Switzerland personal taxation

Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas others are levied by the cantons, the communes and the federal authorities concurrently. Even among the cantons there are significant differences in both the taxes levied and the rates payable though there is current legislation that aims to reduce these differences.

In addition to the taxes described below, there is capital gains tax on real estate transactions averaging 18%, and a capital transfer tax on real estate transactions averaging 4% - however there are wide variations between cantons.

In March, 2004, Switzerland's parliament decided on reforms of the federal/cantonal fiscal equalisation system which will include provisions compensating for "bracket creep". Bracket creep occurs when salary increases related to inflation force workers into higher tax brackets, and under Swiss law, the government is required to address the situation when the accumulated inflation rate breaches the 7% mark.

A report in April 2004 from ratings agency Standard & Poor’s concluded that the planned overhaul of the fiscal equalization system would likely reduce the differences in tax burden between each canton. "Under this system, due to go into effect in 2007, enhanced mutual support and lower exposure of budgetary performance to local economic strength could gain in significance as rating factors," forecasts Standard & Poor's credit analyst, Christian Esters.

"Nevertheless, the expected budget effects on individual cantons differ and specific rating impact on individual Swiss cantons cannot be evaluated at this stage,” he added.

In February 2009, amid growing concerns over the effects of the global economic crisis, voters in the Swiss Canton Zurich elected to abolish the highly controversial flat rate tax or ‘Pauschalbesteuerung’ applicable to wealthy foreigners. Both government and parliament had previously rejected the bill.

In future, wealthy foreigners will be deprived of their special tax privileges, and will no longer be taxed according to expenditure, but – along with their Swiss compatriots – according to wealth and income.

Under current law, income or wealth tax may be replaced by a lump sum tax, provided that an individual is in possession of a residence permit, not gainfully employed in Switzerland, and has not worked in the country for at least ten years.

The flat rate tax is calculated according to the annual cost of living and amounts to at least five times the annual rent or rental value of the taxpayer’s property, generating savings of up to 90%.

Critics have argued, however, that the system is unfair, that it violates the law to tax individuals according to their means, and that it serves to encourage tax evasion, whilst also contributing to rising property prices in affluent areas.

Originally intended to benefit retired individuals choosing to spend their twilight years in Switzerland, many believe the system is currently open to abuse.

Although previous attempts by the political left to amend the tax law have so far proven unsuccessful, a proposal pending in parliament could receive a much-needed boost following approval of the initiative in Zurich.

A fear persists, however, that abolition of the lump sum tax will lead to an exodus of super-rich foreigners, either to other cantons in Switzerland or abroad, to the UK, the Benelux countries, Austria or Liechtenstein where similar tax breaks for foreigners still apply.

Whilst modifying cantonal and local tax law, however, direct federal tax will remain unaffected by the decision.

Meanwhile, voters in the Swiss canton Vaud approved a number of measures designed to alleviate the tax burden on the middle classes, to support businesses, and to prevent the exodus of further wealthy residents from the area.

Modifying both cantonal and municipal tax laws, the key changes – affecting 2009 tax – included:

Switzerland Residence and Liability for Taxation

Residence is the relevant criteria in determining whether an individual is or is not subject to Swiss personal income tax. A person is deemed resident in Switzerland if:

He has Swiss employment (to work in Switzerland a non-national needs a work permit - limited work permits of 90-120 days can be granted and where granted lead to limited taxation);
He carries on a business in Switzerland; or
He lives in Switzerland for not less 180 days in any one year. If however he remains in the same abode the time required to be a resident for tax purposes drops to 90 days.

With the exception of the 'fiscal deal' method mentioned below, Switzerland does not discriminate between Swiss residents and the foreign employees of "offshore" operations for purposes of personal income tax. In any event the Swiss authorities consider the various types of tax-privileged company as legitimate tax planning structures which are available to national and non-national alike and not as 'offshore' operations in the traditional sense of the word.

Wealthy foreign nationals who wish to make Switzerland their home but do not wish to work in the country may qualify to pay personal income tax under the 'fiscal deal' or 'lump sum assessment' basis which entitles them to pay considerably less tax than a Swiss national with an equivalent income. This is the only discriminatory personal income tax levy that exists in Switzerland.

Switzerland Income Tax

This tax is levied at federal, cantonal and communal level. Personal income tax is progressive in nature. The total rate does not usually exceed 40% and in most cases, the maximum tax rate is much lower than this. For example, in the Canton of Schwyz, the top rate, inclusive of federal, cantonal/communal tax is approximately 22%.

The basis of assessment is as follows:

Residents are taxable on their worldwide income other than the income arising from enterprises and real estate located abroad;
Non-residents are taxable on income arising on permanent establishments and real estate located in Switzerland, but the rate of tax is based on the individual's world-wide income.

Personal income tax rates are progressive, rising to a maximum of 11.5% for incomes over CHF682,200 at federal level, and approximately twice that at cantonal level. There is considerable variation between cantons. Municipal rates are usually a small fraction of cantonal rates.

NB: Payments to individuals of salary or interest on loans at what are judged to be excessive rates are likely to be deemed 'hidden profits' and subjected to a withholding tax at 35%.

In December, 2007, the Swiss canton of Obwalden became the first canton to adopt a flat rate of tax for individual income taxpayers, following a recent cantonal referendum. Obwalden's authorities announced the decision to put in place a flat tax after 90% of the canton's electorate voted in favour of the proposal.

Obwalden had been forced to review its tax system following a complaint from Socialist Party deputy Josef Zisyadis that reforms put in place in January 2006 had created a regressive tax system, where wealthy taxpayers paid a lower tax rate than those on lower incomes, and which was therefore unconstitutional.

Zisyadis succeeded in getting the tax overturned by the Federal Tribunal in Lausanne in June, stating at the time that the court's decision had "put a brake on the fiscal cannibalism between the cantons".

After a referendum in 2005, Obwalden, a tiny mountainous region in the centre of Switzerland, brought in an income tax law which cut tax for those earning more than CHF300,000 per year to 1% from 2.35%. Individuals earning up to CHF70,000 paid 8% and those with income up to CHF300,000 paid up to 6%. At the same time, Obwalden also cut corporate tax to 6.6%, making it one of the lowest rates in Switzerland.

Obwalden's tax reforms also prompted other cantons to respond with tax cuts of their own: cantons Zurich, Valais, Fribourg, Uri and Schaffhausen all reduced tax rates in 2006. This prompted complaints from those on the left that some cantons were engaged in a 'race to the bottom' on taxation that would eventually endanger the viability of public finances.

The cantonal tax system has also come under attack from the European Commission, which is attempting to make Switzerland change aspects of its corporate tax regime designed to attract holding companies to the jurisdiction. The Commission argues that the Swiss tax regime, which allows cantonal governments freedom to set their own tax rates to attract new companies and wealthy expats, breaches the 1972 trade agreement between Switzerland and the EU by distorting trade and competition.

Switzerland The 'Fiscal Deal'

The 'fiscal deal' or 'lump sum assessment' method can be used by an individual who is prepared to be resident in Switzerland but who is not a Swiss national and who has never engaged in any substantial economic activity in Switzerland.

This method, which couples a residence permit with the tax deal, involves a negotiation with the canton in which residence is planned. The individual's income might, for instance, be deemed to be the amount of expenditure he incurs on certain items. Thus his deemed taxable income may be twice what he pays for food and accommodation or five times what he pays for lodgings whichever the higher, conditional on this sum not being less than a figure calculated according to a complex formula relating to his Swiss source income.

An applicant for the 'fiscal deal' must have a certified net wealth of not less than CHF2m. The individual concerned must not involve himself in any lucrative economic activity in Switzerland. Whilst such individuals are considered residents for tax treaty purposes some double tax treaties contain limitations as to what benefits such residents can obtain under the treaty terms.

The rates of tax payable under the lump sum basis are the same as would apply normally. The advantage is of course the fictitiously low amount of income to which the individual is assessed.

Switzerland Social Security Taxes

Social Security taxes are levied at a federal level and are payable by employees, employers and the self employed.

Resident individuals and individuals with gainful activity in Switzerland are required to contribute to the Federal Old Age and Disability Insurance plan and the mandatory federal unemployment insurance plan.

Currently, the total annual old age and disability contribution is 10.1% of total employee remuneration (no ceiling). Half is paid by the employer and half by the employee. Employers are required to deduct contributions from salary payments and to remit the total amount to the social security authorities.

Unemployment contributions are currently 2.2% of employee remuneration on annual salaries up to CHF 106,800. A supplemental contribution of 2% must be paid for salaries capped at CHF 126,000. A 'solidarity surcharge' of 0.5% is payable by both employer and employee on annual salaries of CHF126,000 to CHF 315,000.

In most cantons, health and hospitalisation insurance is mandatory, and as a rule, virtually all employees are covered at their own expense. Their contributions depend largely on the type of benefits selected by them. Some companies voluntarily contribute to their employees' health insurance or organize group-insurance schemes for them.

Some cantons levy further payments in relation to child and family allowance schemes.

Social insurance therefore currently (2011) represents about 12.5% (not including the 0.5% 'solidarity surcharge') plus health insurance costs and some cantonal payments.

Switzerland Stamp Duty

The federation has the exclusive right to levy this tax. The rates are as follows:

1% on the issue of shares where the value of the shares is over CHF1m including cases in which shares are issued at a premium. A loan made by a shareholder to the company without any consideration is also subject to this tax. The tax is also payable on the nominal value of shares where a majority shareholding is transferred as a consequence of a liquidation irrespective of the fact that the shares have virtually no market value in the circumstances. The issue tax is not payable by the Swiss branch of a foreign company.
A rate of 0.15% on the transfer value of shares in Swiss resident companies and 0.3% on the transfer value of shares in non-resident companies where the transfer is effected by "security dealers" which definition includes banks, 0stock brokers, investment fund managers and other financial institutions. The definition of security dealers is quite wide and includes any company which owns securities with a value in excess of 10m Swiss francs and all intermediaries. The tax is split between the buyer and the seller and is automatically deducted by the dealer.
A rate of 0.12% per annum on the value of the bonds issued meaning that a 5- year bond pays 0.6% stamp duty.
A rate of 0.06% per annum on bank-issued medium term bonds and on the issue of financial paper meaning that a 5-year bond pays 0.3% stamp duty.
A rate of 5% on an insurance premium or 2.5% in the case of a life insurance premium paid in one contribution.

Switzerland Inheritance Taxes

Inheritance taxes are levied at a cantonal level, and by all 25 cantons. Where a canton imposes both an inheritance tax and a gift tax the rates are normally identical. The right to tax inheritances belongs to the canton in which the deceased died domiciled. The tax is levied on the estate of the deceased and not on the heir. Inheritances received by a resident from abroad are not taxable. The basis of assessment to inheritance taxes is as follows:

Deceased Residents: the estate is assessed to inheritance taxes based on the value of world wide estate (with the exception of real estate situate in a foreign jurisdiction);
Deceased non-residents: the estate is assessed to inheritance taxes based on the value of real estate situate in Switzerland.

The rate of inheritance tax is progressive and is based on the relationship between the deceased and the heir - the closer the blood relationship the lower the inheritance tax levied, with the result that in some cantons transfers to children and the surviving spouse remain tax free whereas transfers to parties with whom there is no blood relationship are charged at the highest rates.

Gift taxes are levied at a cantonal level and are imposed by 24 out of the 25 cantons. Where a canton imposes both an inheritance and a gift tax the rates are normally identical. The right to tax gifts belongs to the canton in which the donor is domiciled. The tax is levied on the donor and not on the donee. The basis of assessment and the rates charged for gift taxes follow those for inheritance tax.

Switzerland Wealth Tax

The annual wealth tax is levied at a cantonal level . The basis of assessment is as follows:

Residents pay annual wealth tax on the value of all assets located in Switzerland;
Non-residents pay an annual wealth tax on assets derived from enterprises and real estate situate in Switzerland.

The tax payable varies between canton to canton. Individuals whose wealth is below a certain threshold are exempted from the tax. By way of an example, the annual wealth tax in canton Zurich is levied at rates of up to 0.3%.

Lowtax Jurisdictions

Switzerland: Personal Taxation

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