Tax Deductibility of Vacation Provisions

The impact of the Federal Court's decision on the tax deductibility of "vacation provisions" for Swiss companies.

Do you run a company in Switzerland and employ staff? The Swiss Federal Court has recently handed down a decision that could have an impact on the deductibility of unused vacation provisions recorded in your financial statements.

On July 3, 2024, the Swiss Federal Supreme Court ruled on the tax deductibility of provisions for unused vacation time (9C_192/2024). This case, concerning a Geneva-based company specializing in auditing and tax consultancy, raised important questions about the way in which such provisions are treated for tax purposes throughout Switzerland.

What was the context?

The company in question had booked a provision of CHF 250,000 for its employees' unused vacation time. The Geneva tax authorities rejected this provision, considering that it constituted a future expense not justified by commercial usage. In other words, it considered that the provision served to artificially reduce the company's taxable profit.

The Swiss Federal Supreme Court has confirmed this interpretation. According to article 63, paragraph 1, of the Federal Law on Direct Federal Taxation (FDTL), provisions are only deductible if they relate to liabilities for the year whose amount is indeterminate, or to risks of imminent losses during the year. However, in the case of untaken vacation days, as long as the employment contract has not been terminated, they do not constitute an immediate financial obligation. They can be carried forward and taken at a later date, which means that the provision for untaken vacation is in reality a reserve for future obligations, not deductible for tax purposes.

According to case law, provisions set aside for future expenses, such as those relating to charges that the company will have to bear in the future, are classified as reserves. These reserves are included in taxable income and cannot be deducted until the expenses are actually incurred, in accordance with the principle of periodicity (9C_469/2023). Tax law prohibits the creation of hidden reserves by means of provisions, although this is tolerated under the law of obligations and according to commercial practice. To be admissible, provisions must be clearly limited and linked to the current financial year.

Why is this decision important to you?

This decision could influence the way Swiss cantons deal with the deductibility of unused vacation provisions. Some cantonal tax authorities may now adopt a stricter approach, reassessing and potentially disallowing the deduction of such provisions in future.

What do you need to do?

It's essential to review the way you account for unused vacation provisions. To avoid tax reassessments, make sure that these provisions comply with legal requirements and are justified by immediate obligations and not by forecasts of future expenses.

Want to avoid the risks? Our team is here to help. Contact us for personalized advice and find out how we can help you protect your interests in this changing tax environment.