which was included in the Tax Harmonization Act as part of TRAF as of January 1, 2020, the cantons can now deduct research and development costs by a maximum of 50 percent above the business-related R&D expenses (so-called super-deduction for R&D). This tax incentive instrument was introduced by the federal legislator primarily to create tax incentives in an unbureaucratic way to favor research and innovation in Switzerland. This blog post provides a brief overview of this new tax instrument and points out that the high documentation requirements of the cantonal tax authorities in particular, as well as the unfamiliarity of the instrument among small and medium-sized enterprises (SMEs), meant that it was rarely used in the initial phase.
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Overview of cantonal implementations
The decision to introduce an additional deduction for R&D for the purposes of state and municipal taxes is voluntary for the cantons. The cantons are also free to determine the scope of the additional deduction for R&D up to a maximum of 50 percent. In this context, as of the 2023 tax period, all cantons except Basel-Stadt, Glarus, Lucerne, Schaffhausen and Uri have included the super-deduction for R&D in their tax laws.
It should be noted that the maximum additional deductions for R&D allowed for state and municipal taxes are only granted to the extent that the company does not incur an annual loss or current profits can be offset against prior-year losses. In this respect, an additional deduction for R&D, as a purely tax-effective deduction, has no influence on the loss carryforward for tax purposes. In this respect, however, the additional deduction for R&D is also of no use to "start-up" companies that do not yet have any income inflows and are therefore dependent on external financing to pay their costs. It should also be mentioned here that periodic deferral of the additional R&D deduction through capitalization of qualifying R&D expenses is explicitly excluded from the additional R&D deduction. The additional deduction for R&D is consistently based on the wage expenses incurred. The additional deduction for R&D is thus primarily tailored to innovative small and medium-sized enterprises (SMEs) that are constantly expanding their product range and in parallel generate income from existing product lines.
Scope of the deduction
The calculation basis for the additional deduction for R&D is the directly attributable personnel expenses for qualifying R&D plus a surcharge of 35 percent, but no more than the total expenses. The 35 percent surcharge is used as a lump sum to cover other R&D expenses such as material expenses, depreciation of fixed assets such as laboratory installations, IT infrastructure, etc. Qualifying personnel expenses include in particular employees with the corresponding title and job profile (i.e. researchers and technical staff with the title "scientific employee") as well as other personnel such as direct laboratory assistance who provide direct services for the qualifying R&D project.
Furthermore, qualifying R&D expenses invoiced by third parties may also be taken into account for the additional deduction for R&D, provided that the invoiced expenses were actually incurred in Switzerland. In this case, the deduction is limited to a maximum of 80 percent of the amount invoiced by third parties. The deduction is explained by the fact that R&D expenses invoiced by third parties include not only personnel and material expenses but also a profit margin, which must be deducted in advance for the additional R&D deduction.
Documentation requirements
As a tax-reducing fact, the taxable entity must provide evidence that and to what extent the requirements for the additional deduction for R&D are met. In principle, the proof must be provided in each tax period. A company may declare the additional deduction for R&D by entering the relevant item (i.e. figure) in the tax return. In accordance with the practice of the cantons, this request must be accompanied by appropriate documentation as part of the tax return. Otherwise, the deduction will not be granted or the competent tax authority will send the company a corresponding request for documentation. However, the cantonal practices differ considerably with regard to the density and completeness of the documentation requirements and are sometimes not yet consolidated.
Conclusion
With Art. 25a StHG, the federal legislator wanted to introduce a low-threshold, tax-based input subsidy that benefits Swiss SMEs in particular. It is therefore desirable if the audit of R&D projects is solved as pragmatically as possible. The considerable documentation requirements, some of which are explicitly demanded, make the deduction unattractive, especially for SMEs, and obviously discourage them from dealing with it in detail. From the point of view of these companies in particular, however, it is of crucial importance that no excessive requirements are placed on qualifying R&D projects.
