The pharmaceutical, biotechnology and MedTech industries are under intense pressure to deliver and introduce new drugs and technology despite tightened budgets and the closure and relocation of many R&D centers. R&D tax incentives offer a solution that may assist with the funding of R&D programs to help companies remain competitive, improve access to medicine and deliver a fast turnaround of disease diagnostics for patients.
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 incentive schemes, focusing on additional R&D tax deductions, are designed to recognize and reward companies incurring expenditure on 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. In order to qualify, R&D activity needs to meet the respective criteria (i.e. novelty, creativity, uncertainty, systematic approach and transferability and/or reproducibility) of the OECD’s Frascati Manual.
What types of activities can qualify?
The definition of R&D for Swiss tax purposes is much broader than the indicative list below. We would expect that – among others – the following activities in the pharmaceutical, biotechnology and MedTech industries could qualify for R&D tax deduction:
- Design and development of autonomous diagnostic devices and integrated IT and biological solutions for enhanced diagnosis, disease targeting and product delivery.
- Design and development of new surgical, restorative and regenerative solutions.
- Clinical trials of phases I, II and III. Phase IV activities may qualify as R&D if there is further scientific or technological advance.
- Design and development of new process platforms and test methods.
- Identification and development of new chemical entities, pre-clinical research and development.
- Design and development of new production processes for existing medical device products resulting in higher product yield.
- Development of new consumer drug formulations and coating techniques.
What is the benefit?
As an example, a profit-making 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 7.2% cost saving for R&D.