Net Tax Rate Method

When calculating and declaring VAT in Switzerland, not all businesses have to use the standard effective billing method. For small and medium-sized enterprises (SMEs), the net tax rate method offers a simplified alternative. Instead of separately calculating input and output tax, VAT is settled using a flat percentage of total turnover.

In this article, we explain how the net tax rate method works, who can use it, and what the rules are in 2026. We also look at the advantages and disadvantages of this approach, with practical considerations to help you decide whether it’s the right fit for your business.

What is the net tax rate method for calculating VAT?

The net tax rate method allows eligible Swiss SMEs to calculate VAT using a simplified flat rate applied to total turnover, eliminating the need to track input and output tax separately. This method aims to reduce administrative complexity while implicitly accounting for expected input tax deductions through industry-specific rates set by the Federal Tax Administration (FTA).

The easiest way to understand the net tax rate method for VAT is to compare it to the conventional effective billing method.

Effective billing method

All Swiss companies with an annual turnover exceeding CHF 100,000 must register for and pay VAT in Switzerland. The conventional way to calculate and account for VAT is known as the effective billing method. In short, it involves declaring the VAT collected on sales turnover (usually at the standard rate of 8.1% as of 2026) and deducting the VAT paid on production costs (input tax).

The difference is the VAT amount the company owes to the Swiss tax authorities. With this method, VAT is typically accounted for and paid quarterly. However, as of 1 January 2025, businesses with taxable turnover below CHF 5.005 million can request approval from the FTA for annual VAT reporting (Art. 35 para. 1 lit. b VAT Act). This option is available for both the net tax rate method and the effective billing method.

Net tax rate method

Not all companies are required to use the effective billing method for calculating VAT thanks to an alternative approach known as the “net tax rate method”, sometimes called the “balance tax rate method”. The net tax rate method was introduced to ease the administrative burden for small and medium-sized enterprises (SMEs) and simplify the VAT accounting process.

The method involves calculating the VAT liability at a flat rate of turnover while ignoring input tax deductions. The flat rate used is lower than the statutory VAT rate of 8.1%, and therefore implicitly factors in the input tax deduction without companies needing to calculate them separately. In other words, it makes an implicit estimate of the input tax which is reflected in the lower net tax rate percentage.

Each industry has its own specific net tax rate based on the expected average input costs of the industry in question. For example, service-related industries, such as IT services, tend to have a higher net tax rate of 6.2%, because one would expect their input tax to be quite low compared to their output.

In contrast, industries involved in selling goods with a high production cost and relatively low mark-up, such as a new car trader, have a much lower net tax rate of 0.6%, as their input tax value is expected to be quite close to the value of their output tax.With the net tax rate method, the VAT owed is calculated and settled every 6 months as opposed to quarterly. As of 2025, businesses with turnover under CHF 5.005 million can also request annual VAT reporting (Art. 35 para. 1 lit. b VAT Act).

Who can use the net tax rate method?

The net tax rate method was specifically created to simplify VAT accounting for SMEs. Therefore, larger businesses with a higher turnover may not be eligible to settle their accounts using this approach. In general, a company may opt to use the net tax rate method if they meet the following two criteria (as of 2026):

• Their annual taxable turnover (including VAT) does not exceed CHF 5.024 million.
• The tax owed does not exceed CHF 108,000 per year. This is calculated by multiplying the total taxable turnover by the net tax rate which applies to their industry.

The consequence of the second point is that, for industries with a higher net tax rate, the taxable annual turnover needs to be well below CHF 5.024 million. For example, an architectural office with a net tax rate of 6.2 % may only be allowed to use the balance tax rate method if their annual taxable turnover does not exceed CHF 1.74 million. (CHF 1.74 million x 6.2% = CHF 107,880).

How does the net tax rate method work in practice?

The net tax rate method simplifies the administrative burden for companies in two ways:

• Firstly, the input tax statement is no longer required.
• Secondly, the VAT statement only needs to be prepared once every 6 months, compared to quarterly with the effective method.

The second point is less relevant given the 2025 updates to the VAT Act which enable any business with a taxable turnover below CHF 5.005 million to request approval from the FTA for annual VAT reporting, regardless of whether they use the net tax rate method or the effective billing method.

However, there are some practical aspects to keep in mind for companies applying the net tax rate method:

Invoicing using the statutory VAT rate

Firstly, even when using the balance tax rate method for calculating their final VAT liability, the correct statutory VAT rate must still be shown on invoices for billing customers. This is usually the standard rate of 8.1 % but could also be the reduced rate of 2.6% or 3.8% depending on the products or services provided.

It is important that the correct statutory VAT rate is shown on the invoice. If, for example, the company quotes a tax rate that is too high (e.g. 8.1 % instead of the correct reduced rate of 2.6 %), they will have to cover the difference between the VAT calculated using the stated tax rate and the correct VAT in accordance with the appropriate statutory rate.

This is in addition to the VAT calculated using the appropriate net tax rate. Therefore, the cost of incorrect invoicing of statutory VAT can be high for those using the net tax rate method.

Net tax rate on turnover including statutory VAT

It is also important to note that the net tax is calculated as a percentage of the final turnover including the quoted statutory VAT amount. The company bills its customers an amount which includes statutory VAT, and it is the total of this turnover that is used when calculating the net tax applicable.

Payment to the Federal Tax Administration

The final VAT payment made to the Federal Tax Administration (FTA) is the amount calculated by multiplying the total taxable turnover (including statutory VAT) by the approved flat net tax rate (industry specific, set by the FTA). This value could be higher or lower than the actual effective tax amount if input and output tax had been separately calculated.

What are the applicable net tax rates?

The approved net tax rates are industry-specific and range from 0.1% to 6.8%. It is important that businesses applying the net tax rate method use only the rates approved for their respective industries. Since the revision of the VAT Act on 1 January 2025, businesses must apply separate net tax rates for each business activity that accounts for more than 10% of the total taxable turnover (Art. 86 MWSTV), with no limit on the number of rates (previously limited to two rates maximum). This means businesses with diversified operations must now track and apply separate rates for each significant activity, adding considerable administrative complexity. (See FAQ for detailed rules on the 10% threshold calculation and authorization requirements.) A full list of approved industry rates can be found here.

How does a company opt to use the net tax rate method?

Businesses who would like to use the net tax rate method must inform the FTA in writing and fill out the relevant form when registering for the first time. If you want to use the net tax rate method from the start of your tax liability, you must notify the FTA in writing within 60 days of receiving your VAT number.

If you fail to do this, you must first use the effective method for at least three full years before you can request to change to the net tax rate method at the beginning of a new tax period. (Art. 37 para. 4 VAT Act).

Since the 2025 VAT revision, businesses with multiple activities (each exceeding 10% of total turnover) can request additional net tax rates directly in their VAT return. The FTA will review and authorize these requests afterward, simplifying the process for businesses with diversified operations.

To be granted permission to use the net tax rate method, the total taxable turnover must not exceed CHF 5.024 million and the calculated tax owed using the applicable net tax rate must not exceed CHF 108,000 in the first year of tax liability or in the year before changing from the effective method to the net tax rate method.

How did the 2025 VAT revision change the net tax rate method?

The 2025 partial revision of the Swiss VAT Act significantly altered the net tax rate method, introducing new complexities that undermine its original simplification purpose.

Three major changes took effect 1 January 2025:

1. Multiple rate requirement: 

Each business activity exceeding 10% of total turnover must now be reported and taxed using its own industry-specific net tax rate, rather than the previous limit of two rates maximum (Art. 86 MWSTV). This requires detailed revenue analysis and potentially obtaining new rate validations from the FTA.

See FAQ for a more detailed explanation of how this works in practice. 

2. Residual value adjustment mechanism: 

When switching from the effective method to the net tax rate method, businesses must now repay input tax previously deducted on goods and services based on their residual value at the time of change (Art. 79 MWSTV). This prevents “double-dipping” where businesses would benefit from both the actual input tax deduction under the effective method and the implicit input tax allowance built into the lower net tax rate. 

The reverse also applies: when switching from the net tax rate method to the effective method, businesses can deduct input VAT based on residual value for assets they paid VAT on but couldn’t previously deduct (Art. 81 MWSTV).

Example: Equipment purchased for CHF 100,000 + CHF 8,100 VAT with a 10-year life. Switching to net tax rate after 2 years requires repaying CHF 6,480 (80% of the original input VAT) because the net tax rate already implicitly accounts for input costs. The reverse adjustment applies when switching back to the effective method.

3. Foreign taxpayer exclusion: 

As of 1 January 2025, foreign taxpayers can no longer use the net tax rate method and must switch to effective reporting.

Practical implications

These changes have led many tax professionals to question whether the net tax rate method still offers genuine simplification. For businesses with multiple activities or significant capital investments, the effective reporting method may now offer greater clarity and potentially lower overall compliance costs despite the additional administrative requirements.

Advantages and disadvantages of the net tax rate method

The net tax rate method was designed to simplify VAT for SMEs, but it’s not universally beneficial. Companies with high input costs may pay more VAT than under the effective method, and the 2025 regulatory changes (detailed above) have significantly increased complexity.

Advantages of the net tax rate method

• Reduced settlement frequency: Businesses who use the net tax rate method only need to settle their VAT liability twice a year as opposed to every quarter. However, as of 2025, all businesses with a taxable turnover below CHF 5.005 million may request for annual VAT reporting. 
• Simplified calculation: The net tax rate method simplifies the VAT calculation process, making it more straightforward for businesses with limited resources or complex transactions. Input tax need not to be calculated because it does not get deducted from the tax liability. 
• Predictable tax liability: Since the net tax rate is a fixed percentage of turnover, businesses can predict their VAT liability more easily, aiding in financial planning.
• Administrative ease: The streamlined nature of the net tax rate method reduces the administrative burden associated with VAT calculations and reporting. This can also save costs.

Disadvantages of the net tax rate method

• Lack of precision: The net tax rate method is based on industry averages and may not accurately reflect the actual VAT liability for all businesses. This can, in some cases, be advantageous to businesses who would have otherwise had a higher VAT liability when calculated with the more accurate effective billing method. However, other businesses may overpay VAT if the predetermined percentage exceeds the actual VAT liability based on effective billing.
• Limited applicability: The net tax rate method may not be suitable for all businesses, especially those with diverse and complex transactions. The 2025 regulations now require businesses with multiple activities to apply separate rates for each activity exceeding 10% of total turnover, significantly increasing complexity.
• Additional expertise required: Even though the balance tax rate method is designed to simplify the VAT reporting process, changing methods from the conventional effective billing method to the net tax rate method requires knowledge and expertise of both methods. The 2025 changes require professional assistance for residual value calculations, revenue analysis by activity, and potentially obtaining multiple rate approvals.
• Method switching costs: The 2025 residual value adjustment mechanism means switching methods now carries potential cash flow implications through one-time payments to or credits from the FTA.

When does it make sense to opt for the net tax rate method?

The net tax rate method was designed to simplify VAT reporting for SMEs with limited administrative resources while also offering potential tax savings in certain circumstances. However, the 2025 regulatory changes have fundamentally altered this calculation and businesses must now weigh the original simplification benefits against increased complexity from multiple rate requirements and method-switching costs.

Whether the net tax rate method makes financial sense depends largely on how your company’s input expenses compare to your industry average, but the 2025 changes add new considerations that may outweigh traditional cost-benefit analysis.

Traditional cost-benefit analysis

If your company has significantly lower expenses than your industry average, there is the opportunity to save on taxes when using the net tax rate method (which implicitly makes an estimate of your input tax based on the industry average).

On the other hand, if your expenses are higher than average, then using the net tax rate method can result in overpayment of VAT. This can occur especially in your first years of operation, during which time expenses may be high compared to the turnover you realise, or you may even be making a net loss.

Starting with the effective method before switching

For this reason, if you can handle the administration, it may make sense to first use the effective tax rate method for the first three years and then shift to the net tax rate method once it is clear it would bring financial and administrative advantages. 

However, the 2025 residual value adjustment mechanism largely nullifies the financial benefit of this switching strategy. When you switch methods, you must repay input tax previously deducted on assets based on their remaining useful life. This prevents “double-dipping”, i.e. benefiting from actual input cost deductions during your high-expense startup phase, then switching to a method that already implicitly accounts for input costs.

When expenses match industry averagesFor companies whose expense and income profile are relatively close to the industry average, using the net tax rate method would not make a significant difference in terms of tax liability. In this case, the benefits would be purely in the form of simplified administration with fewer VAT reporting periods in the year.

This itself can be a major draw for small companies who don’t have the time or resources to apply the more complex effective billing method.

How the 2025 changes complicate the decision

The 2025 changes, however, have undermined many of these traditional benefits. Businesses with multiple revenue streams must now track and apply separate net tax rates for each activity exceeding 10% of total turnover. This administrative burden, combined with the inability to deduct actual input tax and the residual value complications when switching methods, means the net tax rate method may now be less attractive than the effective method for many businesses.

Businesses should carefully evaluate whether the net tax rate method still offers genuine simplification given the 2025 changes. Companies with multiple business activities, those considering method switching, or those with significant capital investments should particularly scrutinize whether the administrative “savings” remain real under current regulations.