Tax in Switzerland

Individuals establishing tax residence in Switzerland are assessed for federal income tax purposes on a current-year basis.

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.

This includes:

• Remuneration from an employer (base salary, bonus, stock options, home leave, and payment of rent, taxes, school fees and utilities)
• Self-employment or business income
• Pension payments and compensation for loss of work or health
• Income from private investments (including interest and dividends)
• Income from real estate

Income from a fixed place of business or a permanent establishment located abroad, as well as real estate located abroad, is exempt from taxation. But this income must be properly recorded on a Swiss tax return for the determination of the tax rate (exemption with progression).

At the cantonal level, tax is also assessed on a current-year basis. Taxable income for cantonal and municipal tax purposes is calculated in basically the same way as taxable income for federal taxes.

An individual who is tax resident 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:

• Interest in Swiss real estate
• Interest in a Swiss partnership or sole proprietorship
• Trade or business attributable to a Swiss permanent establishment or fixed place of business
• Professional practice in Switzerland
• Trade and agency of real estate located in Switzerland
• Services performed in Switzerland (with exceptions)
• Interest income derived from a mortgage secured by Swiss real estate
• Services rendered as a director or officer of a Swiss corporation (with exceptions)
• Payments from Swiss pension funds

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 70% 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.

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:

• Income from Swiss real property
• Income from Swiss investments
• Income from any other property located in Switzerland
• Income from Swiss-source patents, copyrights and similar property rights
• Pensions or annuities paid from Swiss sources
• Foreign income, if treaty exemption is claimed

Cantonal income taxes - Several cantons allow a non-working 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, residents 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 ten countries.