Switzerland: Taxes
1. Overview of the tax system (tax rates 2011):
a) Taxation of corporations:
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Taxation of income and wealth: direct federal tax: 8,5% of net income, but tax itself is deductable, so in fact about 7,83% (8,5/108,5= 7,83) + cantonal and municipal tax on net income, 2%-6% depending on the canton and the community. Also, there is a wealth tax.
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Withholding tax (e.g. on interests or on dividends): 35% as a safe deposit payment, there is a possibility to avoid this totally or partial if there is an active parent company in an EU country (because with art 15 interest convention Switzerland takes part in the mother-daughter guideline of the EU- ownership: 25%, 2 years). or in a country that has a favorable tax treaty with Switzerland. Also, the «Denkavit» practice allows to distribute money immidiately to a mother company in an EU member state, and to pay as a deposit the withholding tax that is defined in the double taxation treaty, which will be refunded later, when the criteria for of the Savings Tax Agreement are met. However, Swiss administration is famous to impose bureaucratic hurdles on such demands.
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VAT: 8 % to transactions received by Swiss recipients. No VAT on export of goods and services; in the EU, imports of services from Switzerland often are subject to reverse charge system.
b) Taxation of partnerships:
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VAT: 8% to transactions received by Swiss recipients. No VAT on export of goods and services; in the EU, imports of services from Switzerland often are subject to reverse charge system.
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Taxation of income and wealth: not the company, but the owners are taxed (see below)
c) Taxation of branches of foreign companies:
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In general, branches of foreign companies are taxed similar to a corporation
d) Social contributions and taxation of natural persons:
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Social welfare system: first pillar (AHV/IV) for entrepreneurs and limited partners mandatory, second pillar (BVG) mandatory for employees over a certain income
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There is a withholding tax (“Quellensteuer”) on employment income of foreign nationals residing in Switzerland without a permanent residence permit.
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Taxation of income and wealth are calculated based on the family, and tax rates vary between cantons and communities. In most cases there is a progressive scale. Taxation: Direct federal tax plus cantonal tax plus communal tax. Calculation: Taxable income x tax rate of canton = basic tax rate x tax rate % of the community (varies depending on the canton) = community tax rate. Total = effective tax
Overview of Taxation in Zug 2009:
Source of the following table: Zuger Presse, 7.1.2009, amounts in CHF.
Note: the taxable income is 10-25% lower than the gross income, as various deductions can be made.
Employed persons residing in Switzerland have to calculate not only taxes, but also social security and mandatory health insurance.
Taxable Income |
Federation |
Canton Zug |
Zug community |
Total |
% |
40,000 |
133 |
1,148 |
882 |
2,163 |
5.41% |
50,000 |
254 |
1,665 |
1,279 |
3,198 |
6.40% |
60,000 |
505 |
2,239 |
1,720 |
4,464 |
7.44% |
80,000 |
1,196 |
3,464 |
2,662 |
7,322 |
9.15% |
100,000 |
2,171 |
4,772 |
3,667 |
10,610 |
10.61% |
150,000 |
6,846 |
8,323 |
6,394 |
21,563 |
14.38% |
250,000 |
19,846 |
16,220 |
12,461 |
48,527 |
19.41% |
500,000 |
52,346 |
32,800 |
25,200 |
110,346 |
22.07% |
2. Tax incentives in Switzerland:
a) Planning security: companies and citizens have the right to a mandatory pre-tax assessment ( «Ruling») for planned projects.
b) Participation exemption: this is explained in detail in the circular (“Kreisschreiben”) Nr. 9 from July 9th, 1998. If a company holds more than 20% (2011: 10%) of another company, there is a tax exemption on dividends (there is no restriction «subject to tax»).
If a company holds more than 20% (2011: 10%) of another company for more than one year, there is a tax exemption on capital gains, and in addition, net income can be reduced further by flat 5% administrative costs.
c) Holding privilege: corporations that primarily manage their holdings pay only federal tax (as of 2009 8,5% = 7.83), no cantonal and no municipal tax. This privilege applies to all kind of income that may result in a holding company, such as interest, royalties, management fees, etc.
Moreover, many tax treaties provide a tax credit for non-recoverable foreign withholding taxes.
d) Management companies: profits of corporations (or permanent establishments of foreign corporations) that perform in Switzerland administrative work, but do not engage in business activities, are subject to full federal tax (8,5/108,5 = 7,83%), but a reduced cantonal and municipal tax. The administrative activities can include income from interest, royalties or dividends.
e) Mixed companies: companies (or permanent establishments of foreign corporations) with predominantly foreign business that meet certain requirements, can apply for a privileged taxation for their income from foreign-foreign transactions. If privileged taxation is granted, profits for Swiss and foreign activities have to be calculated separately using division accounting.
f) sale of an enterprise or part of an enterprise by private individuals: profits from such deals are taxable in the country of residence. If the residence is in Switzerland, such profits are usually tax free, if the person is not commercially a company dealer (this would constitute a fiction of a non- registered sole proprietorship. This would have to pay social charges and profit taxes).
g) Inheritance tax: in most cantons, there is no inheritance tax for direct descendants.
h) other incentives: because of the tax competition, cantons try to attract specific target groups by offering them some tax incentives. Such incentives can be tax credits for qualified new residents for some of their expenses in the first years, short depreciation periods or the acceptance of certain costs as a flat percentage of sales.
3. Planning issues:
a) Withholding tax: when a company pays interest or dividends, it has to deduct 35% withholding tax and pay it to the federal tax administration in Bern. Later, the recipient can require a tax credit if he proves that he has declared interests or dividends in his tax statement. If there is no double tax agreement, foreigners lose the withholding tax. Therefore it is important to design appropriate legal structures using double tax agreements to avoid losing the withholding tax.
b) «AHV/IV»: social costs at the basic level run linearly with income at 10,3% (pay- as –you – go system, half of it has to be paid by the employer) and therefore have an effect similarly to taxes. Limited partners living or working in Switzerland also are subject to AHV. No AHV has to be paid from corporations (except for their employees) or from persons who have social insurance in an EU country and fulfill the requirements to apply for an exemption in Switzerland (because of the social security agreement between the EU and Switzerland).
c) “ ALV”, “UVG” and «BVG»: social costs of employees include unemployment insurance (2,2%, half of it to be paid by the employer), an accident insurance and the second pillar of the pension system (about 12% of gross salary, half of it to be contributed by the employer).
d) Social Security cost-comparison at first glance, social burden looks rather low. However, this figure does not include health insurance that is mandatory for all residents of Switzerland.
4. Organization of Swiss tax authorities
The tax system is a decentralized structure, most taxes are administrated by the cantonal tax administration. The cantonal authorities are audited by federal administration.
The cantonal tax offices are responsible for taxes on income and capital. They are subject to federal and cantonal laws. There are differences in cantonal laws but also in the way local authorities deal with discretionary matters.
The staff of the cantonal tax offices usually is correct, friendly and cooperative. Taxpayers are not treated as a subject, but as a business partner. It is a fundamental right of citizens to clarify tax issues in advance and obtain a written «ruling» that binds the administration.
The withholding tax is administered by the Federal Tax Administration in Bern and levied on the income from movable capital assets. It is paid by the payer of interest or dividends and taxpayers have a claim on tax credit. Concerning withholding tax, the responsibility of the cantonal administration is limited, and the review by Bern is very accurate.
The VAT is also levied by the Swiss Federal Tax Administration in Bern.
5.International Tax Law – Overview
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First there is national tax law that also takes into account international relations.
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If there are double taxation agreements to apply, they take precedence over national tax law. Usually double tax agreements follow the pattern of the text of the OECD, which covers specific subjects. Examples are the definition of residence and establishment as well as various tax bases (e.g. business income, dividends, interest) and application rules (tax credit or exemption method).
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Usually article 7 of double tax agreements states: profits of an enterprise of a Contracting State shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.
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However, income from employment, licenses, dividends or interest usually is taxed by the state of residence but there may be a withholding tax in the other state, too.
Interesting options arise:
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because of different tax rates,
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if a situation qualifies differently in two countries and this has different consequences
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by the difference of national tax incentives (depreciation period, adjustments, etc.) and
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by differences in administrative practices.