Due to a practice specification of the VAT authority, which will report to the other federal tax authorities, unforeseen tax implications result. The can add up to substantial amounts.
If more than one company car have been bought by the firm, e.g. a fourwheel drive and a convertible, that are mostly used by the main shareholder for company and private purposes, it becomes critically important to be able to proof the business usage of these cars. Otherwise unpleasant tax consequences can result.
If business usage of (one or both cars) cannot be sufficiently proven, the tax auditor will consider the respective car as a rental car. From the real operating costs of the car, the calculatory depreciation and an overhead and earnings rate he will calculate a (fictional) rental income. This income then is subject to VAT at the normal rate of 8%. This usually goes five years back. Therefore also default interest is calculated over the respective period. As the VAT on this rental income can only be determined if a rent has been paid. Usually – because the rent has been calculated fictionally by the tax inspector, the rent has neither been paid, been set off nor been declared on the shareholders salary statement, at the same time a benefit-in-kind has been distributed to the shareholder. Therefore the VAT authority report to the other tax authorities.
Withholding tax effects
As shown the rental income represents a benefit-in-kind granted to the shareholder. Therefore the withholding tax auf 35 % is due on this amount (if it is passed on to the shareholder – otherwise it is calculated within the hundred which adds up to 54 %). Due to its retroactive effect default interest of 5 % has to be paid from maturity onwards. Furthermore the right to a refund in most cases will be forfeited due to article 23 of the Swiss withholding code that says: “Income or assets burdened with withholding taxes, that has not been declared … forfeits all rights of refund.
Income tax effects
Within the company a benefit-in-kind towards the shareholder exists. Therefore the respective cost is not related to operations and is added up to the company’s profit and income tax is imposed on this amount.
At the shareholder level the rental income is an income from assets. Also here this amount is added to the taxable income and tax is imposed here as well.
To how much can these combined taxes add up?
If we assume that the purchase price of cars in question is between CHF 60‘000 and 80‘000, the fictional rental income quickly can amount to CHF 15’000 per annum.
VAT imposed on this amount would be CHF 1‘200 per year plus default interest of 5 %. Altogether for five years this would add up to CHF 7’000.
The withholding tax of 35 % per year (if passed on to the shareholder) would be CHF 5’250 (plus 5 % default interest). If not passed on to the shareholder the 54 % would add up to CHF 7’600 (plus default interest). For five years withholding taxes in total of between CHF 30’000 and 43’000 might result (and be non refundable!).
Direct taxes on the income (assumption: company level tax rate = 20%; shareholder level tax rate: 35 %) of roughly 3’000 on company level and 5’000 on personal level would again add up to approximately another CHF 40’000.
The total tax burden of combined taxes and default interest for five years therefore add up to around CHF 75’000!
Check, if the described circumstances (two cars mostly used by the shareholder) is applicable in your company. Then check if you can prove that the operational use of both cars can be conclusively proven (by board book, excel sheet etc.). If not, we recommend to convert the car in question to your private assets as fast as possilble.
If the respective cars are german made and have a board computer the might have an application that allows to indicate before every journey if the journey is for done for business or private purpose. In Switzerland this application is not known, but can be activated in most cases and would easily deliver the required proof.
The indicated tax implications are substantial. It absolutely makes sense to transfer one car into your private assets. From the tax savings a nice new car can be bought.