When we look at the framework conditions of an innovation ecosystem, and in particular for start-ups, taxation is certainly only one piece of the puzzle. But it is an important piece for start-ups themselves and their employees, and also for entrepreneurs and investors. Indeed, the tax authorities impose a tax on a young company by tax on the company's profits and capital, as well as on its investors and executive shareholders in respect of income and wealth tax.
For start-ups, the Swiss and Vaud tax system as a whole offers an attractive international tax framework. Indeed, the overall level of income tax levied is lower than the average for OECD countries.
However, it should be noted that income tax is, in principle, of relative importance at the beginning of a start-up's activity. Indeed, this type of company logically starts by recording losses in the first few years. It therefore does not pay income tax and benefits from loss carryforwards. If the start-up generates investment or research and development expenditure, as well as jobs, it can also benefit from a five to 10 year tax exemption under certain conditions.
«For start-ups, the Swiss and Vaud tax system as a whole offers an attractive international tax framework»
The Federal Taxation Reform (RFFA) should make it possible to reduce the tax burden of beneficiary start-ups. The RFFA, accepted by popular vote on May 19, 2019, contains two measures that help to promote innovation for start-ups, but also for SMEs and multinationals. On the one hand, the patent box, by which a part of the profits from inventions (patent and licence) may benefit from reduced taxation. On the other hand, the deduction for research and development (R&D), which represents an additional deduction of up to 50% for this type of expenditure. Finally, these special regulations will be subject to a limitation which implies that a company will always have to pay tax on at least 30% of the taxable profit (for Vaud 50%).
In this context, the canton of Vaud has determined the extent and distribution of these deductions. These compensatory measures are proposed as part of the measures annexed to the 2020 budget. We can appreciate the importance of their adoption to foster innovation, research and development in our canton.
In short, Swiss and Vaud profit tax is not an obstacle for young companies.
For the taxation of entrepreneurs, investors and employees, the situation is more nuanced.
All shareholders of a start-up potentially benefit from the absence of tax on capital gains in Switzerland. Capital gains realized on private assets are not taxed. This means that in the event of the start-up's resale (exit), the capital gain, i.e. the difference between the purchase price and the sale price, is not taxed.
At the federal level, for investors, Switzerland has no direct tax incentives at the time of investment, i.e. regardless of the success of the company, nor tax incentives at the time of sale.
However, our country remains attractive in international comparison, even in the absence of tax privileges for angel investors, particularly because of the capital gains exemption.
«All shareholders of a start-up potentially benefit from the absence of tax on capital gains in Switzerland»
Switzerland is one of the few countries in the world to have a wealth tax, which varies from one canton to another. The Vaud rate is among the highest in the country, as shown in the table below.
In the canton of Vaud, the wealth tax rate is high in comparison to the intercantonal tax rate. This makes it an important and potentially problematic factor for the entrepreneur and investors who hold the capital of a company, namely shares, whose value is revalued due in part to the arrival of an external investor.
In this context, the valuation of start-ups for wealth tax is a sensitive issue in the Vaud ecosystem. Like any unlisted company, the value of a start-up's shares is estimated on the basis of instructions from the Swiss Tax Conference (CSI). According to the latter, when a company's shares are sold or a capital increase is carried out, their tax value may correspond to the value of the start-up in the transaction.
These issues are well known and both the legislative and the federal executive are concerned about them. In 2017, the "Start-up" working group, composed of representatives of the Federal Tax Administration and several cantons, recommended that the ITUC amend its circular on the valuation of unlisted securities. The objective: to ensure that, in special cases where justified, an exception can be made to the principle that the assets of unlisted companies are determined on the basis of the price paid for the share in the context of a financing transaction. In 2018, Parliament called on the Federal Council to "develop an attractive and internationally competitive formula for the tax treatment of start-ups and employee-owned investments".
This practice is problematic for several reasons. The shares of a start-up are not always easily saleable, especially at the price of the financing round. Indeed, this value often represents a potential, an investor's bet. This price reflects the future earnings of start-ups expected by investors, and does not take into account the company's often initially loss-making accounting result; it may therefore not correspond to the economic reality at the time of the transaction. The investor and the entrepreneur could then be forced to use part of their income to pay wealth tax and cause major liquidity problems.
It should also be noted that in order to limit their expenses and encourage employee involvement in the development of the business, start-ups frequently grant contributions (shares or options) in addition to the salary. The implementation of a participation plan must then be carefully studied, if necessary with a specialist, in order to confirm the tax treatment (income and assets) for employees, in particular in the event of a subsequent sale of their shares.
Overall, Switzerland offers a competitive fiscal framework for innovation. In recent years, several adaptations have been implemented to improve the general conditions for start-ups. However, as the political debate shows, there is potential for improvement in tax policy.
Start-ups are distinguished from other companies by relatively high financial needs on the one hand and low or no profit on the other. This is why the taxation of equity and wealth (capital and wealth tax) is particularly important for investors and entrepreneurs. The process of assessing the tax value of a start-up is therefore essential for its various shareholders (entrepreneurs, employees or investors).
Finally, it should be noted that in many OECD countries, business angels can benefit from tax incentives. Switzerland does not take any action in favour of angel investors, with the exception of the canton of Jura. Such incentives could help to boost investment in start-ups.
«Overall, Switzerland offers a competitive fiscal framework for innovation»