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Individual income tax

Taxation of individuals in Switzerland

Resident individuals are subject to personal income and net wealth taxes. Partnerships (and similar groups of persons without legal personality) are transparent for tax purposes, the partners being taxed individually.

Non-residents deriving income from certain Swiss sources (see below) may be subject to certain withholding taxes.

Income taxes are levied by the confederation and also by the 26 cantons and their municipalities. The federal income tax is regulated in the Federal Direct Tax Act. There is no federal net wealth tax. The cantonal and municipal income and net wealth taxation is settled in cantonal tax laws.

By 1 January 2001 all cantons had to bring their income and net wealth taxes into line with the Federal Tax Harmonization Law. Subject to harmonization are mainly the concept of income and most of the deductions and allowances. The cantonal sovereignty in respect of the amount of deductions and the tax rates, however, is not affected by the Tax Harmonization Law. Thus, the tax burden will differ considerably also in the future, depending on the canton and municipality of which the taxpayer is a resident.

Residence

An individual is resident for tax purposes mainly if the centre of his vital interests is in Switzerland (and in the canton/municipality respectively). Key factors are where a person has a permanent home, where his family lives and where his most important personal and economic contacts are. This concept is similar to Art. 4 of the OECD Model Convention.

Tax residence, however, may also arise if an individual works in Switzerland for a period of minimum 30 days or if he stays in Switzerland (without working) for a period of minimum 90 days. He may be taxed as a resident for this period of time (pro rata temporis).

Resident taxpayers are subject to world-wide taxation in Switzerland, subject to unilateral exemptions and prevailing tax treaty provisions, of course. The most important unilateral exemptions are:

real estate abroad, and
permanent establishments abroad
The exemption with progression method applies to such income and net wealth.

Non-resident taxpayers may be subject to Swiss taxes only with respect to income from certain Swiss sources. Important examples are:

  • income from Swiss real estate (assessed tax)
  • income from business performed in Switzerland and permanent establishments located in Switzerland (assessed tax)
  • employment income performed in Switzerland or on bord of international aircraft/ships/trucks if paid by an employer being resident in CH or having a permanent establishment in CH (withholding tax)
  • directors' fees (withholding tax)
  • interest secured by mortgage on Swiss real estate (withholding tax)
  • pensions and similar payments related to a former employment in Switzerland (withholding tax)
  • income from certain Swiss retirement funds ("gebundene Selbstvorsorge"), excluding the public old-age/survivor/disability insurance (withholding tax)

Very often, however, the right to levy these taxes is also restricted by tax treaties.

Taxable income

Swiss tax laws (federal and cantonal/municipal) apply a rather broad concept of income. It includes income from gainful activities (employment, self-employment), income from movable and immovable property, retirement income, compensations etc.

All types of income are pooled and taxed together (excluding capital gains on immovable property, see below). Income from husband and wife is aggregated and taxed together, unless they are separated or divorced. Alimony payments are deductible for the payor and taxable for the recipient.

The rental value of owner-occupied dwellings is taxable income. The valuation, which is made by the cantonal tax authorities, varies between 50% and 100% of fair market values.

Capital gains on private movable property (e.g. capital gains on shares) are tax-free (unless the taxpayer performs a business, i.e. his assets are business property). See also employee stock options.

Capital gains on immovable property are tax-free at the federal level (unless the taxpayer is a professional real estate broker). All cantons, however, levy specific real estate profit taxes on capital gains realized on the alienation of immovable property located in the canton. The rules of calculation of the capital gain, deductions and tax rates vary considerably. Real estate profit tax apply to both residents and non-residents, selling Swiss real estate.

Deductions

In general, all expenses related to taxable income are deductible. Important examples are: employment expenses and maintenance costs of immovable property.

Interest paid is fully deductible if related to business property. Private interest payments are also deductible, but only up to the total amount of [all gross income from property + CHF 50'000].

Depreciation (capital allowances) is deductible only in respect of business assets. Self-employed taxpayers may also carry-forward losses (in general 7 years). There is no carry-back in Switzerland.

Alimonies paid are deductible (but taxed in the hands of the recipient).

Tax rates

In general, Swiss income tax rates are progressive. Very often different rates apply for married and single taxpayers, as the income of husband and wife is aggregated and taxed together. The maximum federal income tax rate is 11.5%. A taxable income of CHF 100'000 is taxed at about 4% (singles) and 3% (married). The rates for CHF 200'000 are 8% and 7.5% respectively.

The cantonal rates vary considerably. Usually, the tariff mentioned in the cantonal tax act only results in so-called "basic rates". These rates are subject to annually fixed cantonal and municipal multipliers. Parish taxes (church taxes) are levied in the same way.

Maximum income tax rates (total, all levels) are between 25% and 40%.

Expatriates

Alien employees working in Switzerland for a limited period of time are taxed as follows:

1. Very often, there is no tax in Switzerland if the employer is a non-resident enterprise without permanent establishment in Switzerland and if the stay in Switzerland does not exceed 183 days per calendar year, depending on the applicable tax treaty.

2. If there is no treaty or if the conditions above are not met (e.g. if the employer is a Swiss company) the employee is subject to federal, cantonal and municipal taxes.

2a. Alien employees of Swiss companies or Swiss permanent establishments without a so-called "C-permit" are subject to wage tax at source. This tax is calculated on the gross income (standard deductions are included in the tariff). They may only apply for the assessment procedure if the annual gross income exceeds CHF 120,000.

2b. Alien employees with a "C-permit" or with a gross income exceeding CHF 120'000, and also employees of non-resident enterprises (without permanent establishment in CH) are subject to assessed income taxes. They must file a personal tax return and pay their taxes by themselves (no taxation at source). This tax is calculated on the net income and certain additional deductions apply.

3. Expatriates may claim certain specific deductions according to specific cantonal and federal laws. Examples are: costs for housing, moving, travelling and school of minor children.

Lump-sum taxation ("forfait tax") of resident aliens

Resident aliens may opt for a lump-sum income taxation instead of the ordinary Swiss income and net wealth taxes under certain conditions. This tax is not based on the effective income derived by the taxpayer but on certain living expenses. It applies at the federal and cantonal/municipal level, but only if the taxpayer does not perform any professional activity or employment in Switzerland. The lump-sum taxation, however, must not be lower than the ordinary income tax on certain Swiss-sourced and treaty protected income.

Example
A non-Swiss citizen moves from Amsterdam to Berne and lives in a house acquired for CHF 3 Mio. In addition, this person owns shares and other securities of total CHF 17 Mio. The person realizes the following annual income:

- pension/insurance from home country:

CHF 200000

- dividend and interest (foreign sourced)

CHF 500000

- Swiss real estate income (deemed income)

CHF 50000

Total income per year

CHF 750000

Ordinary Swiss income taxes per year

CHF 300000 (40%)

Ordinary Swiss net wealth taxes per year

CHF 150000 (0.75%)

Total ordinary Swiss taxes per year

CHF 450000

 

 

Taxable income based on expenses say

CHF 300000

Lump-sum Swiss taxes (instead of ordinary taxes)

CHF 100000
(
~33%)



Certain Swiss tax treaties only apply if the income derived from the partner state is subject to ordinary Swiss income taxes (e.g. USA Art. 4(5), Austria, Germany, France, Italy and Belgium). If treaty protection is important in such a case, the taxpayer may opt for a modified lump-sum taxation, including such income.

 
 

© by Toni Amonn, Berne, Switzerland, pictures by berne tourism