In today’s fast-paced global economy, innovation is critical to a company’s competitiveness. Research and development (R&D) has always been the cornerstone to progress in manufacturing. Today, it is the main driving force behind concepts like Industry 4.0, Smart Factories and AI predictive analytics.

Switzerland is a prime example, offering several tax incentives designed specifically to support R&D and patent exploitation. This article explores this subject in general with a certain focus on the benefits of Switzerland’s tax incentives landscape for manufacturing businesses, focusing on the tools available to maximise their benefits and address regulatory challenges.

What drives innovation?

There is a direct correlation between investment in R&D and sustainable growth. R&D exists to gain knowledge, generating new ideas and concepts in line with market needs and consumer demands. When a company takes the time to invest in R&D, they can identify and address specific issues and inefficiencies, leading to innovative solutions that could potentially increase their market share and profitability.
Knowledge sharing is a key aspect of R&D. Collaborations between academics, industry experts and governments especially often culminate in technological advancements that address societal challenges, such as environmental sustainability.
In a rapidly changing global manufacturing landscape, R&D enables companies to better adapt to new trends, consumer behaviours, geopolitical and environmental risks and government standards, assisting with long-term business viability.

Tax incentives for R&D

Despite investments in R&D and patent protection providing manufacturers with a market advantage, the costs associated can be substantial. Governments worldwide recognise the role that new technologies, procedures and products play in economic growth, prosperity and sustainable development, with many offering tax incentives to encourage companies to invest in R&D and Intellectual Property (IP) commercialisation.
These tax incentives often take the form of R&D tax credits or deductions, allowing companies to offset a portion of their R&D expenditures against their tax liability. In some cases, governments may offer additional benefits, such as accelerated depreciation of R&D-related capital expenditures, R&D tax credits or reduced corporate tax rates for income derived from patents and other forms of IP. According to the Organisation for Economic Cooperation and Development (OECD), in 2021, 33 of the 38 OECD member countries gave preferential tax treatment to business R&D expenditures. In several OECD countries, generous R&D tax relief provisions compensated for relatively low levels of support through direct funding, such as R&D grants and procurement of R&D services.

The typical tax tools

Policies across OECD countries vary widely. Some countries have sizable tax subsidies for R&D spending, while others have designed their tax systems to support business investment in general. Typically, OECD countries can offer three different tax tools to incentivise manufacturers to invest in R&D and develop patented innovations. These include:

• R&D tax credits: based on the amount of R&D costs and used to reduce a company’s tax liability.

• RDAs and full expensing: enables businesses to qualify for a 100% tax deduction on their R&D expenses in the year they are incurred, rather than over multiple years. The total qualifying costs
are deducted from the business’s taxable profits, reducing the company’s corporation tax.

• Patent boxes: a profit-based tax incentive for innovations that apply a reduced corporate tax rate to profits from patents and similar IP.

It is important to note that the availability and structure of these incentives vary from country to country. Manufacturers are advised to explore the specific opportunities available in their jurisdictions.

R&D Super Deduction

Whilst in many countries this tax relief was put in place to help aid businesses during the pandemic, it was just for a limited time and ended on 31 March 2023 (e.g. in the UK). However, Switzerland is different.

Switzerland provides an R&D super deduction that allows companies to deduct up to 150% of qualifying R&D expenses from taxable income. This enhanced deduction, applied at the cantonal level, reduces the effective cost of R&D, offering a substantial tax benefit that varies according to each canton’s rate and eligibility requirements. Qualifying R&D costs include directly allocable wages with a mark-up of 35% and 80% of external R&D expenses within Switzerland.

This substantial deduction can free up resources for reinvestment into R&D projects, yet requires careful documentation of eligible expenses. Each canton’s eligibility requirements differ, so companies must stay informed of their specific regulations and ensure compliance to optimise their deductible amount.