The Tax System Of Switzerland
Introduction
There are three levels of taxation in Switzerland: the Confederation, the cantons as well as the communes are empowered to levy taxes. This is in accordance with the Swiss system of federalism and is rooted in Switzerland’s historical development. The cantons are free to decide which taxes they choose to levy unless the Federal Constitution specifically bars them from collecting a given tax or reserves the exclusive right to do so to the Confederation.
This explains why there are differences between tax laws at the federal and cantonal level and also between the individual cantons as well. At first glance, the large number of taxes levied by the Confederation, cantons and communes may seem astonishing. However, in comparison \ with other countries, Switzerland does not stand out in any way with regard to the variety of taxes levied.
Tax harmonisation
Harmonisation is intended to rationalise and simplify the Swiss system of taxation. On June 12, 1977, the Swiss people and the cantons approved a constitutional article on tax harmonisation. This article (Art.129 FC) provides for both vertical (Confederation, cantons and communes) and horizontal harmonisation (among cantons, within a given canton, and among communes). In order to achieve this goal, the Confederation passed two laws on December 14, 1990: the Federal Law on the Harmonisation of Direct Cantonal and Communal Taxes, and the Federal Law on Direct Federal Tax.
Harmonisation law
The Federal Law on the Harmonisation of Direct Cantonal and Communal Taxes, which entered into force on January 1, 1993, constitutes a framework law. It contains fiscal principles with regard to tax liability, taxable units and assessment periods, procedure and criminal law. However, the fixing of schedules, tax rates and tax-free allowances remains a competence of the individual cantons. The most important principles may be summarised as follows:
• standardised assessment periods for both individuals and legal entities;
• full taxation of social welfare services and full deduction of premiums paid out;
• retention of family taxation;
• moderate taxation of rentable value;
• tax exemption for (private) capital gains on movable assets and taxation of earnings derived from the sale of immovables;
• standardisation of tax deducted at source;
• deduction of taxes for legal entities;
• tax relief for mergers, demergers and restructuring into a different legal entity;
• tax relief for holding and management companies;
• tax relief for newly incorporated companies.
Following the entry into force of this law, the cantons were granted eight years (i.e. until January 1, 2001) to align their own tax legislation.
Direct Federal Tax
The Federal Law on Direct Federal Tax has been in force since January 1, 1995. It has been aligned as closely as possible with the Federal Law on the Harmonisation of Direct Cantonal and Communal Taxes and takes into consideration the concerns of the cantons with regard to tax harmonisation.
The Swiss Taxation System
Historical background
The Swiss system of taxation has been strongly marked by history. When Switzerland was still a federation of states, the cantons derived the bulk of their revenue from customs duties. In addition, some cantons had also even introduced a wealth tax. The right to levy customs duties was transferred from the cantons to the Confederation in 1848, the year in which the Swiss Federal State was founded. However, the cantons retained the right to levy tax on incomeand assets. Until the First World War, revenue derived from customs duties was sufficient to cover the Confederation’s expenditure. Towards the end of the war, however, stamp duties were introduced. Later on, as the federal government needed additional financial means, it turned to direct taxes, previously a domain granted to the cantons.
This evolution culminated in the introduction of the so-called National Defence Tax (1941). Today, along with Value Added Tax, Direct Federal Tax (formerly known as National Defence Tax) is an important cornerstone of fiscal revenue and subsequently of the federal budget. Initially, wealth tax used to be the principle tax levied by the cantons; taxation on income was merely supplemental. However, a conversion took place over time from the traditional system of taxes on wealth and income to a common system of taxation on income with a supplementary tax on wealth and assets.
Originally, these taxes were levied proportionally. Over time, progressive taxation became the rule in taxation on income and wealth, and social deductions were introduced to take account of taxpayers in the lower-income bracket or with families.
The three levels of taxation
1) Taxes on income and wealth.
2) Taxes on goods and services.
3) Taxes on property and expenditure.
International double taxation
Double taxation results from the overlapping of different tax jurisdictions. As a consequence, the taxpayer is simultaneously subject to similar taxes on the same item by two different fiscal jurisdictions. Double taxation occurs both in intercantonal and in international relations. Intercantonal double taxation conflicts are settled on the basis of the practice established by the Federal Supreme Court. The avoidance of international double taxation is achieved by means of international double taxation conventions.
So far, Switzerland has concluded comprehensive double taxation conventions with more than sixty countries. There are two principal methods for the elimination of double taxation, namely, the exemption method and the credit method. Under the exemption method, the country of residence is required to exempt from tax those items of income and/or capital allocated to the source country. Exempted items may nevertheless be taken into account in determining the rate of tax applicable to the remaining income (exemption with progression). Under the credit method, both countries keep the right to tax a specific item. However, the country of residence must credit the source country’s tax against its own tax. The annex contains two tables under figure 1:
✘ a list of double taxation conventions concluded by the Confederation;
✘ an enumeration of tax relief for Swiss dividends and interest.
Federal taxes
Taxes on income or profits and other direct taxes
Direct Federal Tax Legal basis Art. 128 FC Federal Law on Direct Federal Tax of December 14, 1990. General Direct Federal Tax is levied only on the income of individuals; legal entities are, as a rule, subject to tax on profits. For individuals, the tax is generally assessed annually on the basis of the actual income earned.4) Legal entities are assessed for each tax period (which corresponds to the financial year). Taxes are collected annually by the cantons for the Confederation, under the latter’s supervision.
Income tax
Residents or temporary residents engaged in gainful activities in Switzerland are, as a rule, subject to tax (unlimited tax liability). Limited tax liability applies to non-residents having specific economic relations with Switzerland. In such cases, the tax is not levied on an international basis but only on specific items of income having their source in Switzerland (e.g. property, permanent establishments, etc.). Pursuant to the principle of family taxation5), income earned by a married couplein a joint household is calculated without regard to their marriage property regime (see also section IV, fig. 3).
The total income is subject to Direct Federal Tax, e.g.:
✘ Income from dependent and independent gainful employment.
✘ Compensatory income (such as annuities and pensions).
✘ Subsidiary income (such as seniority allowances and tips).
✘ Income from movable and immovable property.
✘ Capital gains and increases in value of property and rights, if they were realised in an enterprise.
✘ Prizes in lotteries and pools.
Generally, expenses related to the earning of income, i.e. costs necessary to earn this income (e.g. professional expenses), are deductible from gross income. In addition, so-called general deductions are granted for insurance contributions, premiums and contributions to old age, company or individual pension schemes, for double-income married couples etc. as well as for social deductions for children and dependants.
The rates at which Direct Federal Tax is levied on individuals are progressive. Married couples in a joint household and oneparent families benefit from a more favourable rate than other taxpayers (“double schedule“ system). Rates directly determine the tax calculation; no annual multiple is used (see section IV, fig. 2 for further details). The maximum legal rate is 11.5% (Art. 128, para 1, clause a FC). Bracket creep is offset (index clause).
Taxes on profits of legal entities
As a rule, legal entities having either their registered office or their effective administration in Switzerland are liable for tax.
Two categories of legal entities may be distinguished:
• corporations (joint stock companies, limited partnerships, limited liability companies) and cooperative societies;
• other legal entities (associations, foundations, public and ecclesiastical entities and institutions as well as investment funds with direct property holdings).
Corporations and cooperatives
At the federal level, corporations and cooperatives pay a proportional tax on profits amounting to 8.5%. No annual multiple is applied.
Holding companies are companies which have significant holdings in the capital of other companies. They benefit from a reduction
in the tax on net profits in relation to the net investment profits out of total gains. This is done to avoid double or multiple taxation which would arise if a company with holdings in another company were liable to taxation on the (already taxed) earnings paid out. Pure holding companies, meaning those companies which consist entirely of holdings in other companies, pay no tax on profits.
Other legal entities
Associations, foundations, public and ecclesiastical bodies and institutions as well as entities under cantonal law generally pay a proportional federal profit or income tax of 4.25% unless they are exempt from tax on the basis of their charitable, social or other purpose or due to their modest incomes. The same also applies for investment funds with direct property holdings.
Swiss withholding tax (anticipatory tax)
Legal basis
Art. 132, para 2 FC Federal Law on Withholding Tax of October 13, 1965.
Principle of taxation
The withholding tax is an anticipatory tax deducted at source on income derived from movable property (35%; especially on interest and dividends), Swiss lottery winnings (35%) and insurance payments (8 or 15%).
Under certain conditions, it is reimbursed in cash or through crediting with cantonal and communal taxes. An individual, resident in Switzerland and liable to tax, who meets his declaration obligations will thereby not be definitively burdened by the tax. It is the domestic debtor who is liable for the tax. He is required to pay the tax on the taxable object and to deduct the tax from the amount due to the recipient. In cases where the recipient is a Swiss resident, he is entitled to a refund or the equivalent in credit of the tax withheld, as long as he declares the income and constituent assets. The aim of this concept is to make tax evasion unattractive for domestic taxpayers.
For taxpayers resident abroad, the withholding tax represents a final tax burden. Only persons whose country of residence has concluded a double taxation convention with Switzerland, may, depending on the terms of the convention, be able to claim a full or partial refund of the withholding tax, as long as proof can be provided that the revenue subject to the withholding taxw has been taxed in their country of residence.
Taxes on goods and services
Value Added Tax (VAT)
Legal Basis
Art. 130 FC Federal Law on Value Added Tax of September 2, 1999.
Principle of taxation
The Value Added Tax is a general use and consumption tax. It is levied on all phases of production and distribution as well as on the import of goods, domestic service industries and the procurement of services from companies based abroad.
Tax liability originates in the exercise of an independent occupation or a commercial activity, the purpose of which is to generate income, insofar as its deliveries, services and personal domestic consumption exceed CHF 75,000 per year. Furthermore, Value Added Tax applies to those who procure taxable services from companies based abroad totalling more than CHF 10,000 per year and those who are subject to customs duties for the importation of goods.
The basis for calculation of the tax on domestic deliveries and services is the agreedupon or the collected gross payment. The pre-tax deduction avoids tax cumulation (taxable purchase and taxation of the turnover): each taxpayer can deduct the sum of all pre-taxes from the gross taxes on its turnover (net all-phase principle). Since the Value Added Tax is intended to be borne by the consumer, it will generally be passed on him by way of its inclusion in the sale price or as a separate item on the bill. Only those subject to the Value Added Tax may make a reference to it.
Particulars The law differentiates between turnover which is exempt and that which is excluded from Value Added Tax. No tax is levied on either form of turnover. However, a distinction must be made with regard to the right to the pre-tax deduction. The pre-tax deduction is only allowed for all taxes paid for goods and services which are necessary to generate turnover exempt from Value Added Tax (genuine exemption). However, there is no pre-tax deduction for the taxes paid in generating turnover excluded from Value Added Tax (false exemption).
In particular, the following are tax exempt:
✘ export deliveries, insofar as export is documented;
✘ cross-border transport services;
✘ services for recipients with personal or business domicile abroad (since 1.1.2001, foreign turnover is no longer subject to VAT).
In particular, the following are excluded from VAT:
✘ services performed in the areas of health, social services, social security;
✘ education, teaching as well as child- and youth-care;
✘ cultural activities;
✘ insurance sales;
✘ turnover in the area of money and finance (with the exception of the administration of property and the collection business);
✘ transfer and purchase of real rights to property as well as its assignment for use or utilisation;
✘ gambling, lotteries and other types of games of chance;
✘ sale of domestic postage stamps used as such.
Taxation rates
Standard rate: The tax amounts to 7.6%. Special rate: 3.6% on services rendered in the hotel sector (such as bed and breakfast). Reduced rate: On certain categories of goods, a reduced rate of 2.4% is applied:
✘ food and beverages, with the exception of alcoholic beverages and services rendered in the hotel or catering sectors;
✘ cattle, poultry, fish;
✘ seeds, living plants, cut flowers;
✘ grain;
✘ fodder and fertiliser, etc.;
✘ medicine;
✘ newspapers, magazines, books and certain other printed matter;
✘ services of the radio and television corporations (exception: standard rates for activities of a commercial nature).
Principle of taxation
Switzerland levies customs duties on imports at rates laid down in the customs tariff. There are no “ad valorem“ duties, as Switzerland almost exclusively levies duties based on weight.
Income taxes for individuals
All cantons and communes apply a system consisting of a general income tax and a supplementary net wealth tax. Cantonal income tax legislation is similar to the Direct Federal Tax in structure.
All cantons tax the total income without distinction to individual components. Therefore, individuals must declare every item of income, whether it be derived from dependent or independent personal activities, income from compensatory or subsidiary payments or income from movable or immovable property.
As far as the taxation of couples is concerned, the Swiss tax system is based on the principle of family taxation. This means that the income of both spouses in a joint household is aggregated and as a rule the income of under-age children is also added to the income of the person who exercises parental authority. There is one exception: income earnings of under-age persons for which a separate tax liability applies. (See section IV, fig. 3 for details.) Expenses incurred in the course of earning income are deductible from the gross income (e.g. professional expenses or general costs). In addition, general deductions (insurance contributions, premiums and contributions to AHV/IV/EO, contributions to company and individual pension schemes, private debt interest, double earner deductions etc.) as well as social deductions (personal deduction, deduction for married persons, single-parent families, children, dependants etc.) may be claimed. The amount of these deductions varies considerably from one canton to another.
Income tax rates are progressive in all cantons; that is, the tax rate rises as income increases until a certain ceiling is reached. The intensity and impact of the progressiveness of rates vary from canton to canton.
All cantons take the family situation into consideration inasmuch as they – despite or in addition to the deduction for married couples – use a double schedule or tax according to the splitting procedure or based on consumer units. Taxation at source All cantons tax at source the earned income of foreigners working temporarily in Switzerland and not in possession of a residence permit (withholding tax). The employer must withhold the tax due and pay it to the cantonal tax administration.
This deduction levied at source covers federal, cantonal and communal income tax liabilities (including any church taxes). (See section IV, fig. 4 for details.) Taxation on the basis of expenditure All cantons allow foreigners resident in Switzerland who are not and have not been engaged in any gainful activity in our country to choose between an ordinary assessed tax or payment of a flat rate. The basis for assessment of this tax generally consists of the annual expenses of the tax subject. (See section IV, fig. 5 for details.)
Tax on the assets of individuals
In contrast to the Confederation, all cantons and communes levy a tax on the assets of individuals.
In general, tax is applied to the total assets of the individual. This includes all of the assets and rights which the taxpayer owns or utilises. These are usually taxed at market value. In particular, taxable property includes movables (e.g. securities, bank deposits, automobiles) and immovables, redeemable life and annuity insurances, as well as assets invested in a business. Household and personal equipment are not taxed. The basis of assessment for the tax on assets is net property, i.e. the gross wealth of the taxpayer after deduction of total proved debt. In addition, certain deductions (social deductions) which vary from canton to canton are allowed from net property. The rates for the net wealth tax are generally progressive. Most of the cantons further grant certain tax exemptions. Foreigners who pay tax based on expenditure are not required to pay a separate tax on assets.
Real estate tax
In approximately half of the cantons, property is subject not only to the wealth or capital tax but also to a property tax levied periodically (yearly), which is also known as a land or immovable property tax. The property tax is primarily a communal tax. When it is cantonal, the communes usually receive a percentage of the revenue. The immovable property tax is levied at the place where the property is situated, without consideration as to the domicile of the taxpayer. For the calculation of the tax, non-farm properties usually measure their market value, whereas farm and forestry properties measure their earning power. The tax is assessed on the full value of the property without allowing for the deduction of debts.
The tax is always proportional; the tax rate is expressed in units of thousandths and varies between 0.3 and 4.0‰ of the market value or earning power. In addition to a possible property tax, almost half the cantons also apply a so-called minimum tax on properties of corporations, if the latter is higher than the sum of the tax on profits and the tax on capital or higher than the minimum tax on gross income.
Transfer tax
The transfer tax is a legal transfer tax which is levied on any change in ownership of immovable property (and the related rights) which are located in the canton or the commune. Thus, the subject of the tax is the change in ownership as such. Transfer taxes are levied in almost all cantons, usually by the cantons but sometimes exclusively by the communes or by both simultaneously. A few cantons levy transfer fees rather than transfer taxes. The tax is assessed on the purchase price and is usually paid by the purchaser of the property (individual or legal entity) if there is no mutual arrangement. The tax rates are generally proportional and amount to between 1% and 4% of the purchase price in the majority of the cantons.
Taxation of holding and management companies
Holding companies In general, the term “holding company“ includes joint stock companies, limited partnerships, limited liability companies and cooperatives, whose main purpose is the permanent administration of holdings in other companies (corporations). In order to avoid any double or multiple taxation, these corporations enjoy tax relief. Accordingly, they are as a rule exempt from any tax on profits and pay only a reduced cantonal tax on capital.
✘ Tax on profits
The Direct Federal Tax does not recognise the concept of a holding company. However, there is a deduction which can lead to a 100% reduction of the tax on profits, provided the net earnings from the holdings tally with the net profits. The holding deduction can also be claimed for the profit on sold shares. All cantonal tax legislation provide for full tax exemption of holding companies, as long as the participation level or level of participation revenue is at least 2/3 of the total assets or revenues. However, the Confederation and all cantons tax the earnings from property situated in Switzerland or the canton concerned.
✘ Tax on capital
The Confederation does not levy any tax on capital. While the cantons do levy a tax on capital for holding companies, it is at a more moderate rate. Most cantons envisage a minimum tax of between CHF 100 and CHF 500.
Furthermore, the systems and rates vary from canton to canton; in the majority of cantons, proportional (i.e. fixed) rates are applied.
Management companies
Management companies are taken to mean companies which only have a head office in the canton but do not exercise any business activity there. Almost all of their business is conducted abroad.
✘ Tax on profits
Unlike the Confederation, all cantons grant management companies certain tax reliefs: participation revenues and gains on capital and appreciation on participations are exempt from tax while other earnings from Switzerland (also from immovable property) and from abroad are subject to tax at the normal rate.
✘ Tax on capital
The Confederation does not levy any tax on capital. Almost all cantons apply a reduced rate in the taxation of capital, often the same as for holding companies (minimum tax of between CHF 100 and CHF 500).
