II.Most Important Taxes and Tax Codes
1. FEDERAL TAXES
a)Federal Direct Taxes
The first federal direct tax was introduced during World War I to meet the increasing financial needs of the federation. In the following, the federation’s right to levy a direct federal tax was prolonged ever since, today the competence is enacted in Article 128 Constitution.12 The authorisation is still limited in time, relying on repeated extensions by popular vote (currently the federation has been granted the competence until 2035; Article 196 No. 13 Constitution).13 As a consequence, the federation is forced to reconsider its financial regime on a regular basis, particularly since the federal direct tax makes up approximately one third of the federal revenue.
Based on Article 128 Constitution, the federation enacted the Federal Direct Tax Act14 which regulates the federal individual and corporate income tax and provides for the imposition of a source tax on the income of certain individuals and legal entities.
bb) Federal Individual Income Tax
The federal individual income tax is levied from Swiss tax residents as well as from non-residents who have economic attachment to Switzerland. Income taxes are generally considered as the most appropriate indicator for the ability to pay taxes.
Tax residency is deemed to exist if an individual intends to live permanently in Switzerland, stays in Switzerland for at least 30 days during which he is engaged in a gainful activity, or stays in Switzerland for at least 90 days without partaking in any gainful activity (Article 3 Federal Direct Tax Act). Swiss tax residents are subject to unlimited tax liability on their world-wide income, with exceptions for enterprises, permanent establishments and immoveable properties which are situated abroad. Income derived from one of these sources is unilaterally exempt from taxation in Switzerland (Article 6 I Federal Direct Tax Act).
Non-residents with an economic relationship with Switzerland are subject to a limited tax liability. Limited tax liability means that taxation is restricted to income that is derived from Swiss sources such as income from real estate, permanent establishments situated in Switzerland, or from gainful activity carried on in Switzerland (Article 6 II Federal Direct Tax Act).
The individual income tax is levied on the taxpayer’s overall income. This includes income derived from employment and businesses as well as income from immoveable (e.g. rental income) and moveable property (e.g. interest, dividends, royalties, lottery winnings etc.), pension schemes and any other income that is realised on a single or regular occasion. Exempt from individual income tax are capital gains realised on privately held moveable and immoveable assets such as securities, works of art, or real estate (Article 16 III Federal Direct Tax Act). In contrast, capital gains realised on business assets, for example on assets belonging to an individual business, are fully taxable. The distinction between private assets and business assets is hence a rather weighty one, and in practice often a cause for dispute between the taxpayer and the tax authorities, particularly in cases in which a taxpayer incidentally acts as a professional trader, for example of securities or real estate, without having registered a business.
Families are considered to form an economic unit for income tax purposes. The income of spouses living in an intact marriage, meaning not legally or effectively separated, or of registered partnership are jointly assessed (Article 9 Federal Direct Tax Act).
There are various deductions which may be made from the taxable income (Articles 33, 33a and 35 Federal Direct Tax Act). For example, professional expenses are deductible from the gross income if they were closely enough linked to or caused by the earning of the income, e.g. expenses for (public) transportation, even though capped at a certain amount15, expenses for any special clothing required for work, meals taken outside of the home, costs for professional development, etc. General deductions are also available for private debt interest, alimony or child support payments, donations to tax-exempt charities, contributions to social security institutions and pension plans, self-owned real estate maintenance costs, and medical expenses if not reimbursed. This list is non-exhaustive. Further, lump-sum allowances are granted for each dependent child, for married couple and for individuals who are providing financial support to a person in need.
The overall taxable income is taxed as a whole at the applicable tax rate. There are no baskets or schedules with different tax rates for certain kinds of income. Two different tariffs apply: on the one hand for single persons and on the other hand for married couples and/or families and single persons living together with minor children or with persons requiring support (Article 36 Federal Direct Tax Act). The tax rate for the federal income tax currently starts at a taxable income of CHF 17’800 per tax year for those who are single and CHF 30’800 per tax year for married couples. Income which falls below this level is not taxed. The tax scale is progressive. For example: the tax rate for a single person with a taxable income of CHF 100’000 amounts to 2.87 % and with a taxable income of CHF 200’000 to 6.78 %. A married couple with the same taxable income would pay federal income tax at a rate of 1.97 % or 6.28 % respectively. The maximum tax rate is 11.5 %: it applies to a taxable income of over CHF 755’200 (for singles) and CHF 895’000 (for married couples).16
Swiss residents with foreign citizenship who are not engaged in any gainful activity in Switzerland may request that they are not taxed according to the ordinary assessment principles, but instead on a lump-sum basis (Article 14 Federal Direct Tax Act). The income tax in these circumstances is not based on the effective world-wide income, but – with some exceptions – on the annual living costs of the taxpayer and his or her family (Article 14 III Federal Direct Tax Act). The justification of the very favourable lump-sum taxation is disputed, but is mainly seen in the goal to attract very wealthy people to Switzerland. On the cantonal level, in recent years, some cantons have removed lump-sum taxation in order to better ensure equality (e.g. Zurich and Basel Stadt).
Tax assessment is generally based on a personal tax return filed by each individual taxpayer. Switzerland’s system does not provide for a general salary tax (commonly referred to as a “pay as you earn” system). However, a source tax is levied in some circumstances (see below). The due date for filing the tax return is usually 31 March of the calendar year following the tax year. The assessment procedure for assessing the federal income tax is delegated to the cantons: they assess the federal income tax together with the cantonal income and net wealth taxes.
cc) Federal Corporate Income Tax
Legal entities that have their statutory seat or their place of effective management in Switzerland are subject to the federal corporate income tax , so called net-profit tax (Article 50 Federal Direct Tax Act). A corporation is considered to have its statutory seat in Switzerland if it is registered with the Swiss Register of Commerce. For determining the effective place of management, the decisive criterion is where the activities which serve to achieve the company’s business purpose are taken in their entirety. Thereby, the day-to-day business decisions taken by the company as opposed to strategic or pure administrative decisions are the most important consideration in this regard.
Swiss income tax law generally follows the so-called separation principle: legal entities and their shareholders are taxed separately. For that reason, Swiss income tax law does not provide for group taxation. However, a so-called participation exemption is available to avoid triple or multiple taxations within a group (Article 69 Federal Direct Tax Act). Partnerships are principally treated as transparent and the net profit of the partnership is attributed to each partner according to the partnership agreement (Article 10 Federal Direct Tax Act).
Similar to the situation with the federal individual income tax, taxpayers with a personal attachment to Switzerland (i.e. statutory seat or effective place of management) are unlimitedly liable to pay tax on their world-wide income, except for income arising from permanent establishments, enterprises or real estate located abroad (Article 52 I Federal Direct Tax Act). Non-resident legal entities with an economic attachment to Switzerland are subject to a limited tax liability. This mainly includes income derived from permanent establishments, business enterprises or real estate located in Switzerland (Article 52 II Federal Direct Tax Act).
The federal corporate income tax is levied at a flat rate of 8.5 %. However, because paid taxes are deductible, the effective tax rate is actually lower and may range from approximately 7 to 7.8 %, depending on the deductible amount of federal, cantonal and communal taxes. A reduced tax rate of 4.25 % applies for associations, foundations and other legal entities.
The required filing date for the tax return depends on the balance sheet and reporting date of the legal entity. The tax return generally has to be filed 6 to 8 months after the reporting date.
dd) Source Tax Levied on Income of Certain Individuals and Legal Entities
Because the ordinary tax assessment procedure is considered too complicated for taxpayers who are only living in Switzerland for a short period of time, Swiss tax residents with foreign citizenship and who do not have a Swiss residence permit are taxed at source for their employment income provided that their taxable salary does not exceed an amount of CHF 120’000 per year (Articles 83–90 Federal Direct Tax Act). This means that the employer of such an individual is obliged to deduct the source tax directly from the salary and to forward it on to the tax administration. The source tax is principally a final tax replacing the ordinary income tax.
Source taxation also applies to certain non-residents who have an economic attachment to Switzerland and derive income from Swiss sources, such as cross-border commuters, artists and sportspersons, or board members and company directors (Articles 91–101 Federal Direct Tax Act).
b)Withholding (Anticipatory) Tax
The law covering the federal withholding tax is the Federal Act and Ordinance on Withholding Tax.17 Withholding tax is levied on the revenue from certain moveable capital assets (particularly dividends and interest on bonds and bank accounts), on Swiss lottery winnings (including commercial bets) and on certain insurance benefits (Article 1 Federal Withholding Tax Act).
The tax is withheld at source by the Swiss debtor of the revenue (e.g. a Swiss bank paying out interest on bank accounts or a Swiss company distributing dividends) and then forwarded on to the Federal Tax Administration.
The tax rate for the withholding tax varies depending on the category of item at hand. It amounts to 35 % for moveable capital revenue and lottery winnings, 15 % for life rents and 8 % for other insurance benefits.
The purpose of the withholding (anticipatory) tax is to secure correct income tax declaration and to avoid tax evasion and tax fraud. For that reason, Swiss resident beneficiaries can request a full reimbursement of the tax provided that they fully comply with their income tax reporting obligations in due time.
In contrast, for non-resident beneficiaries the withholding tax is principally a final tax. Non-resident beneficiaries may only ask for a full or partial refund of the withholding tax if they are entitled to the benefits of the respective double taxation treaty concluded between Switzerland and their country of tax residence.
c)Federal Value Added Tax
The Federal Value Added Tax (VAT) was introduced in Switzerland on 1 January 1995. The current Value Added Tax Act entered into force on 1 January 2010.18
The Swiss VAT is a general consumption tax aiming at the taxation of non-business related domestic consumption of goods and services. Therefore, VAT is levied on supplies of goods and services by a taxable person within Switzerland as well as on the import of goods and the acquisition of certain services from abroad. Because only consumption within Switzerland should be taxed, an exemption applies for the export of goods as well as the providing of certain services to recipients abroad.
VAT is typically levied at all stages of the value chain. Since only final consumption should be taxed, registered businesses are allowed to deduct paid VAT as input VAT (net all-phase principle). This system avoids an accumulation of tax within the value chain. Because the tax must be shifted to the consumer, the business itself should – systematically – not bear any final tax costs.
With regard to VAT, a taxable person is anyone who carries on a business activity in Switzerland. Exemptions exist for businesses that generate a turnover of less than CHF 100’000 per year or resp. CHF 150’000 per year in case of non-profit and charitable institutions (Article 10 Value Added Tax Act). Upon registration with the Federal Tax Administration, the taxable person must self-declare and self-assess the VAT amount due generally on a quarterly or semi-annual basis.
From 1 January 2018, the VAT rates amount to 7.7 % for all supplies not subject to a special VAT rate, 3.7 % for accommodation services and 2.5 % for certain goods and services typically used in daily life, for example, items like food, water, drugs and newspapers (Article 25 Value Added Tax Act). The maximum VAT rates are set out by the Constitution (Article 130 I Constitution). Any increase or decrease of the VAT rates thus requires the approval of the majority of the Swiss people and the cantons in a referendum. Past experience of referenda in this area demonstrates that the Swiss people tend to agree to a VAT increase if this is linked to special expenditures, for example the development of railway infrastructure (Article 130 IIIbis Constitution) or the devoting of increased finance to the social security system.
According to the Federal Act on Stamp Duties,19 the federation levies three types of stamp duties purposing to tax the constitution or transfer of rights: an issuance stamp duty on the issuance of shares as well as participation and dividend certificates in companies and cooperatives, a transfer stamp duty on the transfer of securities and a stamp duty on insurance premiums.
Pursuant to Article 131 Constitution, the federation is also permitted to levy further consumption taxes, for example a tobacco tax, a beer and a spirits tax, a mineral oil tax on crude oil, other mineral oils, natural gas, the products obtained from the processing thereof and motor fuel, a mineral oil surtax on motor fuel, and an automobile tax on the value of imported or domestically manufactured automobiles. Moreover, the federation levies a CO2 tax and a federal casino tax.
2. CANTONAL AND COMMUNAL TAXES
a)Taxes on Income and Net Wealth
aa) Individual Income Tax
The cantons are obliged to levy an individual income tax based on the principles and framework outlined by the Tax Harmonisation Act (Articles 3 et seq. Tax Harmonisation Act). Because the Tax Harmonisation Act harmonises not only the tax laws of the 26 cantons (horizontal harmonisation), but also the federal direct tax law and the cantonal tax laws (vertical harmonisation), the cantonal tax laws largely follow the system of the federal direct tax law and contain very similar, sometimes even identical provisions.
There has been however no harmonisation in the area of tax allowances and tax rates. As such, the income tax rates vary considerably between the cantons and also between the communes of a canton. Traditionally, the municipalities with the lowest income tax rates are located in the Canton of Schwyz and Zug. The more expensive regions are traditionally found in the French part of Switzerland. For example, a single person with a taxable income of CHF 100’000 per year pays cantonal and communal income taxes at a total rate of 8.1 %20 if he or she lives in Wollerau (Canton Schwyz) and at a total rate of 23.5 %21 if he or she lives in Les Verrieres (Canton Neuchâtel). If such a person lived in the City of Zurich the income tax burden (cantonal and communal levels) would amount to 13.8 %.22
Up to this day, political efforts to restrict the cantons’ sovereignty to autonomously determine their income tax rates have been consistently unsuccessful. The positive effects of tax competition have so far been weighted higher than equality concerns, in particular since tax competition is considered to foster the spending discipline of the cantons (and communes) and to uphold their right of fiscal self-determination. A fiscal equalisation system on both the cantonal and the federal level aims to balance out to a certain extent the different burdens, financial strengths and financial needs of the 26 cantons (and communes), but has not the purpose to prevent tax competition.
bb) Net Wealth Tax for Individuals
Based on Article 2 Tax Harmonisation Act, the cantons are obliged to levy a tax on the net wealth of individuals. In general, individuals’ worldwide net wealth is subject to the tax, including for example bank deposits, securities, cars and real estate, but not household goods and personal effects (Article 13 Tax Harmonisation Act).
Assets are usually assessed at fair market value at the end of the tax year (Article 14 and Article 17 Tax Harmonisation Act). All debts are deductible. Further, different personal deductions are available. Some cantons further provide for tax-free minimums in terms of net wealth (e.g. Canton of Obwalden CHF 25’000, Canton of Zug CHF 100’000).23
Most of the cantons provide for a system of progressive tax rates. The maximum cantonal and communal net wealth tax rates range from between approximately 0.1 % in the Canton of Nidwalden to 1 % in the Canton of Geneva.24
b)Taxes on Net Profit and Capital of Legal Entities
aa) Net-Profit Tax of Legal Entities
The cantons are also obliged to levy a tax on the net-profit of legal entities. Due to horizontal harmonisation, the relevant provisions with regard to the tax subject, the tax object, the tax period, the tax procedure, and the tax penal law are again very similar or even identical to the federal net-profit tax.
As already mentioned, the tax rates are however not harmonised and for that reason the cantonal and communal corporate income tax rates differ quite significantly. Today, for corporations, the effective cantonal and communal tax rates including the federal direct tax rate range from approximately 12 % in the Canton of Lucerne to 24 % in the Canton of Geneva (for the tax year 2017).25
As a consequence of the ongoing so-called tax proposal 17 that aims at abolishing several cantonal preferential tax regimes which the international community considers harmful, many cantons intend to considerably reduce their corporate income tax rate. In future, in order to remain internationally attractive, most of the cantons aim at reaching an income tax rate for corporations of 13 to 15 % (total of effective federal, cantonal and communal tax rates).
bb) Capital Tax
The cantons are also obliged to levy a capital tax on a legal entities’ equity. For corporations, the taxable equity includes the paid-in share capital, any capital contributions made by the shareholders, and both disclosed and taxed hidden reserves. In almost all cantons the tax rate is proportional and ranges from approximately 0.001 % in the Canton of Uri to 0.5 % in the Canton of Basel Stadt.
c)Further Cantonal Taxes
aa) Inheritance and Gift Taxes
Inheritance and gifts are not subject to the income tax, neither on the federal nor the cantonal level. However, almost all cantons levy a special inheritance and/or gift tax.26 Inheritance and gift taxes are not subject to the Tax Harmonisation Act and are therefore not harmonised.
The inheritance tax is levied on the transfer of assets to heirs and legatees (statutory and designated), and the gift tax comprises gifts inter vivos. The surviving spouse is exempted from inheritance and gift taxes in all cantons, and most cantons also fully exempt all children and grand-children. The tax is generally calculated on the market value of the assets at the time of the decedent’s death or the gift minus any transferred debts. Other relevant factors in calculating the tax rate are the total amount of the assets transferred and the relationship between the heir and the deceased (degree of relationship) or the donor and the done respectively.
bb) Real Estate Capital Gains Tax
As outlined above, capital gains realised on moveable and immoveable private assets are tax-free on the federal level. Capital gains realised on moveable assets are also tax-free on the cantonal level.
The cantons are however obliged to levy a real estate capital gains tax on privately held immoveable property. This tax qualifies as a special kind of income tax. Even though the real estate capital gains tax belongs to the harmonised taxes (Article 2 Tax Harmonisation Act), there is much less harmonisation here as compared to the individual and corporate income taxes. However, the Tax Harmonisation Act demands that short-term real estate capital gains are subject to a higher tax burden in order to combat property speculation (Article 12 V Tax Harmonisation Act).
cc) Other Property and Expenditure Taxes
Due to the fiscal sovereignty of the cantons, the cantons or their communes provide for various further taxes. Most cantons levy a real estate transfer tax on the transfer of ownership of immoveable property (house and land) including any associated rights located in Switzerland. Some cantons levy a special real estate property tax that is assessed on an annual basis and calculated on the tax value of the property at the end of the tax period.
All cantons levy a motor vehicle tax on all motor vehicles and trailers located in Switzerland. Such motor vehicles must be duly registered in the respective canton in order to receive the registration papers and a number plate.
Further cantonal or communal taxes include dog taxes, entertainment taxes levied on the ticket price of public events, lottery taxes, stamp duties and register duties as far as not covered by the federal stamp duties, city taxes or visitor’s taxes for overnight stays, tourism promotion taxes, fire brigade exemption taxes, water taxes, etc.
3. International Tax Agreements
One key multilateral convention recently ratified by Switzerland is the Convention on Mutual Administrative Assistance in Tax Matters entered into force on 1 January 2017. Drafted by the OECD and the Council of Europe, the convention is today the most comprehensive multilateral instrument applicable to all forms of tax co-operation in order to tackle tax evasion and avoidance.
Subsequently, Switzerland also ratified the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. This agreement provides a standardised mechanism to facilitate the automatic exchange of financial account information between tax authorities. It has been in force in Switzerland since 1 January 2017 with the consequence that the Swiss banking secrecy does no longer apply to holders of Swiss bank accounts living abroad.
Switzerland also actively participated in the OECD’s working groups of the Base Erosion and Profit Shifting (“BEPS”) project. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS was signed by Switzerland on 7 June 2017 and shall be ratified in the course of 2018. This instrument should allow countries to easily implement the minimum standard outlined in the BEPS final reports.
b)Double Taxation Treaties
Switzerland has signed a total of approximately 95 double taxation treaties covering individual and corporate income taxes as well as withholding taxes. Some of them also include net wealth and capital taxes. Swiss double taxation treaties principally follow the OECD model convention with just a few Swiss-specific deviations. Unlike the situation regarding income taxes, currently, Switzerland has only concluded 8 double taxation agreements covering inheritance taxes.
c)Bilateral Agreements with the European Union
Switzerland is not a member state of the European Union. Nevertheless, a close relationship exists between the two parties on political, economic and cultural levels. Over the years, countless bilateral agreements have been concluded to govern these relations. From a tax perspective the most important agreements are the Agreement on Free Movement of Persons that prohibits amongst others discrimination of EU nationals in Switzerland and vice versa,27 and the Agreement on Automatic Exchange of Information in Tax Matters that replaced the former Agreement on the Taxation of Savings Income as of 1 January 2017.
12Madeleine Simonek, Kommentierung zu Artikel 128 BV in Bernhard Waldmann/Eva Maria Belser/Astrid Epiney (eds.), Basler Kommentar Bundesverfassung, Basel 2015, N 1 et seq., also for additional information on the history of the federal income tax.
13In a popular vote of 4 March 2018, the federation’s competence was prolonged for another term of 16 years.
14Federal Act on the Federal Direct Tax of 14 December 1990, SR 642.11.
15Costs for private transportation are only deductible if no public transportation is available.
16Tax rates for the tax year 2017.
17Federal Act on Withholding Tax of 13 October 1965, SR 642.21; Ordinance on Withholding Tax of 19 December 1966, SR 642.211.
18Federal Act on Value Added Tax of 12 June 2009 (Value Added Tax Act, VAT Act), SR 641.20; see for an English version of the Value Added Tax Act www.admin.ch (https://perma.cc/6P3Q-AXMW).
19Federal Act on Stamp Duties of 27 June 1973, SR 641.10.
20Including the federal income tax the total rate amounts to 11.0 %.
21Including the federal income tax the total rate amounts to 26.4 %.
22These calculations include the usual deductions and tax allowances that may however vary from canton to canton, and represent the average tax rates for the tax year 2017.
23For a single person without children for the year 2017.
24Maximum tax rate for a single person without children for the tax year 2017.
25“Effective tax rate” means the applicable tax rate before deduction of the taxes.
26The Canton of Schwyz and the Canton of Obwalden levy neither an inheritance nor a gift tax; the Canton of Luzern does not levy a gift tax.
27See for a landmark case on the application of the Agreement on Free Movement of Persons p. 268.