Switzerland divides many people into believers and non-believers. The believers are convinced that it’s a beautiful country with magnificent nature, civilised people, discipline, everything well-organised, excellent facilities and an attractive tax system. The perfect world in a compact form. Others portray Switzerland as boring, a bit rustic, narrow-minded, a country where women only gained federal voting rights in 1971! The truth probably lies somewhere in between. That doesn’t alter the fact that you can enjoy a very high standard of living in Switzerland and as a wealthy individual, you can benefit from a very attractive tax system.
With regard to tax matters, it’s important to realise that Switzerland’s political system is organised on three levels: the communal, the cantonal and the federal level. Switzerland is divided into 26 independent cantons. Besides the federal tax system, each canton has its own tax system. So from a fiscal point of view, it’s of high importance in which canton you’re going to live as a resident of Switzerland.
What about income tax?
Federal income tax applies to worldwide income derived from both performed work and capital. Residents owning property in Switzerland and inhabiting the property themselves are obliged to add a fictitious rental value to their taxable income. Gross income from Swiss capital is taxable while income from foreign capital is only taxed after deducting the foreign withholding taxes.
Generally, expenses necessarily incurred to earn the income (for example professional expenses) are deductible from the gross income. Additionally, various tax-deductible expenses are granted which may be deducted from the gross income to compute the taxable income. Examples of these tax-deductible expenses are interest on private loans, alimony paid for children, insurance premiums, social security premiums and social deductions such as a deduction for married couples, for single-parent families, for children, etc.
At the federal level, personal income tax rates are progressive and the maximum income tax rate is 11.5%. Besides the federal income tax, also cantonal and municipal taxes have to be paid at the cantonal and municipal level. These are calculated separately, have their own deductions and in most cantons, these income tax rates are also progressive. The various cantons are characterised by a large variety of income tax rates because all cantons (and within the cantons even the municipalities) have their own tax system. That’s why the choice of the canton of residence can have significant fiscal consequences.
So what are the most attractive cantons? Examples of cantons with relatively low-income tax rates are Obwalden, Schwyz, Zug, Uri, Appenzell Innerrhoden and Nidwalden. The highest observed income tax rate in one of these cantons is around 17%. Examples of cantons with a relatively high-income tax rate are Basel-Landschaft, Vaud, Bern, Geneva and Zurich. In one of them, the highest observed tax rate amounts to 30%. The observed tax rates include both cantonal and municipal taxes.
Generally, we can conclude that the total personal income tax rate in Switzerland doesn’t exceed 40%. For example, residents of the canton Schwyz are subject to a maximum personal income tax rate of 22% (covering the federal, cantonal and municipal level).
What about capital gains tax?
In general, capital gains of Swiss residents are tax-exempt, provided these were obtained by selling private movable assets which aren’t assets of a company. Therefore, capital gains arising from securities transactions, for example, aren’t subject to any tax. Gains derived from the sale of private immovable property aren’t subject to federal tax. However, the cantons do levy a capital gains tax on immovable property: the seller pays capital gains tax on the realised capital gains. The tax rate generally depends on two factors: (1) the period of time the seller owned the immovable property and (2) the realised capital gains. In most cases, a longer period of ownership reduces both the taxable basis and the tax rate. There’s no capital gains tax payable if the property is transferred by virtue of a gift or legacy.
Becoming a resident of Switzerland
There are several residence permits available in Switzerland so let’s have a look at the three most important ones.
Class B residence permit
This is the most frequently issued residence permit and gives the permit holder the right to live and work in Switzerland. This permit is excellent for managers and self-employed professionals who wish to establish their own company in Switzerland.
The class B permit has the following characteristics:
- Usually granted for a one-year period;
- The applicant can obtain the permit without being capable of speaking the official languages of Switzerland;
- It allows the permit holder to enjoy the company of his/her close family (meaning the partner and children can also live in Switzerland);
- This permit can only be granted if it doesn’t have the effect of depriving a Swiss national of employment;
- If the permit is for work purposes as an employee, then the applicant must have concluded an employment agreement (speculating to find a job once you were granted the permit isn’t allowed);
- The permit holder is allowed to buy real estate in Switzerland.
Class C residence permit
This is a longer-term residence permit which gives the permit holder almost the same rights as Swiss citizens. It has the same characteristics as the class B residence permit and in order to obtain it, the applicant must be holding a class B permit for minimum 5 and maximum 10 years, depending on the applicant’s country of origin. Obtaining this class C residence permit is the last required step before one can apply for Swiss citizenship.
Fiscal deal permit
This permit is perfect for wealthy people who wish to live in Switzerland but don’t desire to work there. Typically, applicants are wealthy people who are inactive or who are actively earning their income outside Switzerland (for example professional sportsmen). The holder of a fiscal deal permit pays considerably fewer income taxes than a ‘normal’ Swiss national! This because of the unique lump-sum taxation regime.
Lump-sum taxation regime or “Pauschalbesteuerung”
What makes Switzerland so attractive is the so-called lump-sum taxation regime. This regime is available for foreigners who aren’t gainfully occupied in Switzerland and is very attractive to wealthy individuals and families. Under federal and cantonal tax laws, individuals settling in Switzerland can request a special tax arrangement whereby Swiss taxes are levied on the basis of expenditure and standard of living, rather than on the usual worldwide income and assets! Fiscal deal permit holders will then be taxed on a favourable lump-sum basis for wealth and federal income tax purposes and for cantonal and municipal income tax purposes. This means that fiscal deal permit holders remain subject to the gift tax, inheritance tax as well as to social security tax.
The starting point of this regime is the pattern of expenditure associated with the lifestyle of the taxpayer and his family. The tax rates under the lump-sum taxation system are the same as they would normally apply but the advantage is that the taxable amount isn’t the permit holder’s real income but rather a much lower fictitious amount. This method of taxation obviously results in a much lower tax penalty than paying on the basis of normal income and wealth tax laws. This system persuaded famous people such as Michael Schumacher and Ingvar Kamprad, the founder of Ikea, to settle in Switzerland. Obviously smart thinking of the Swiss government: the presence of wealthy foreigners has a positive impact on the local economy: both the consumption of goods and services and the demand in the real estate market increases.
Who can benefit?
A person who:
- is settling in Switzerland for the first time or after an absence of at least ten years; and
- doesn’t engage in any gainful activity in Switzerland (for example, the applicant is retired, isn’t employed by a Swiss employer and isn’t carrying out any business activity in Switzerland).
Individuals who meet the above criteria can submit an application for a fiscal deal permit at the cantonal tax authorities. It’s clear that this lump-sum taxation regime is specifically designed for financially independent persons who aren’t seeking employment in Switzerland. However, applicants are allowed to carry out a professional activity outside Switzerland. Married couples are treated as one taxpayer and as of the first of January 2016, they can only be eligible for the regime if they’re both foreign nationals and if neither of them exercises a gainful activity in Switzerland.
In principle, foreign citizens are eligible for the lump-sum taxation regime for an indefinite period of time. On the contrary, Swiss citizens (both Swiss nationals and foreigners with dual nationality) are eligible for the lump-sum taxation regime in their first year of residence in Switzerland only. The right to be taxed according to the lump-sum taxation regime expires when the fiscal deal permit holder starts exercising a gainful activity in Switzerland or obtains the Swiss nationality!
How is the taxable income calculated?
Tax is levied on the basis of a fictitious income based on the annual living expenses incurred by the taxpayer and his family. The living expenses typically include the costs of housing (including heating, cleaning, etc.), food, clothing, wages of employees, education, leisure activities, travel, health, horses, cars, yachts, aeroplanes, and all other expenses linked to the standard of living. As of the first of January 2016, both the living expenses incurred in Switzerland and abroad are relevant.
As of the first of January 2016, such a fictitious income based on the annual living expenses may not be less than seven times the annual rent paid for the main accommodation occupied by the taxpayer and his family. In the case the taxpayer owns his/her own accommodation, the fictitious income may not be less than seven times the deemed rental value of the property. Until the first of January 2016, the minimum annual living expenses are calculated by applying the multiplier five instead of seven in the multiplication. In practice, it comes down to this: when you rent or own a large property in Switzerland, its rental value will be higher and your total annual tax bill will be higher as well.
It’s difficult to assess the living expenses of the taxpayer and that’s why the minimum fictitious income explained above (based on the main accommodation of the taxpayer) is used in practice. The annual tax base is determined by a tax agreement concluded with the cantonal tax authorities of the canton in which the individual wishes to reside.
As from the first of January 2016, the minimum taxable income on the federal level is CHF 400,000 and the different cantons will also have to impose a minimum taxable income autonomously. Certain cantons also levy wealth tax on lump-sum taxpayers. This sounds bad but it isn’t. When you calculate the total amount of tax payable, one can conclude this is peanuts for a millionaire. The lump-sum taxation regime isn’t available in the following cantons: Zurich, Appenzell Ausserrhoden, Basel-Stadt and Schaffhausen.
Possible adjustments to the taxable amount
Since the lump-sum taxation regime is negotiable, the cantonal tax authorities are free to determine a different and even higher taxable amount in future years. Factors which are of importance are the total worldwide assets, age, family situation, and the municipality in which the residence permit holder is living. Generally, the fictitious income is reviewed every three to five years and it may be subject to indexation.
Which tax rate?
The fictitious taxable income agreed on is used to compute the personal income tax due. To calculate the tax due, the normal income tax rates apply to the fictitious income. As mentioned before, tax rates can vary significantly, depending on the canton of residence and the family situation of the taxpayer. The advantage of the lump-sum taxation regime exists not because of the application of any special tax rates, but rather because the fictitious income (in practice based on the value of the main accommodation in Switzerland) can be much lower than the taxable amount based on the actual income and assets.
Based on federal legislation, the fictitious income based on living expenses is verified annually on the basis of specific audit calculations. The taxes due under the fictitious income approach shall not be less than the taxes determined in a control calculation which is based on specific items. The specific items are:
– the income from Swiss sources (income from Swiss real estate, securities issued by a company domiciled in Switzerland and dividend and interest income derived from such assets, interest income from Swiss bank accounts and gold or other precious metal deposited in Switzerland, income from Swiss royalties, retirement pay and pensions from Swiss sources) and,
– foreign income (such as foreign pension income) for which the taxpayer claims a partial or total foreign tax relief on the basis of a Double Taxation Avoidance Agreement concluded by Switzerland and the foreign source country. However, if the taxpayer is entitled to tax relief but doesn’t claim any tax credit on the foreign tax, then the control calculation doesn’t take into account that specific foreign source income.
If the tax payable resulting from this control calculation is higher than the tax payable under the lump-sum taxation system, then the tax ultimately payable is the higher amount determined by the control calculation. Foreign securities held in a Swiss bank on behalf of an individual and foreign fiduciary deposits held in a Swiss bank aren’t included in the control calculation.
It should be clear by now that the fiscal deal permit with its lump-sum taxation regime is financially advantageous for wealthy foreigners. But there’s more. Wealthy foreigners are also attracted to the lump-sum taxation system because fiscal deal permit holders aren’t required to declare their non-Swiss income and assets. This means that the lump-sum taxation system provides privacy with respect to their foreign income and assets. This is an exceptional system which should be cherished, keeping in mind the average European government which acts like a privacy-invading monster.
Inheritance and gift tax is very beneficial
Gift and inheritance taxes aren’t included in the lump-sum taxation system which means that fiscal deal permit holders are subject to both of them. Switzerland doesn’t levy inheritance and gift tax at the federal level. Instead, the cantons levy inheritance and gift tax which implies that there are 26 different inheritance and gift tax regimes. For example, the canton of Schwyz doesn’t levy an inheritance or gift tax.
Many cantons don’t levy inheritance taxes between spouses or between parents and children or levy only a very modest tax of less than 10% for descendants. The highest tax rates apply to gifts and inheritances between unrelated persons: in such cases, the applicable tax rates can rise to 50% or higher. In other words, it’s important to pay attention to the applicable cantonal gift and inheritance tax systems when choosing your canton of residence in Switzerland.