As a federal state, Switzerland has no uniform system of taxation. Due to the existence of the federal and cantonal levels of taxation, as well as differing regulations among the various municipalities, taxation in Switzerland can be a complex issue. The Confederation and all 26 sovereign cantons have their own laws for the collection of taxes, as do the approximately 2,300 independent municipalities.
According to the Swiss constitution, cantons have fiscal sovereignty and full right of taxation, to the exception of some sources allotted at federal level and the limitations set by tax treaties concluded between the Confederation and other countries. International double taxation issues are dealt with by way of double-taxation treaties, and cantonal and municipal taxes account for a significant part of the total tax burden. The Confederation ensures most of its revenue from indirect taxation, while the cantons and municipalities rely primarily on direct taxes. All cantons apply current-year assessment.
Tax Liability and Jurisdiction
Income and net-wealth tax liabilities of individuals result from connection to the taxing jurisdiction. The extent of an individual’s tax liability depends on whether their attachment to the tax-collecting jurisdiction (Confederation, canton, and municipality) is based on personal or solely economic factors. Tax liability is unlimited in the former case and limited in the latter case.
Unlike other countries, in Switzerland citizenship has no bearing on tax liability. Irrespective of whether tax liability is limited or unlimited, worldwide income and net wealth are taken into account for assessing the tax rate on Swiss income and wealth. Individuals are subject to unlimited tax liability as residents if they have their permanent or temporary residence in Switzerland. A limited tax liability is based solely on an economic connection to the tax-collecting jurisdiction. Non-residents usually enter such limited liability on taxable income derived from immovable property located in Switzerland or from a Swiss permanent establishment.
Taxation of Personal Income
Swiss residents are liable for federal, cantonal, and municipal taxes on income from all sources on a worldwide basis. Recurring and non-recurring income of any kind is deemed income for income tax purposes. Federal and the variety of cantonal tax statutes do differ in their treatment of exemptions, allowances, and personal deductions; however, most of them apply the same general principles in determining gross income.
Income from all categories is usually combined and taxed at one rate. However, annuities, pensions, and other retirement monies usually benefit from more favorable income tax treatment. Income from real estate comprises, inter alia, the deemed rental value of any apartment or house owned and occupied by the taxpayer. The income progressive tax rates vary from canton to canton, and the tax burden depends on the multiplicator factor applied at municipal level.
Income from Swiss immovable property is fully taxable under federal and cantonal income tax statutes. This income includes rental or lease payments, which are the deemed rental or lease value of immovable property used by the taxpayer. Income from movable property covers all receipts from property, life interest (usufruct) in movable objects, or assets that cannot be considered as part of immovable property. This category of income includes interest and dividend payments or other benefits derived from any form of investments (loans, savings, accounts, bonds, capital stock, and other securities) and receipts from the rental or lease under any form of movable objects. Also, deemed interest, the difference between an obligation’s nominal value and its redemption price, is taxable. Royalties, payments for the use of, or the right to use, intellectual property, are usually business income. They are considered as investment income only if the rights are part of the taxpayer’s private net wealth.
In the case of dividend interest that supports a withholding tax, tax withheld is credited against the taxpayer’s final tax liability. As a general rule, capital gains are taxable only upon realization. Depending on the level of taxation (federal, cantonal, municipal) and the kind of assets involved, (movable or immovable, private or business), capital gains may be entirely tax-free, subject to special gains taxes, or included in taxable income.
Taxation of Investments
At federal level, no tax is levied on the net worth of individuals. The net-worth tax is levied by the cantons and municipalities on the fair-market value of total taxable assets, less liabilities, and standard deductions according to personal circumstances. The net-worth tax base includes almost every type of asset held by individuals, including immovable property, intangible personal property, securities, cash redemption value of life insurance policies, investments in proprietorships or partnerships, and other beneficial interests. Certain assets (personal and household effects, etc.) are exempt from taxation.
In computing the value for net-worth taxation purposes, taxpayers may deduct from the total market valuation of their taxable assets any mortgages and other liabilities and a generally allowed tax-exempt amount. Net-worth tax rates are progressive in most cantons. They range from approximately 0.04% to 0.9%, imposing thereby a much lesser burden than income tax. Resident taxpayers who have an unlimited tax obligation pay the cantonal net-worth tax on all assets, except extra-cantonal and foreign immovable property and assets attributable to an extra cantonal or foreign permanent establishment. If an individual owns assets in several cantons, the assets located in a particular canton — less a proportional part of the taxpayer’s liabilities — will be subject to the taxes of that canton. Generally, intangible property is considered to be located at the residence of the taxpayer.
To conclude, Swiss-resident individuals are taxable on worldwide income and assets. Income derived by residents from foreign businesses, foreign permanent establishments, and property abroad is exempt from income tax but it must be declared for the determination of the tax rates (exemption with progression principle). Switzerland, while being an investment country globally acknowledged for its political and economic stability, high level of innovation, and worldwide recognition, is not a tax haven. It places itself in the medium/high ranking at EU level and several discussions are ongoing at a political level about taxation of rental income of real estate occupied by the owner, about fair tax treatment of married couples versus unmarried couples, about federal tax harmonization to avoid inter-cantonal tax competition and, in general, about the Swiss tax system’s position from an EU and international perspective.
Renato H. Bloch
Founder and Senior Partner, Bloch Law Offices, Switzerland