A server colocation typically refers to a situation in which servers and ancilliary equipment of a company are housed in a datacenter of a third party (datacenter operator), and those servers and equipment are run by using the colocation services of the datacenter operator. Such colocation services can or normally comprise rental/leasing of server cabinets or so-called cages (ring-fenced areas), connecting to the datacenter’s network and infrastructure, the supply of energy, and monitoring services.
Given the range of possible services offerings and contractual arrangements, various provisions of the Swiss VAT regulatory framework are of relevance. Article 7 and Article 8 Swiss VAT Act determine the place of supply for goods respectively services. For purposes of Swiss VAT, electricity is considered to be a good (Article 3 letter b Swiss VAT Act). According to Article 7 Par. 2 Swiss VAT Act, the place of supply of electricity is deemed to be the place where the recipient of the supply has its place of business, or a fixed establishment for which the supply is made, or, in the absence of such a place of business or such a permanent address, its domicile or the place from which its activities are performed. In VAT Business Sector Info No. 13 the administrative practice on Telecommunication and electronically provided services has been laid down. Parts of the publication are of relevance for foreign companies that use a Swiss server colocation.
- output out of scope of Swiss VAT: it is possible that due to the different Swiss VAT treatment of the purchased colocation services and the services supplied by the foreign company (e.g. webhosting or similar data services) the foreign company incurs Swiss VAT on (some) of the purchased colocation services, but that the services supplied by the foreign company -with use of the Swiss colocation- are not subject to Swiss VAT. The latter is the case when such services are -from a Swiss VAT perspective- taxable at the place where the recipient has its establishment and that place is outside Switzerland. Under such circumstances the foreign company could recover the Swiss input VAT in connection with the Swiss colocation through the VAT refund regulation for foreign companies -provided all other conditions for Swiss VAT refund have been met.
- cabinet space: depending the space a foreign company needs for its server colocation, the foreign company may rent units of cabinet space, one or more complete cabinets and/or so-called cages where it can store its own equipment. For purposes of Swiss VAT, the rental of one or more units in shared cabinets (i.e. non exclusive use) is treated as a supply of services, taxable at the place where the recipient has its place of business or fixed establishment. However, in situations in which the foreign company has an exclusive right of use of a particular space (e.g. cage) within a Swiss datacenter, then such rental is treated according the treatment for rental of (part of) immovable property. Experience shows that in the latter situation normally the Swiss supplier of the colocation services opts for taxation of the rental of such spaces for exclusive use.
- fixed establishment: Article 5 Par. 1 Swiss VAT Ordinance (‘MWSTV’) determines that a fixed establishment means a fixed place of business from which the activity of the business is wholly or partly carried out. VAT Business Sector Info No. 13 on Telecommunication and electronically provided services determines in § 2.2 that the location of a server can under circumstances be considered as a fixed establishment. Namely, when the server is at the disposal of the company -ownership is not needed, rental and operation are sufficient- and the server is not merely used for activities with a preparatory or auxiliary character. Standard webhosting, i.e. the provision of data or transmission capacities in the scope of a contract with a provider and without the assignment to a specific server, is not sufficient to establish a fixed establishment. The verification of the conditions is done on a case-by-case basis, in which scope the actual performance is decisive and not the formulation in the contract.
The administrative practice of the Swiss tax authorities is less liberal than applied in other countries. Foreign companies that do not want to take the risk of having their Swiss colocation being qualified as a fixed establishment (and thus possibly face tax liability) for purposes of Swiss VAT (and possibly also for direct taxation) may consider to base their colocation in a country with a more advantageous tax practice in this respect.
The determination that in a particular case the Swiss server colocation of a foreign company qualifies as a fixed establishment within the Swiss tax territory would imply that the foreign company would not be entitled to refund under the regulation for Swiss VAT refund to foreign companies.
- supply of electricity: the charge (as such) by a Swiss datacenter for the supply of electricity to a foreign company in connection with its Swiss server colocation is in line with Article 3 letter b Swiss VAT Act (electricity = good) treated as a supply of goods. According to Article 7 Par. 2 Swiss VAT Act the place of supply of electricity is the place where the recipient of the supply has its place of business or a fixed establishment for which the supply is made.
Consequently, a foreign company with a Swiss server colocation should verify whether from a Swiss VAT perspective that server colocation is considered to be a fixed establishment within Switzerland (i.e. Swiss tax territory). If positive, the supply of electricity -used for operation of the server colocation- is subject to Swiss VAT. Without a Swiss fixed establishment the supply of electricity is out of scope of Swiss VAT, due to the fact that the business establishment of the foreign company is outside Switzerland.
Experience shows that Swiss suppliers of colocation services often apply either Swiss VAT on all supplies or in general apply Swiss VAT inconsistently.
- installation of cables: the installation of cables, as well as the unlocking of cables connected to free ports, is treated as a supply of goods. This will be taxable at the place of the server colocation. The aforementioned must be distinguished from the single calibration needed to connect a server to the data network in the scope of a contract for the supply of access to a data/information network. Such calibration is considered to be ancilliary to the supply of access to the data/information network, and is treated as a telecommunication service.
- fixed line: the rental of lines for transmission of data for exclusive use is according to the practice of the Swiss tax authorities treated as a supply of goods. In case the transmission line not only runs through the Swiss territory but also through territories outside Switzerland, the distance (and thus the consideration) must be divided in a domestic part and a foreign part. Consequently, the rental of lines for transmission of data for non-exclusive use (shared lines) are treated as a supply of services, taxable at the place where the recipient has its business establishment or fixed establishment.
- telecommunication services: a foreign company, whether or not with a server colocation in Switzerland, that purchases telecommunication services from a Swiss supplier will receive these services without Swiss VAT -provided the place of business or fixed establishment of the foreign company is outside Switzerland. From time to time it can be seen that despite its place of business outside Switzerland (or despite the lack of a fixed establishment in Switzerland) a foreign company is charged with Swiss VAT in connection with the supply of telecommunication services (as such). The latter may be due to applying the wrong tax code when setting up the client account of the foreign company at the start of the client relationship.