Lawyers and VAT: Debunking a common misconception

In fact, the practice of law constitutes a genuine entrepreneurial activity within the meaning of the Federal Act on Value Added Tax (VAT Act). The lawyer exercises an independent professional activity, oriented towards the sustained generation of revenue from supplies, and appears under their own name vis-à-vis the outside world (Art. 10(1) and (1bis) VAT Act). The confusion arises from the fact that a significant portion of the income received by lawyers does not constitute consideration within the meaning of Art. 18 VAT Act and therefore does not count towards the CHF 100,000 exemption threshold (Art. 10(2)(a) VAT Act). However, this in no way means that an independent lawyer or law firm is not an enterprise within the meaning of the VAT Act, nor that all of its revenue escapes taxation.

This article seeks to clarify this issue by examining in turn the concept of entrepreneurial activity as it applies to lawyers, the financial flows that do not constitute consideration, the lawyer’s services that remain taxable, and finally the practical consequences regarding VAT liability.

II. The lawyer as an enterprise under the VAT Act

A. The concept of entrepreneurial cctivity

Under Art. 10(1bis) VAT Act, any person who independently carries on a professional or commercial activity oriented towards the sustained generation of revenue from supplies and who appears under their own name vis-à-vis the outside world operates an enterprise. This definition is independent of the volume of non-consideration received (Art. 10(1bis) VAT Act).

The lawyer satisfies each of these conditions. Their activity is carried on independently: they bear the entrepreneurial risk, freely choose their mandates, and organise themselves autonomously. According to the Federal Supreme Court, the classification as self-employed for social insurance and income tax purposes constitutes a decisive indicator for VAT purposes. The activity is oriented towards the sustained generation of revenue, sustainability being recognised where the activity rests on a planned approach intended to endure. Finally, the lawyer appears under their own name vis-à-vis clients and third parties, whether as a sole practitioner or within a firm.

It should be emphasised that no intention to make a profit is required to establish the entrepreneurial character of the activity. The practice of law, even if not always profitable, remains a fully-fledged entrepreneurial activity within the meaning of Art. 10(1bis) VAT Act.

B. The distinction between operating an enterprise and being subject to VAT

It is essential to distinguish between operating an enterprise – which every independent lawyer does – and actually being subject to VAT. Indeed, even if the lawyer operates an enterprise, they may be exempt from VAT liability under Art. 10(2)(a) VAT Act if their annual turnover from supplies that are not excluded from the scope of the tax is below CHF 100,000.

This exemption mechanism is explained by the principle of economy of collection and enforcement (Art. 1(3)(b) VAT Act): the costs associated with registering all entrepreneurs, regardless of the level of their turnover, would be disproportionate relative to the expected tax yield. A lawyer whose taxable turnover remains below the threshold is therefore not subject to VAT – not because they are not an entrepreneur, but because the legislature has exempted them for pragmatic reasons.

III. Financial flows that do not constitute consideration

It is precisely the significant share of non-consideration (Nichtentgelte) in the lawyer’s revenue that fuels the confusion. Art. 18(2) VAT Act lists, in a non-exhaustive manner, the financial flows that do not constitute consideration and which consequently do not count towards the CHF 100,000 threshold.

A. Activities carried on in a dependent capacity (Art. 18(2)(j) VAT Act)

When a lawyer serves as a member of a company’s board of directors, a foundation board member, or acts as an assessor judge at a commercial court, the fees received in this capacity constitute non-consideration within the meaning of Art. 18(2)(j) VAT Act. These activities are considered, from a VAT perspective, as dependent activities – that is, non-entrepreneurial.

The Federal Supreme Court has clarified that the question of dependent activity can only arise in respect of natural persons. Where the board fees are invoiced by the firm employing the lawyer (for example, a law firm constituted as a corporation), the remuneration does not qualify as non-consideration on the basis of dependent activity, but constitutes the consideration for a taxable supply of services.

B. Activities relating to the exercise of public authority (Art. 18(2)(l) VAT Act)

When a lawyer is appointed ex officio as a guardian, a tutor, a legal adviser, or when they act as a composition commissioner, a liquidator in the context of debt enforcement proceedings, or as an extraordinary examining magistrate, the fees paid in this context constitute financial flows arising from activities relating to the exercise of public authority (Art. 18(2)(l) VAT Act, in conjunction with Art. 3(g) VAT Act). These amounts are not considered and do not count towards the CHF 100,000 threshold.

This type of activity falls outside the entrepreneurial domain and thus outside the scope of VAT. A lawyer exercising such functions does not supply a service on the market but performs an act of public authority on behalf of the state.

C. Damages and party costs awards (Art. 18(2)(i) VAT Act)

The party costs award (Parteientschädigung) granted by a court to the successful party constitutes genuine damages within the meaning of Art. 18(2)(i) VAT Act. It represents non-turnover for the party that receives it and does not count towards the exemption threshold.

The same applies to amounts received as reimbursement of procedural costs in the context of debt collection or bankruptcy proceedings, which are also classified as damages. The Federal Administrative Court has confirmed that the restitution by a lawyer of an amount to their client on the basis of a court decision does not qualify as a price reduction but as damages.

IV. Lawyer’s services that remain taxable

Despite the significance of non-consideration, the lawyer also provides a large number of taxable services which do count towards the CHF 100,000 threshold.

A. Services specific to the practice of law

The following, in particular, constitute taxable supplies of services at the standard rate, supplied for consideration within Swiss territory (Art. 18(1) VAT Act): legal advice in all areas of law, asset management, the preparation of expert reports, services related to the role of executor and the conduct of estate partitions, the representation of parties in all judicial and extrajudicial proceedings (including court-appointed defence and legal aid), the authentication of all types of legal instruments, and the management of an association’s secretariat.

The tax base is constituted by the consideration actually received (Art. 24(1) VAT Act). This consideration includes the reimbursement of all costs, even if billed separately, as well as public law charges owed by the taxable person. By contrast, court fees and other official charges incurred by the lawyer on behalf of and for the account of their client constitute pass-through items (durchlaufende Posten) within the meaning of Art. 24(6)(b) VAT Act and do not form part of the tax base, provided they are indicated separately on the invoice and recharged without any margin.

B. Supplies excluded from the scope of the tax

Certain services provided by lawyers are excluded from the scope of the tax within the meaning of Art. 21(2) VAT Act. This is the case, in particular, for services in the field of education (Art. 21(2)(11) VAT Act) and for serving as an arbitrator (Art. 21(2)(29) VAT Act). By contrast, representation before an arbitral tribunal remains taxable at the standard rate.

For these excluded supplies, the taxable person has the option of electing for their voluntary taxation (Art. 22(1) VAT Act), which allows the recovery of input tax on corresponding expenditure. According to Federal Supreme Court case law, entrepreneurs who provide only supplies excluded from the scope of the tax but eligible for the option may waive the exemption from VAT liability. Conversely, if the entrepreneur provides only excluded supplies for which the option is not available, the Federal Supreme Court has held that they cannot voluntarily waive the exemption.

V. Practical consequences

A. Calculation of the exemption threshold

To determine whether the CHF 100,000 threshold is met, only turnover from supplies that are not excluded from the scope of the tax is taken into account (Art. 10(2)(a) VAT Act). In concrete terms, this means the lawyer must aggregate all revenue from taxable supplies (legal advice, representation in proceedings, authentication of instruments, etc.) realised in Switzerland and abroad, but exclude from this calculation non-consideration (fees for dependent activities, public authority activities, damages) as well as revenue from supplies excluded from the scope of the tax (education, arbitration).

Since the partial revision of the VAT Act that entered into force on 1 January 2018, worldwide turnover is determinative for calculating the threshold, and no longer solely turnover realised in Switzerland. The threshold is calculated on the basis of agreed consideration, exclusive of VAT (Art. 10(2bis) VAT Act).

B. Impact on input tax deduction

A lawyer subject to VAT may in principle deduct input tax (upstream VAT) on goods and services acquired in the course of their entrepreneurial activity (Art. 28(1) VAT Act). However, expenditure related to non-entrepreneurial activities (dependent activities within the meaning of Art. 18(2)(j) VAT Act, activities relating to the exercise of public authority within the meaning of Art. 18(2)(l) VAT Act) does not give rise to a right to deduct input tax.

Where the firm’s infrastructure is used for both entrepreneurial and non-entrepreneurial activities, a proportional input tax correction must be made (Art. 30(1) VAT Act). The flat-rate correction may be calculated at 1% of gross non-consideration (gross fees including ancillary costs), provided these fees or non-consideration exceed CHF 5,000 per year.

C. VAT subjects in law firms

The question of VAT liability may arise differently depending on the structure of the law firm. Where each lawyer practises as a sole proprietor, each of them is individually subject to VAT. Where the members of the firm form a simple partnership, it may be registered under a single VAT number if it appears as such vis-à-vis third parties (Art. 10(1bis)(b) VAT Act). Where the firm is organised as a corporation (SA, Sàrl), it is the legal entity that constitutes the taxable person.

VI. Conclusion

The assertion that lawyers are not subject to VAT because they are lawyers rests on a confusion between two distinct concepts: on the one hand, the status of entrepreneur within the meaning of Art. 10 VAT Act – which the lawyer indubitably possesses – and, on the other hand, the exemption mechanism based on the CHF 100,000 turnover threshold under Art. 10(2)(a) VAT Act.

While it is true that a substantial portion of the lawyer’s revenue – fees for dependent activities (Art. 18(2)(j) VAT Act), activities relating to the exercise of public authority (Art. 18(2)(l) VAT Act), damages (Art. 18(2)(i) VAT Act) – does not constitute consideration and does not count towards the exemption threshold, the fact remains that the core of the lawyer’s activity (legal advice, representation, authentication) generates taxable turnover. As soon as the sum of this taxable consideration exceeds the CHF 100,000 threshold per year, the lawyer is mandatorily subject to VAT.

Lawyers would therefore benefit from examining their situation carefully and, where appropriate, considering the voluntary waiver of the exemption from VAT liability (Art. 11(1) VAT Act) where this allows them to recover input tax on their operating costs. In any event, the notion that the legal profession by its very nature falls outside the VAT system is erroneous and deserves to be definitively abandoned.