With unusual clarity the Federal Court has found against the Federal Tax Administration (FTA). At issue was the tax liability of a foundation, which operates a museum. The FTA struck the foundation off the VAT Register as of 1.1.2010, because „the costs of an activity are not covered in the long-term as to at least 25% by revenues from supplies and services (excluding investment and interest income), but more than 75% by non-considerations, such as subsidies, donations, cross-financing, contributions of capital, etc.“.
In its judgement 2C_781/2014 dated 19April 2015 the Federal Court has now found the practice to be contrary to law. Even if, as in the case in question, the costs are covered only 4.4 or 9.9% by considerations, the tax liability cannot be denied. In effect this results in an input tax surplus, which contrary to the view of the FTA is not a „subsidisation not foreseen by the law“. Retroactively to 1.1.2010 the foundation will again be entered in the Register and it is likely that it will be reimbursed a high six figure amount from the FTA. According to the Federal Court the unity of a business also means that “within a business activity there can be no non-business area. A non-business area, which does not entitle to the input tax deduction, cannot simply be assumed, but must be clearly and unequivocally separable from the business area.“
For charitable institutions this judgement has wide-reaching consequences:
- If the charitable institution performs a business activity, it is liable for the tax and must register, if the turnover threshold of CHF 150,000 is exceeded. Below this turnover threshold, voluntary waiver of exemption from tax liability is to be investigated.
- Without a non-business area that is clearly and unequivocally separable from the business area, the input tax deduction can be corrected, only if supplies and services exempt from the tax without credit are rendered or subsidies received.
- If the institution has been struck off the Register as of 1.1.2010, the entitlement to retroactive registration and the related input tax deduction are to be investigated.
- If the institution has, besides its business activity, a clearly separable non-business area, the allocation and therefore the deductibility of the input taxes are to be investigated.
In any event the FTA will have to review the pending procedures and take decisions that are long overdue. In view of the Federal Court’s clear wording, pro-active measures may be worthwhile. Submit your proposed solution to the FTA.