Expense Regulations: What to Consider

A company’s expense reimbursement regulations play a crucial role in maintaining financial transparency and ensuring fair compensation for their employees. The Swiss tax authorities impose specific guidelines and regulations pertaining to expense reimbursements.

In this blog, we explore all the significant aspects of expense regulations in Switzerland, with a focus on taxation, types of expenses recognized for reimbursement, effective versus flat-rate reimbursement methods, and the important issue of having your company’s expense regulations approved by the tax administration.

Taxation of expense reimbursements

Reimbursements to employees for work-related expenses are typically exempt from income tax. However, these expense reimbursements must meet certain conditions to ensure compliance with Swiss tax laws.

Specifically, the reimbursements should be for genuine work-related expenses which are recognized by the tax authorities as necessary. They should not be over-inflated or fictitious, in which case they become a hidden form of tax-free wages.

They should also adhere to the approved standards of calculation and reporting, for which there are two main methods: effective and flat-rate reimbursements.

The latter can simplify the administration burden but the company’s methodology for determining the flat-rate amounts is subject to additional scrutiny and should be approved by the tax authorities in most cases.

Which types of expenses are recognized for reimbursement?

Swiss tax authorities recognize various types of expenses that are considered necessary for conducting business, which may be reimbursed without incurring additional income tax. These include travel expenses, accommodation costs, meals, and other expenditures directly related to work activities. It’s essential to ensure these expenses are properly documented and meet the criteria set by the tax authorities for reimbursement.

Examples of necessary business expenses

Below are some examples of expenses that are recognized by the tax authorities as necessary for the performance of a professional activity:

• Travel expenses: Transport costs and other incidental expenses such as parking tickets and tolls associated with business-related travel are reimbursed to the employee. Transport costs are only reimbursed for travel outside of the designated place of work (i.e., the daily commute to the office is not considered a reimbursable travel expense). It is important to note that the employer may specify multiple contractual places of work within reason.
• Accommodation costs: Expenses related to overnight stays during business trips are generally recognized for reimbursement. If an employee has to spend a longer period of time working away from home on a business trip, they may also receive reimbursement for appropriate leisure and wellbeing expenses, such as visiting the gym or tickets to a show.
• Meals while traveling: Costs incurred for business-related meals outside the workplace are usually eligible for reimbursement. Meals may either be reimbursed as per the actual costs or at a flat rate. In both cases, there may be maximum allowable amounts set both by the employer and the relevant tax regulations.
• Communication expenses: Reimbursement for expenses related to the private use of an employee’s phone for business calls, own internet usage, and other communication tools is common.
• Training and education costs: Certain costs associated with professional development, training programs, and educational courses may be recognized for reimbursement.
• Work clothing: Reimbursement of expenses for purchasing special work clothing and gear required by the employer is an interesting case. In principle, such expenses should be reimbursed by the employer; however, if these clothes are also worn outside of working hours, the employee may only receive partial reimbursement for the expense.
• Other: We have outlined a few of the main expenses which are typically recognized for reimbursement, but there are numerous other costs, both small and large which may qualify. It is dependent on the company’s own internal expense regulations, approval from the tax authorities, and relevant legislature and case law on the subject.

Examples of unrecognized expenses

While many different expenses incurred while conducting work are recognized for reimbursement, some do not qualify. These include:

• Personal entertainment costs.
• Personal travel expenses, including the cost of regular commute to the contractual place of work.
• Purchase of operating equipment without approval/request from the employer.
• Traffic fines, including those incurred during business-travel.
• Expenses not supported by proper documentation.
• Ordinary meals at the place of work or when working from home: while many employers may provide the added benefit of meal allowances, canteen vouchers, etc., these are typically denoted as benefits in kind and are therefore included in the wage statement as taxable income.

Effective vs flat-rate expense reimbursements

Expense reimbursements can be structured using two primary methods: effective and flat-rate. Each method has its relative advantages and considerations, and the choice depends on the nature of the business and its specific needs.

Many businesses may use a combination of effective and flat-rate reimbursements depending on the specific type of expense. This is because certain types of expenses are generally better suited to one method of reimbursement or the other.

What is the effective method of reimbursement?

The effective method involves reimbursing employees for the actual expenses they have incurred. This requires meticulous documentation, as all expenses must be accurately recorded and supported by receipts. While this method ensures greater accuracy, fairness, and transparency, it can be administratively burdensome for both employees and employers.

What is the flat-rate method of reimbursement?

In contrast to the effective method, the flat-rate method allows for a fixed reimbursement amount for specific expense categories, eliminating the need for detailed documentation. This method offers simplicity and ease of administration but may lead to overpayment or underpayment, as the reimbursement is not based on actual expenses incurred.

Flat-rate expenses are often paid as a fixed monthly allowance to cover the various small expenses related to the costs of representing the company, customer acquisition and maintenance of existing relationships (meeting with customers, phone calls, etc.), and field duty. As such, allowances for flat-rate expenses (sometimes also called “representation expenses”) are usually only paid to operationally active owners, managers, senior employees, and field staff.

Flat-rate expense reimbursements should always approximately correspond to the actual costs incurred. It is therefore important that the amount paid to cover flat-rate expenses is not determined by the employee’s hierarchical position in the company but should be based on the actual circumstances and likely expenses they would incur during duty. Paying an obviously higher amount than the actual likely expenses brings into question hidden salary payouts, which we will discuss in more detail later.

Flat-rate expense reimbursements are typically used to cover smaller expenses up to a value of CHF 50, or CHF 100 in some cases. This saves the administrative complexity of keeping track of all these minor expenses. This also means that employees who receive a monthly flate-rate allowance cannot additionally claim reimbursement for these small expenses on an individual basis.

Examples of expenses reimbursed using the flat-rate method

While the flat-rate method of reimbursement is most often used for smaller representation expenses, it can also be used for other ongoing expenses, such as car expenses if the employee frequently uses their private vehicle for business purposes.

The following are examples of expenses that can be reimbursed using the flat-rate method:

• Meals with business partners and customers in a restaurant or at home including tips,
• Small gifts for customers or business partners,
• Snacks while travelling for work (excluding meal allowances for lunch and dinner),
• Business phone calls using a private phone,
• Small expenses for conducting meetings,
• Public transport costs when travelling,
• Car expenses when frequently using a private car for business purposes (usually for frequent smaller trips in the local area, where longer trips would be billed according to the effective method),
• Parking fees.

Differences between effective and flat-rate expense reimbursement

Here are some of the key differences between effective and flat-rate expenses:

• Reimbursement: Effective expenses are reimbursed as per the actual amount of the expense that can be proven with a receipt, whereas flat-rate reimbursement is a predetermined amount that aims to cover numerous costs incurred over the period of reimbursement.
• Expense regulations: When formulating the company’s expense regulations for effective expense reimbursements, the company must include details of which expenses are eligible for effective reimbursement and the acceptable amounts/limits of reimbursement. The flat-rate expense regulations should include details of the expenses covered and the applicable amount of the reimbursement.
• Proof of expenditure: Effective reimbursements require that every expense is verifiable, the easiest way being an original receipt. Flat rate expenses typically do not require a receipt or other means of proof. There are exceptions to this which we will discuss later.
• Suitability: Effective expense reimbursement is suitable for all employees with a valid employment contract (i.e., not including independent contractors or other paid service providers). On the other hand, flat-rate reimbursement is usually only offered to employees in a managerial or senior role and/or field employees (those frequently travelling for work).
• Administrative requirements: Effective expense reimbursement comes with increased administration and accounting efforts because each expense needs to be provable and recorded individually. Flat-rate reimbursement is less burdensome from an accounting and administrative standpoint in the long run; however, it involves some additional work upfront to determine the appropriate flat-rate values and have them approved by the tax authorities.

Approval of expense regulations with flat-rate reimbursement

The implementation of expense regulations, especially those pertaining to flat-rate reimbursement, requires careful consideration, and often approval from the tax administration.

These regulations need to be explicit, well-documented, and fair. The conditions and criteria for reimbursement must be clearly communicated to employees to avoid misunderstandings and disputes.

What are expense regulations?

Expense regulations are internal policies and guidelines set by a company to govern the reimbursement of expenses incurred by employees. These regulations may cover various aspects, including eligible expenses, documentation requirements, amount covered and the method of reimbursement.

Both flat-rate and effective expense reimbursements must be explicitly regulated by companies so that employees understand the detailed rules regarding compensation and what is required of them to claim reimbursements.

When and why should flat-rate expense regulations be approved by the tax administration?

Companies with at least ten beneficiaries of flat-rate expense reimbursements can have their flat-rate expense regulations approved by the cantonal tax authorities. This is highly recommended to avoid potential complications later.

Flat-rate expense reimbursements are legally required to roughly approximate the actual expenses incurred. By having the expense regulations approved by the authorities, the company can be certain that their reimbursements are in alignment with established guidelines and that they will not be subjected to scrutiny of their expense reimbursements down the line.

Averting the dangers of hidden salary payouts

Expense reimbursements are typically tax-free for the employee. This can tempt employers and employees to engage in the illegal practice of providing hidden salary payouts by artificially inflating reimbursements and lowering the actual salary payout.

When reviewing a company’s expense regulations, the tax authorities are primarily verifying that they are not overinflated which would therefore be viewed as hidden salary payouts or tax evasion. They also verify that all reimbursement limits and guidelines are adhered to.

Companies are allowed to set their own flat-rate expense regulations without approval from the tax authorities, but they set themselves up for scrutiny from the authorities. The tax authorities can even request the actual expense receipts of the employees to determine whether there is a significant difference between the documented expenses and the flat-rate reimbursement from the company.

The risk is greater with larger expenses. This places an additional administrative burden on the company to maintain receipts in case they are audited, as well as opening them up to penalties and consequences if their expense regulations are not deemed acceptable.

To avoid such dangers, it is always best to have the expense regulations approved. If this is not possible (i.e., for smaller companies with less than ten employees receiving flat-rate reimbursements), the regulations should be drafted with the help of experts and should always closely follow all regulatory guidelines to avoid discrepancies.

Reimbursement limits

There are certain guidelines and reimbursement limits for both effective and flat-rate expenses outlined by the Federal Tax Administration (FTA). For example:

• The effective reimbursement limit for lunch is CHF 35 against the receipt, or a flat-rate allowance of CHF 30.
• The limit for car expenses is 70 cents per kilometer.
• Daily flat rate allowance of maximum CHF 20 per day for small expenses.

It is important to reiterate that those receiving flat-rate allowances for small expenses can no longer claim individual expenses under the value of CHF 50 as it is assumed they are covered by the flat-rate allowance. The guidelines also state that flat-rate expense allowances can be approximately 3.5 to 4.5 percent of the employee’s gross annual salary.