The food and drink industry is under increasing pressure from health-conscious consumers seeking a wider range of healthier, natural, environmentally friendlier and minimally processed food. Hence, this industry is one of the largest sectors relying heavily on R&D with an enormous number of new products being introduced to the market every year. Changing consumer tastes and lifestyle choices, as well as changes to the legislation, have led a period of innovation within the sector. Further transparency and traceability from the manufacturing site to the end consumer requires innovative traceability solutions as a differentiator to stand out from competition, given the raising attention from consumers. Additional R&D tax deduction is a key tax incentive for encouraging and boosting value from R&D to keep companies and brands at the forefront of the industry and supporting R&D in Switzerland.
Additional R&D tax deduction
R&D tax relief is available primarily for expenses associated with qualifying personnel directly involved in R&D in Switzerland. In addition, contract R&D in Switzerland is eligible as well. The level of additional R&D tax deduction varies from canton to canton but could provide up to an additional 50% deduction against the company’s taxable income at cantonal and municipal level.
How does it work?
The Swiss R&D tax incentive schemes, focusing on additional R&D tax deductions, are designed to recognize and reward companies investing in R&D projects. Qualifying expenditure attracts an additional R&D tax deduction if the R&D is conducted in Switzerland. The level of the additional R&D tax deduction varies (max. 50%) but could provide an additional tax deduction against the company’s taxable income on qualifying R&D expense calculated as follows:
- qualifying personnel expenses considering an additional lift-up of 35% (to cover other R&D costs), and
- third-party costs (contract R&D with a related or third party) may be eligible based on 80% of invoiced costs.
Scientific research and science-based innovation activities across any sector may qualify for the additional R&D tax deduction. In order to qualify, R&D activity generally needs to meet the respective criteria (i.e. novelty, creativity, uncertainty, systematic approach and transferability and/or reproducibility) of the OECD Frascati Manual.
What types of activities can qualify?
For Swiss income tax purposes, the concrete scope of application of R&D is much broader than the list below. However, among others, the following activities in the food and drink industry may qualify for additional R&D tax deduction:
- Development of new or appreciably improved product or packaging material
- Development of new or appreciably improved production techniques to improve processing speeds/yields or reduce costs, energy, emissions and wastage
- Change of properties of foodstuff for health or environmental reasons, while maintaining the same taste/appearance/smell/texture (e.g. new vegetarian / vegan meet substitute or dairy-free products)
- Modification of a product to enhance its shelf-life
- New technologies and advancements to utilize and recycle waste or excess products within the production process
- Potentially, also the development of new or appreciably improved systems of e-business, e-ordering or e-logistics
What is the benefit?
As an example, a company in Zurich that operates R&D and has CHF 1 million qualifying R&D expenses can benefit from an additional tax deduction for R&D of CHF 500,000. This would result in an annual tax benefit of approx. CHF 72,000 per CHF 1 million of qualifying expense resulting in material cost saving for R&D activities.
KPMG would be happy to evaluate the feasibility and support you in applying for the cantonal R&D tax benefits. Please feel free to get in touch with your contact at KPMG Switzerland.