Legal and Practical Considerations for Including VAT in Invoices to Swiss Companies from US Businesses

A question often arises in the business world regarding the mandatory inclusion of VAT when invoices are issued from a US-based company to a Swiss company. The answer to this query is not straightforward and depends on several legal and practical factors. This article aims to clarify these factors and provide guidance for US-based businesses selling goods and services to Swiss entities.

Understanding VAT and Its Applicability

Value Added Tax (VAT) is a consumption tax that is applied to goods and services at each stage of their production and supply. It is a tax that is ultimately borne by the final consumer. In the European Union (EU), VAT is mandatory for businesses that generate a certain level of turnover and are registered with the tax authorities.

Is the US Company Required to Collect VAT?

A US-based business selling goods or services to a Swiss company does not have to collect VAT on the sales. This is because the goods or services are not originating in an EU country. However, in certain scenarios, the US company may need to register for VAT and collect it if the goods or services originate in the EU or if the US company has a 'Permanent Establishment' (PE) in the European Economic Area (EEA)/EU.

Conditions for Not Collecting VAT

For a US-based business not to be required to collect VAT, the following must be true:

The goods or services are not originating in the EU. The US business is not registered for VAT in the EU. The Swiss recipient company is already VAT registered in Switzerland.

In such cases, the Swiss company can simply include its VAT number in the invoice, and it will remain responsible for paying the VAT to its local tax authorities.

Alternative Scenarios

Should the goods or services originate in an EU country, or the US business has a Permanent Establishment in the EEA/EU, the situation is different. In these cases, the US-based business may need to register for VAT and collect it from the Swiss company as part of the mandate. However, the Swiss company would typically still be responsible for paying the VAT to the respective EU tax authorities.

Importing High-Value Goods

When importing goods into the EU, the importer is liable to pay Customs Duties and Value Added Tax (VAT) upon delivery. It is important to note that in some cases, exceptions or special arrangements can be made, but in general, the recipient of the goods is always responsible for the payment of taxes upon importation.

Legality and Compliance

It is crucial that US businesses understand the legal implications of not collecting VAT. If a US company voluntarily collects VAT without the necessary registration and remittance procedures, it could lead to legal issues and potential penalties. The legal principle is that a company can only collect VAT if it has the legal right to remit it to the appropriate tax authorities. Failing to do so can be considered illegal and is a significant regulatory risk for the business.

Service vs. Goods

The distinction between providing services and selling goods is also important. If the business is providing services, it must assess whether it has a Permanent Establishment in the EEA/EU. A Permanent Establishment (PE) can be established in an EU country through a substantial and stable base of business activities. For goods, the storage of inventory in the EEA/EU can be indicative of a PE.

Without a Permanent Establishment, US businesses can generally avoid collecting VAT, but it is crucial to comply with the local tax laws and regulations of the EU.

Conclusion

When invoicing a Swiss company from a US-based business, the decision to include VAT depends on the origin of the goods or services and the presence of a Permanent Establishment in the EU. It is essential for US companies to understand the legal and practical considerations and ensure compliance with all relevant regulations to avoid any legal repercussions.