Taxes in Switzerland

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The Swiss tax system is a mirror of the state structure of the country — a confederation under which each of the 26 cantons has its own laws, including on taxation. Cantons govern on their own the taxation of income, property, inheritance, capital, land and other facilities. In turn, each of the 2,800 municipalities of the country has the right to levy local taxes at its own discretion or to use the framework established at the cantonal level. At the federal level, despite the fact that the main revenue yields come from VAT, stamp duties and customs fees, there is also a federal income tax. All taxes in Switzerland can be divided into three groups.

Swiss tax system

Federal taxes: direct federal tax on personal income and on the net income of legal entities (for corporations and cooperatives, this equals 8.5% of profits; for associations, foundations and other legal structures — 4.25%); VAT (average rate of 8%).

Cantonal taxes: cantonal tax on the income and net income of individuals and on the profits of legal entities; annual capital tax for legal entities (from 0.0010 to 0.5288% for companies that are taxed according to the standard procedure, and from 0.0010% to 0.4028% for companies eligible for special tax treatment); inheritance and gift taxes.

Municipal taxes: municipal tax in addition to the basic cantonal tax (in Zurich, for example); tax on the purchase and transfer of real estate ownership.

In most cases, people choose Switzerland as a location to register a company or to live because of the low taxes. However, the country’s 26 cantons are endowed with legislative power, so the tax rates vary widely. Thus, the profit tax rate can vary from 11 to 29%.

Traditionally, the lowest profit taxes are in the cantons of Zug and Fribourg, while the lowest personal income tax is in the canton of Schwyz.
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Therefore, many international trading companies are incorporated in Zug, but the wealthiest people prefer to settle in the canton of Schwyz, where there is also no inheritance tax. There are rumors about cantons where the tax burden is reduced to zero. Although there are no such cantons in Switzerland, the dissemination of such rumors has propelled the practice of tax treaties in the country, which is considered below.

With regard to dividend tax, Switzerland does not have anything to boast. The tax rate is 35%, while in Russia and Cyprus, similar rates are only 9 and 10% respectively. However, good tax planning can reduce the effective tax rate.

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Double taxation avoidance agreements

Switzerland has many agreements with other countries for the purpose of avoiding double taxation. In addition to protecting from double tax on income and profits, these agreements also govern the payment of taxes at source.

The effect of these double taxation avoidance agreements also extends to personal income tax. This means that if you live in Switzerland, where you have an income on which you pay tax at local rates, then it is not necessary to pay the tax again in your home country. However, we must very carefully check the agreement with local specialists, as the USA or Germany, for example, will still require additional tax payments.

Income tax for individuals

All individuals who reside permanently or temporarily in Switzerland must pay taxes without exception. Tax liabilities arise when a person is in Switzerland: for a minimum of 30 days and is employed; for a minimum of 90 days and is not employed.

It is important to understand that this all concerns taxation on income derived from sources in Switzerland.
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The income of married couples living together, regardless of the property status of both spouses, is treated as a single unit.

Direct federal tax is levied on gross income, which includes: income from employment, together with additional income (gifts, bonuses, gratuities, etc.); income from business activities; various kinds of social security (benefits, pensions); income from movable and immovable property; other income (lottery, winnings).

Typically, when calculating gross income, associated costs, payments to social insurance funds, repayments of debt up to a certain amount and certain other payments are subtracted.

Direct federal tax rates are progressive and provide benefits to cohabiting couples and single parent families.

At the cantonal and municipal levels, there are a personal income tax and a partial property tax. Income tax is inherently similar to the direct federal tax.

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Taxpayers who live abroad

There are a number of persons who are required to pay taxes in Switzerland, even if they do not live there. These include individuals who live abroad and derive income from sources in Switzerland.

In this case, when there is some type of commercial involvement with Switzerland, we are talking about “limited tax liability”, which applies to: owners, co-owners and managers of companies located in Switzerland; owners of land rights; those who rent and trade land plots located in Switzerland; through the work of artists, athletes, etc.; through membership on the board of directors or management of legal entities whose principal place of business or activities is in Switzerland; by the payment of employee insurance from a former employer or insurance company with headquarters in Switzerland; by insurance payments through the Swiss labor pension; through payments from a former employer whose principal place of business or activities is in Switzerland; by working in the field of international transportation for a company whose principal place of business or activities is in Switzerland.

Depending on the type of income, there is either a general tax system or a taxpaying system at source.

Flat tax, or what is so attractive about Swiss taxes?

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The progressive income tax rate in Switzerland for individuals with high incomes (from CHF 200,000) is quite high and can reach 42%. This is commensurate with the tax rate on income in excess of GBP 33,600 a year in the UK. Although it is possible to move to the canton of Schwyz, the tax burden will still be substantial, especially for the taxation of gross income from all over the world.

If you are a tax resident in Switzerland and have received a coveted residence permit or citizenship, you must pay taxes in this country on all your income worldwide!

It would seem that if you have a substantial income in, for example, Russia, where the income tax rate is 13%, it is unwise to pay 42% in Switzerland. So what makes Switzerland so attractive to wealthy people?

It’s time to recall the above-mentioned information on “tax agreements” in section on obtaining a residence permit in Switzerland. Recall that in Switzerland, there is a flat tax for individuals (the so-called Pauschalbesteuerung, or lump-sum tax), when the amount of tax is calculated based on the costs of maintaining the customary standard of living (maintaining a home, car, vacation, etc.), but not from the real incomes from around the world, taking into account capital gains.

Note that this tax is quite high, but its size is determined individually in the course of negotiations with the tax department. But it is still advantageous because after paying a flat tax in Switzerland, the Swiss authorities do not lay claim to your income from other countries. Thanks to this, the Swiss tax system has become so popular.

If you pay a flat income tax in other countries and have an agreement with Switzerland for the avoidance of double taxation, then it is not levied. But, to repeat: it is better to consult in advance on all these matters with experts in the field of taxation.

Real estate tax

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When buying real estate in Switzerland, you will be subject to a land transfer tax, which ranges from 1 to 3% of the value of the object (depending on the canton). An exception is the canton of Zurich, in which this tax is not charged. When buying a property, you also have to pay part of the notary fees (approximately 0.5%) and expenses for changes to the property registry (about 0.5%). Total costs range from 2 to 5%. Property tax in Switzerland averages 0.3–0.7% and is calculated on the value of invested capital. Property tax amounts to 0.2–0.6% of the appraised value of the object. Both taxes are paid once a year.

Since in most cases, residential real estate in Switzerland is sold in the form of vacation houses and apartments, there is also an imputed income tax for property owners. The country’s authorities presume that a property owner will lease the property up to 11 months of the year and use it himself for only three weeks, as he is obligated. But in reality, it is difficult to verify how much time the owner lives in the property himself and how much he rents it out. As such, the authorities decided to introduce the so-called “imputed income tax”, which is a usually small, fixed amount.

Every year, a property owner is sent a declaration, which must be filled out and sent to the tax authorities in the place of tenure. While taxation may be very different in different cantons, the procedures are almost identical.

It is important to know that when calculating property tax, specific rates are applied (usually increasing), which are directly dependent on the income bracket of the property owner and the value of his total revenues worldwide. How does this happen? When filling out a tax return, the property owner must specify the size of his assets and income around the world. Of course, he will pay taxes only on what he has in Switzerland, but he is obliged to declare all income and assets. Furthermore, the coefficients used to calculate the value of the tax are based on the aggregate amount of assets and income.

If information on aggregate income and assets is not available, many cantons go by a simple rule — they presume that a foreign property owner in Switzerland has assets in other countries worth three times more than what he owns in Switzerland. In addition, his income earned outside the country, allows him to maintain this property. The multiplying coefficient is usually calculated on this basis of this presumptive amount. For apartments worth CHF 700,000 to 1 million, this could lead to a payment of additional CHF 1,000–1,500 per year. Therefore, when filing a tax return, it is advisable to consult your local tax professional.

About half the cantons also levy a special annual real estate tax on wealth. The tax rate is established based on the market or taxable value of real estate without deduction of debts. The tax rate ranges from 0.03 to 0.3%.

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Frequently Asked Questions

  • What are the tax burdens of acquiring real estate in Switzerland?

    In many respects, it depends on the canton in which the acquired property is located, as the Swiss cantons have great freedom in levying taxes. In general, the tax consequences may be as follows.

    Tax on the transfer of property ownership. Most cantons levy a tax on the transfer of property ownership in the amount of 1–3%.

    Capital gains tax. When a property is sold, capital gains tax is levied at cantonal level if there is a difference between the sale price and the costbased price (purchase price plus additional incurred costs). This tax is paid by the seller, and its size depends on the canton’s current tax rate and term of tenure.

    VAT. VAT is charged at the federal level and its normal rate currently stands at 8%. Property sales, in principle, are not subject to VAT. However, developers may choose a tax plan that stipulates the payment of VAT. In addition, this tax is levied on construction work and materials.

    Inheritance and gift tax. In principle, real estate is subject to taxation on inheritance or gift tax in the canton in which they are located. Inheritance tax is levied only at the cantonal level, and many cantons consider the transfer of property to spouses and close relatives (children) to be exempt from this tax.

  • What are the tax burdens of owning real estate in Switzerland (the annual taxes and fees)?

    Property tax. In almost half of the Swiss cantons, a special tax is levied on real estate (in addition to the general wealth tax), the rate of which varies from 0.05% to 0.2%.

    Income tax. Both federal government and the cantons levy tax on income from real estate, with a hypothetical income taxable even if the property is used by the owner. The tax rates vary considerably from canton to canton.

    Wealth tax. Wealth tax is levied at the cantonal level at a rate of 0.2–0.7%.

    If the property was acquired through a company, then you must also take into consideration corporate income and capital tax at the federal level.

  • What tax complications can occur? Which mistakes are most common?

    It is very important to note that the sale of property management companies could be taxed in Switzerland, even if only involves a transfer of shares, rather than a deal with the assets. Moreover, the purchaser of the property may be obliged to pay the capital gains tax if the seller has not paid them.

  • What should I do to secure a real estate purchase in Switzerland from a tax point of view?

    Buyers of Swiss real estate must carefully examine the potential tax claims related to real estate, and always involve a notary or a (tax) lawyer for the preliminary analysis of the real estate transaction documents.

  • What are the advantages and disadvantages of buying Swiss property in the name of a Swiss company?

    Using a Swiss company for the purchase of real estate involves additional costs associated with the administration and management of the property. In addition, Swiss companies are subject to a tax on corporate profits and capital tax, as well as a withholding tax, which may increase the overall tax burden.

    If the Swiss company qualifies as a holding company for property management, the sale of its shares is taxed on capital gains.

  • What schemes can be used to minimize taxes?

    When dealing with residential property, it is possible to use a trust that will own the real estate, while in the case of commercial real estate, it possible to go through a foreign property management holding company (which is based in a country that has a favorable agreement with Switzerland on the taxation of property management companies).

    However, the acquisition and management of real estate must be carefully planned with the mandatory involvement of a Swiss (tax) lawyer.

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