Taxes in Switzerland - a complex topic. The Swiss tax system is based on a three-pillar principle. The federal government, each of the 26 cantons and around 2200 municipalities are authorized to collect different types of taxes. A complex system which can be difficult to comprehend for non-experts.
The Confederation, each of the 26 cantons and about 2200 municipalities may levy different types of taxes in Switzerland, although not every tax can be collected at every level. The right to levy taxes is limited by the Swiss Federal Constitution.
The basic principles of the Swiss financial order, i.e. the guidelines on how taxes may be levied in Switzerland, are derived from Art. 126 - 135 FC.
The FC defines the division of powers between the Confederation on the one hand and the cantons on the other. While the Confederation may only levy those taxes to which it is authorized by the FC, the cantons are in principle free to determine their own tax structure. Consequently, the cantons may levy all taxes that are not explicitly prohibited by the Federal Constitution or reserved for the Confederation. In contrast, the municipalities may only levy taxes insofar as they have been authorized to do so by the cantons. Regardless of the type of tax and the level at which it is levied, the basic features of the tax in question must be provided for in a law that has been submitted to a referendum.
Further regulations on tax law result in particular from the direct federal tax law (DBG) and the federal law on the harmonization of direct taxes (StHG).
Swiss taxes and the Swiss tax system are based on the basic principles of fiscal sovereignty established in the FC. These limit the possibility of the Confederation, the cantons and municipalities to levy taxes. The legislative and regulatory authorities have to adhere to various principles with regard to the design of taxes.
One of said guidelines is the principle of equality of rights (Art. 8 FC), which states that the equality of rights is violated if there is an objectively unjustified unequal treatment in legislation or in the application of the law.
The prohibition of arbitrariness in Art. 9 FC is also intended to guarantee a minimum of fairness by the state authorities when dealing with tax payers. It prohibits the adoption of unobjective or meaningless laws and the obviously arbitrary application of the law.
Furthermore, the tax regulations may not interfere with economic freedom (Art. 27 FC). For example, the cantons may not introduce special trade taxes.
Last but not least, the freedom of belief and conscience (Art. 15 FC), the guarantee of property (Art. 26 FC), the prohibition and intercantonal double taxation (Art. 127 para. 3 FC) and the prohibition of unjustified tax benefits (Art. 127 para. 3 FC) must not be violated.
Learn more about the basic principles of taxation and how they influence taxes in Switzerland.
The legislator is bound by various barriers when issuing taxes. The principles of taxation contained in Art. 127 FC determine the minimum standard that the legislators must obey.
According to Art. 127 para. 1 FC, the tax structure, namely the group of taxpayers, the subject of the tax and its calculation must be regulated in the law itself.
These minimum requirements must be laid down in a formal law, i.e. a law that was subject to a referendum. This regulation serves the purpose of legal certainty. The people should have a saying in introducing a new tax.
Art. 127 para. 2 FC contains the so-called tax collection principles. These include the principles of universality and equality of taxation as well as the principle of taxation according to economic performance. They are intended to protect the taxpayer from excessive state intervention.
The most notable outflow from the principle of taxation according to economic performance is the progressive design of income tax. Those who earn more have to pay a higher percentage of taxes. This is also reflected in the Swiss tax return.
Taxes are classified according to their collection level (federal/cantonal/communal) and their purpose. Different types of taxes can be distinguished.
The first tax category is direct taxes. These are further divided into general taxes and special taxes. While individuals are subject to general taxes in the form of the income and wealth tax, legal entities pay taxes on profits and capital.
At the federal level, only the income or profit tax is levied. At the cantonal and municipal level, however, the income and profit tax as well as the wealth and capital tax are levied. In addition, various special taxes are levied. The withholding tax and the tax on real estate gains are just a few examples of possible special taxes.
Indirect taxes represent about 30% of Swiss tax revenues. The main indirect tax is the value added tax (VAT), which is levied by the federal government.
Natural persons, i.e. individuals, are obliged to pay taxes in Switzerland. To be more precise, they have to pay the income and wealth tax. This rule applies to all natural persons who are resident or domiciled in Switzerland for tax purposes and who are therefore liable to pay taxes due to their personal affiliations with Switzerland.
According to tax law, a person is considered to be resident in Switzerland if he or she has been in Switzerland for at least 30 days for gainful employment or if he or she has been in the country for at least 90 days without gainful employment. In international comparison, this time requirement is very short.
Persons without fiscal domicile or residence may still be subject to taxation, especially if they carry out a gainful activities in Switzerland or if they receive benefits as members of the administration or management of legal entities with registered office or permanent establishments in Switzerland.
In the above mentioned cases one speaks of economic affiliation to Switzerland. While in the case of personal affiliation all income is taxed, in the case of economic affiliation only income from Swiss sources is subject to taxation.
Taxation of income - On which income do you have to pay taxes in Switzerland?
The income tax is designed as a total income tax, to which all recurring and unique incomes are subject. This includes income from self-employment and employment, income from movable and immovable assets, income from pension plans and a number of other income items.
Sounds simple, but in many cases it is difficult to decide whether or not a particular income is taxable. The distinction between taxable income and tax-free capital gains can be particularly challenging.
From the resulting total income, the exploitation costs, i.e. the costs that were necessary to obtain the income, are deducted. A number of other general deductions may be made as well. The general deductions include the cost of living, namely interest on debts, payments for pension and insurance, the double earner deduction, alimony payments in the event of separation or divorce, as well as sickness, accident and invalidity costs.
The permissible general deductions are listed exhaustively in the StHG. From the resulting net income, social deductions may be made as well, for example for child care. What remains is the taxable income (tax object), the actual basis for tax calculation.
Wealth Taxation - Special Swiss Tax
As one of the few countries, Switzerland still levies the wealth tax. Although the federal government does not levy the wealth tax, the cantons are obliged to do so. The tax is levied on net assets which are made up of movable assets such as account balances or shares and immovable assets such as real estate.
The proven debts may be deducted from assets. Furthermore, there is a tax-free amount of assets, which is determined by each canton individually. The valuation of the assets is based on the key date principle, i.e. the net worth of the assets on December 31, is taxed.
The income and wealth tax is subject to the principle of family taxation. The taxable amounts of the spouses and all minor children are added together and the tax rate is determined on the basis of the resulting value.
Foreign employees who are not properly assessed are subject to so-called withholding tax. One also speaks of the "withholding tax for persons without a permanent residence permit".
The withholding tax is applied to ensure tax collection from foreign employees i.e. it is supposed to prevent people from comitting tax avoidence by simply leaving the country. A distinction is made between foreign employees with and without a tax residence in Switzerland.
Foreign employees with a tax residence in Switzerland
Foreign employees with a tax residence are people who are resident in Switzerland but who have neither Swiss citizenship nor a permanent residence permit. This applies, for example, to a German employee who works for eight months on a project in Zurich.
Foreign employees without a tax residence in Switzerland
The other case in which the withholding may be levied are foreign employees without a tax residence in Switzerland. Said definition mainly applies to cross-border commuters. It does not matter whether they are workers, artists or members of the boards of directors. All these people are all subject to the withholding tax as far as corresponding agreements with other countries provide for Swiss taxation law. Foreign employees are taxed "at source", i.e. not the employee himself, but the employer or organizer as the source of the income has to pay the tax. He or she is obliged to pay the withholding tax to the relevant tax authority every month. Object to the tax is the gross. The deductions that would be possible in the ordinary assessment are taken into account at a flat rate. Some changes will came into force on 01.01.2021 with the federal law on the revision of the withholding tax on earned income.
Another form of separate taxation, in addition to the withholding tax, is lump-sum taxation. This tax form is based on the life expenditure of the taxpayer.
Anyone who does not have Swiss citizenship and who does not carry out any gainful employment in Switzerland, but who is nevertheless liable to pay taxes in Switzerland for the first time or after at least ten years of absence from the country, can demand taxation on the basis of expenditure i.e. lump-sum taxation.
Legal entities, namely companies, must pay tax on profits and capital. In simple terms, the tax on profits corresponds to the income tax and the tax on capital to the tax on wealth for individuals.
A tax liability can result from personal or economic affiliations with Switzerland. Personal affiliations exists if the registered office or the actual administration of a company is located in Switzerland.
If there is no personal affiliation, the tax liability may be base on an economic affiliation. This is the case if legal entities:
• are partners in business operations in Switzerland;
• maintain business facilities in Switzerland;
• own land in Switzerland, have rights of use in rem or personal rights of use that are economically equivalent to real property ownership;
• are creditors or usufructuaries of claims secured by real or personal lien on real estate in Switzerland;
• brokering or trade in real estate located in Switzerland..
If the tax liability results from a personal affiliation, the tax liability applies in principle to the profit made worldwide. Excluded from this rule are profits from business operations, permanent establishments and real estate abroad.
If, on the other hand, the tax liability results from an economic affiliation, only profits from Swiss sources are subject to taxation.
Profit taxation - tax on business success
The profit tax is the tax that companies have to pay on their taxable net profit, i.e. the difference between costs and revenues.
The StHG does not contain any regulations on the scope of tax liability. The cantonal legislators are therefore free to determine the extent of the tax liability themselves. However, certain principles apply to profit tax: the periodicity principle, the principle of completeness and the relevance of the commercial balance sheet.
The balance sheet and income statement are used as the basis for tax calculations and tax returns, but are checked by the relevant tax authorities for compatibility with tax regulations.
Note: Companies are allowed make appropriate corrections. The reason for this is that while in the commercial balance sheet the profit should be shown as low as possible in order to protect creditors, the tax authorities demand the highest possible proof of profit. Particular caution is required with regard to tax depreciation, hidden reserves, provisions, hidden equity and the participation deduction.
Taxation of capital - The wealth tax for companies
Like the wealth tax, the capital tax is levied only by the cantons, after the capital tax was abolished at the federal level in 1998. The cantons are bound by the general principles of taxation as well as the provisions of the StHG when structuring capital tax.
This sometimes leads to drastic cantonal differences in the scope of taxation. Object of taxation is equity capital which is much more difficult to determine than the net assets of individuals, since equity capital is made up of different parts such as share capital, reserves and hidden equity. The capital tax is calculated according to the cut-off date principle as well.
What happens in case of a loss?
Not every fiscal year is profitable. If a company cannot show a profit, it does not have to pay profit tax. Insteas losses may be deducted.
This is even the case for later years. According to Art. 67 DBG or Art. 25 para. 2 StHG, losses from seven financial years preceding the tax period may be deducted from net profit for the tax period if they could not be taken into account in the calculation of the taxable net profit for these years.
This regulation on loss carry-forwards is particularly interesting for young companies or start-ups that do not yet generate profits in the first few years.
As mentioned at the beginning, a number of indirect taxes are levied in addition to direct taxes. At the federal level, the most common indirect taxes are in particular the value added tax (VAT), the withholding tax and stamp duties. In the cantons, the real estate profit tax amongst others is levied.
Value added tax
The value-added tax (VAT, DE: Mehrwertsteuer) is a general consumption tax, which is regulated in the Swiss Federal Law on Value Added Tax (MWSTG). Three forms of VAT are distinguished.
The domestic tax (DE: Inlandsteuer) is levied on services provided in the domestic production, trade and service sectors.
The tax payable on the import of services of foreign companies by Swiss beneficiaries is known as a import tax (DE: Bezugssteuer).
The purchase tax (DE: Einfuhrsteuer) is levied on the import of goods from abroad into Switzerland.
Three different VAT rates are distinguished. To most goods and services the standard rate of 7.7 percent applies. However, in addition to the standard rate, there is a reduced rate of 2.5 percent for a selection of services and a special rate of 3.7 percent for accommodation services.
Anticipatory tax
The anticipatory tax (DE: Verrechnungssteuer) is levied at a rate of 35 percent on the gross amount of certain income components. To be more precise, income from movable assets, winnings from gambling and lotteries and insurance benefits are subject to withholding tax.
The anticipatory tax, like the withholding tax, is designed as a source tax. Therefore the person who pays the income component is the debtor of the tax. In the case of interest on an account, for example, the bank must pay the withholding tax to the tax administration, not the account owner. However, the bank will charge the account owner for the expenses. The anticipatory tax, like the withholding tax, serves as security for the state.
Domestic taxpayers can reclaim the withholding tax in full from the federal tax administration. People residing abroad, on the other hand, are charged indefinitely with the tax. The legal regulations on the anticipatory tax can be found in the Federal Law on Anticipatory Tax (VStG) and the associated ordinances.
Learn more about the anticipatory tax!
Stamp taxes
Stamp taxes are taxes on legal transactions with certain documents. The basis of taxation is the procurement of capital and the turnover of documents.
Stamp duties are regulated in the Federal Law on Stamp Duties (StG). The Federal Government levies stamp duties on the issue of domestic documents (issue tax), on the turnover of domestic and foreign documents (turnover tax) and on the payment of insurance premiums against receipt (tax on insurance premiums).
Real estate gains tax
The real estate gains tax is a special income tax levied on the realized gain in value of real estate. Consequently, the real estate gains tax is levied on the profit from the sale of real estate.
Not only land in the conventional sense is subject to the tax, but also real estate as well as condominium ownership and building rights. The taxable person is the person selling the property.
The federal government does not levy any tax on gains from the sale of real estate. Legislative sovereignty therefore lies with the cantons. In most cantons, however, both the canton itself and the municipalities share the profits.
The tax revenues generated by the Swiss system amounted to approximately 138 billion at the time of the last financial statistics (2016). Of this amount, 63.9 billion (46 percent) is attributable to the federal government, 45.6 billion (33 percent) to the cantons and 38.4 billion (21 percent) to the communities.
At the federal level, the majority of revenues result from direct federal taxes (33 percent) and VAT(32 percent). The anticipatory tax accounts for around 10 percent, stamp taxes for 3 percent. While the composition of tax revenues varies from canton to canton, a large part of the revenue comes from income and wealth tax. In addition, the cantonal fiscal equalization is very important, depending on the canton.
There are several criminal offences regarding taxes which are punishable by law. In addition to the violation of procedural obligations, tax evasion and tax fraud are particularly common offences.
A violation of procedural obligations is made if someone does not comply with his legal obligation to determine the tax owed despite having been warned.
This is usually the case if the tax return or the required enclosures are not submitted at all. As a rule, the violation of procedural obligations is punishable by a fine of up to CHF 1000. In serious cases or in the case of repeat offenders, a fine of up to CHF 10,000 is possible.
The offence is subject to a statute of limitations of three years after the tax period in which the violation was committed.
One speaks of a tax evasion if the taxpayer causes an assessment to be wrongly omitted or a legally binding assessment to be incomplete.
The failure to withhold tax at source or to withhold tax completely or to obtain an unlawful tax remission or refund also qualifies as tax evasion. As a rule, tax evasion is punished by a fine in the amount of the evaded tax.
In addition to the evaded tax, a fine of the same amount must therefore be paid. In the case of serious fault, the fine can be increased to up to three times the amount of the evaded tax.
Attempted tax evasion becomes statute-barred after six years, successful tax evasion after ten years.
The use of forged, falsified or untrue documents for tax evasion purposes in order to deceive the tax authorities constitutes tax fraud.
This is, for example, the case if the tax authority is presented with forged business books, balance sheets, income statements or salary statements. Tax fraud is not a trivial offence. Tax fraud is punishable by imprisonment for up to three years, by monetary penalties or fines.
Additional punishment for tax evasion may be possible. The statute of limitations occurs 15 years after the perpetrator has committed the last criminal act.
The federal government, the cantons and the municipalities are entitled to levy taxes. While individuals pay the income and wealth tax or the withholding tax, companies are obliged to pay taxes on profits and capital. In addition, a large number of indirect taxes are levied.
Besides the VAT, the anticipatory tax, stamp taxes and the real estate profit tax are levied.
Those who fail to meet their obligation to pay taxes are threatened with a fine, monetary penalty or prison sentence.
We are happy to help you keep track of the various taxes. The specialists at taxea are at your disposal with uncomplicated and competent advice and assistance.
