Taxation in Switzerland
The sections below provide the basic information on taxation in Switzerland.
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Switzerland's complex tax structure has been shaped by the country's three levels of government, which are federal, cantonal and municipal. The following two distinct taxes are levied:
Swiss federal tax law is uniform throughout Switzerland, but each of the 26 cantons has a separate law for cantonal taxes. Municipal taxes are levied as a multiple of cantonal taxes. As tax laws and tax rates vary widely among cantons and among municipalities, the choice of residence is an important element of tax planning.
No average tax rates can be calculated because of the multi-layered tax system. Taxes are calculated based on specific figures for specific cantons and municipalities. The maximum overall rate of federal income tax is 11.5%. The various cantonal and municipal taxes are also levied at progressive rates, with a maximum combined cantonal and municipal rate of approximately 36%. In addition, cantonal and municipal net wealth taxes are levied.
The federal Supreme Court and tax administration have developed rules for allocating tax liability among the cantons to avoid double taxation.
At the cantonal level, tax is also assessed on a current-year basis. Taxable income for cantonal and community tax purposes is calculated in basically the same way as taxable income for federal taxes.
Individuals are considered resident in Switzerland if they take up legal residence in Switzerland or if they intend to stay there for a certain period (usually longer than one month), as well as if they work in Switzerland for a period exceeding 30 days.
Employment income - In general, all compensation provided by an employer is considered employment income and is included in the employee's overall taxable income. However, if properly documented, certain reimbursements for necessary business-related expenses are not subject to tax.
Both residents and non-residents who remain in Switzerland for employment purposes are subject to tax on employment income. In general, residents are not subject to withholding tax on employment income. Residents with certain types of work permits, however, and most non-residents are subject to withholding tax on employment income.
Self-employment and business income - Self-employment and business income is included in overall taxable income. A partnership is not taxed as a separate entity; rather, the respective shares of partnership profit are included in the taxable income of each partner. All necessary expenses incurred in operating a business or profession are tax-deductible. Self-employed individuals may carry forward business losses if these losses cannot be offset against other taxable income. No carry backs are allowed for self-employed individuals.
Non-residents may deduct necessary expenses incurred in operating a business or profession and in the maintenance and operation of rental property.
Directors' fees - For residents, directors' fees received from a Swiss company are included in the taxpayer's overall taxable income. Directors' fees remitted from a foreign country are generally included in a resident's overall taxable income, unless an applicable double tax treaty provides otherwise.
For non-residents, directors' fees received from a Swiss company are subject to withholding tax (at a rate of 25% in the Cantons of Geneva and Zurich) and social security contributions (unless the terms of an applicable totalisation agreement specify otherwise).
Investment income - A withholding tax of 35% is levied on dividends; on interest from publicly offered bonds, from debentures and from other instruments of indebtedness issued by Swiss residents; and on bank interest (in excess of CHF 200 per year), but not on normal loans. For Swiss residents, withholding tax is fully recoverable.
For non-residents, withholding tax is a final tax, unless the terms of an applicable double tax treaty specify otherwise.
Dividends received are taxed as ordinary income. However, if the recipient of a dividend owns at least 10% of the share capital of the payer company, only 60% of the dividend is taxable for the purpose of the federal income tax. Some cantons have adopted similar rules.
Rental income and royalties, as well as licensing, management and technical assistance fees, are not subject to withholding tax. With certain exceptions, they are included in taxable income and are taxed by the federal government, cantons and municipalities.
Taxation of employer-provided stock options - Under federal law, equity-based compensation schemes are taxed at vesting (restricted stock units), at exercise (stock options that are not tradable or restricted) or at grant (tradable and unrestricted stock options, and free shares). The cantons also apply this rule.
In addition, the equity gain is allocated to Switzerland on the basis of the number of workdays performed in Switzerland during the vesting period.
Income derived from equity is taxed together with other income at ordinary tax rates. In addition, social taxes are levied on equity income.
The subsequent sale of the shares triggers no further tax consequences because private capital gains are exempt from tax in Switzerland.
Swiss retirement benefits are derived from the following sources:
The Swiss social security contribution rate is 10.25% of total salary, with no ceiling; the employer and employee each pay 5.125%. The employee's share is withheld monthly by the employer. In addition, contributions at a rate of 2.2% on annual salary up to CHF 148,200, and 1% on annual salary exceeding CHF 148,200 must be made to the unemployment insurance fund. This cost is also divided equally between the employer and employee.
In general, employees who pay into the Swiss social security system must contribute to a pension plan. The employer must make contributions of at least 50% of the total contribution.
Contributions to both schemes are fully tax-deductible. Furthermore, contributions to special types of individual savings schemes are tax-deductible, up to a certain amount.
Self-employed individuals must make social security contributions at a maximum rate of 9.65% of their income from their business or profession. The 9.65% rate also applies to partnership profits. Self-employed persons are not required to be members of a pension plan.
Non-residents who carry on a business activity within Switzerland (including serving on the board of a Swiss company) are subject to Swiss social security contributions on income derived from that activity, unless a social security treaty provides otherwise.
Individuals establishing tax residence in Switzerland are assessed for federal income tax purposes on a current-year basis.
Special rules apply for the first year a taxpayer is subject to Swiss tax. In addition, the basis of assessment may be altered if certain extraordinary events substantially change an individual's financial situation (for example, change of business or profession, or divorce or legal separation).
In general, taxable income for federal tax purposes consists of all types of income earned by a resident individual, including the following:
Although income derived from either a fixed place of business or a permanent establishment located abroad, as well as income derived from real estate located abroad, are exempt from taxation, this income must be properly recorded on a Swiss tax return for the determination of the tax rate (exemption with progression).
An individual who is resident or domiciled in Switzerland is subject to federal, cantonal and municipal taxes on worldwide income, except income derived from real estate located abroad and income from either a fixed place of business or a permanent establishment located abroad. Individuals are subject to Swiss income tax and net wealth tax from their first day of residency until they officially leave the country.
Non-residents are subject to tax on income from the following Swiss sources:
Private capital gains derived from sales of movable assets are not taxed at the federal level or at the cantonal level. Capital gains derived from sales of immovable assets are subject to a separate tax in all cantons.
For federal tax purposes, a gain or loss from a sale or exchange of business assets is treated as ordinary income or an expense item. For cantonal tax purposes, the treatment is the same, except that some cantons levy a separate tax on gains from sales or exchanges of immovable assets.
Federal income tax - Resident aliens and Swiss citizens who were resident or domiciled abroad for the past 10 years may qualify for a special tax concession called lump-sum taxation if they do not engage in any employment or carry on a business in Switzerland. Activities outside Switzerland are not taken into consideration. The lump-sum tax is imposed on income imputed from the living expenses of taxpayers and their families (for example, by a multiple of rental value). The amount of lump-sum tax may not be less than the tax that would be payable on the sum of the following items:
Cantonal income taxes - Several cantons allow a nonworking resident to elect lump-sum taxation instead of regular income tax.
In certain cantons, lump-sum taxation is granted for only a limited number of years. In many cantons, eligibility for lump-sum taxation and the method of calculating the tax payable are negotiated individually with the tax authorities rather than statutorily determined.
No net wealth tax is imposed at the federal level. All cantons and municipalities levy net wealth tax on worldwide assets, with the exception of real estate, a fixed place of business, or a permanent establishment located abroad. Tax rates are reasonably low and vary widely, depending on the canton and municipality where the taxpayer resides.
No inheritance or gift taxes are imposed at the federal level. Almost all cantons levy separate inheritance and gift taxes. Rates vary widely depending on the canton where the deceased or donor is domiciled.
In most cantons, resident foreigners are subject to inheritance tax and gift tax on worldwide assets, except for real estate located abroad. Non-residents are subject to inheritance tax and to gift tax on real estate located in Switzerland only.
To prevent double taxation, Switzerland has entered into inheritance tax treaties with eight countries.
Tax filing and payment procedures vary widely from canton to canton and also depend on individual circumstances.
In general, non-residents must file tax returns if they have income from certain sources, including employment, which is taxed at the regular rates. In most cantons, directors' fees and payments by Swiss pension funds are subject to special withholding provisions (covering cantonal and municipal, as well as federal, income taxes).
Income is allocated in accordance with rules developed by the Federal Supreme court on inter-cantonal tax allocation, unless an applicable double tax treaty provides otherwise. In addition, certain cantonal rules may influence international income allocation. However, treaty law always overrules Swiss domestic law.
According to Swiss domestic law and treaty regulations, foreign-source income is excluded from taxable income if it is derived from a permanent establishment located in a foreign country (as defined by treaty law or, in the absence of an applicable double tax treaty, by Swiss domestic law). Also excluded is income derived from real estate located abroad. In addition, certain types of income, including directors' fees, special pensions and partnership profits, may be exempt in Switzerland under an applicable treaty.
In general, all other foreign-source income is taxable in Switzerland. In the absence of a treaty, foreign-source income is taxed net of any foreign income taxes or withholding taxes imposed on such income by the source country.
Most of Switzerland's income tax treaties follow the draft model of the Organization for Economic Cooperation and Development (OECD). Switzerland generally applies the exemption-with-progression method rather than the tax-credit method for qualified foreign-source income. However, a limited tax credit is granted for remaining net foreign withholding taxes imposed on dividends, interest and royalties from the relevant treaty countries. The credit may not exceed Swiss tax due on the relevant income.
Switzerland has entered into double tax treaties with 95 countries. A further treaty has been signed however it is not yet in force.
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