How taxes are deducted in a GmbH or AG

One peculiarity of the Swiss system often catches out those arriving from abroad: in a GmbH and an AG, profit tax is itself a deductible expense. It sounds like a technical detail, but it changes the calculation of the actual tax you pay. Let’s see how.

The principle: tax is a cost

In Switzerland, the profit tax of legal entities is treated as a business expense like any other. This means that a given year’s tax reduces the taxable profit on which that very tax is calculated. It is a circular mechanism: the tax owed depends on the profit, and the taxable profit depends on the tax deducted.

Concretely, the tax provisions recorded in the income statement reduce the taxable base of the financial year to which they relate. It is not a trick: it is how the calculation ordinarily works.

The effect on the effective rate

The practical consequence is that the effective rate you pay is lower than the nominal rate. If a canton communicates an overall rate (federal, cantonal, communal) applied to profit, the fact that the tax is deductible lowers the real burden compared with a system in which the tax is not deductible.

For this reason, comparisons between cantons must be read carefully: some administrations communicate the rate calculated on profit before the deduction of taxes, others after. Comparing a “gross” figure with a “net” one leads to wrong conclusions. The number that matters is always the effective tax on profit net of its own deduction.

How it is recorded in the accounts

The accounting treatment follows the accrual principle:

• During the financial year, the tax owed is estimated and a tax provision is set up in the income statement.
• The provision reduces the profit of the year to which it relates.
• When the final assessment is notified, the provision is compared with the actual tax: any differences are corrected in the year in which they emerge.

A provision that is too prudent creates a small hidden reserve; one that is too small leaves the following year to bear the balancing charge. A correct estimate requires knowing the rate of your municipality of domicile and iterating the calculation, precisely because of the tax-profit circularity.

What is deductible and what is not

Not everything you call “tax” is deductible in the same way:

• Profit tax (federal, cantonal, communal): deductible.
• Cantonal/communal capital tax: deductible as an expense.
• VAT: it is not a cost for the taxable company, it is a pass-through; it does not enter this reasoning.
• Withholding tax levied on distributed dividends: it is not a cost for the company, it is an advance borne by the beneficiary.
• Fines and penalties of a criminal or administrative nature: not deductible.

The classic mistake: confusing the levels

Many entrepreneurs reason as though the company and the shareholder were the same pocket. They are not. The tax deduction we are discussing concerns the company and its profit tax. It is a different level from the taxation of the shareholder when they receive a dividend, which follows its own rules and is subject to partial taxation.

Adding the two levels together without distinguishing them leads to estimates of the overall tax burden that are either too high (if you count twice) or too low (if you forget the shareholder). Correct planning keeps the two levels separate and then recombines them.

Why all this matters

The deductibility of tax has concrete implications:

• It makes the effective rate the only sensible parameter for comparing locations and structures.
• It requires an accurate provision, otherwise the results of two consecutive financial years become distorted.
• It interacts with the other planning levers — depreciation, provisions, salary and dividend policy — which must be optimised together, not one at a time.

At SIH ONE we calculate your company’s effective tax taking deductibility and the municipality of domicile into account, we size the provisions so that your accounts remain comparable over time, and we coordinate the company’s tax plan with the shareholder’s personal one.

Want to know your effective tax burden, not the nominal one? Let’s do the maths together.