Taxes
The Swiss tax system is strongly influenced by the federal structure of the country. Emphasis is on direct taxes. The basic principle is self-declaration by the taxpayer. By European standards, the tax burden in Switzerland is moderate. Because of the federal structure there is ample latitude for healthy competition between the Cantons. A large number of Bilateral Agreements prevents double taxation internationally. Switzerland, as a business location, is therefore also attractive from a tax viewpoint.
1. Tax system in Switzerland
As constituent members of the Federation, the Cantons are free to raise taxes except those that are explicitly reserved to the Federal Government. Tax autonomy is vested in the Federal Government, the Cantons and the municipalities. Each Canton, consequently, has its own tax laws. Tariffs, tax rates, as well as exemptions, remain within the competence of each Canton even after the now completed harmonization of direct taxes between the Cantons and municipalities. Within the framework of the Cantonal tax law, the municipal authorities may raise additional taxes. The Cantonal tax authorities do not see themselves as "tax bailiffs" but as contact partners for existing and new enterprises and tax consultants as their customers. As a rule, they also issue advance decisions on how a business will be fiscally treated. In the majority of the Cantons the tax registers are not open to public inspection. As a general rule there are direct and indirect taxes:
· The Federation, the Cantons and municipalities raise direct taxes on the profit and capital of businesses, and on the income and net worth of physical persons.
· Indirect taxes and duties on consumption can be raised only by the Federation.
2. Taxation of business
Taxation of corporations
A Swiss company or operating facility is subject to taxes on profit and capital. The business is taxed at its domicile or at the actual place of its economic activity. Corporations and limited liability companies are taxed as legal entities. The tax law distinguishes between corporations according to their purpose. This is one of the determining factors whether it will be taxed normally or preferentially.
Operating company
An operating company is a business that is principally engaged in manufacturing, trading or the provision of services.
Holding company
A holding company is a corporation whose main purpose is the continual management of equity in other companies.
Domiciliary company
A domiciliary company is primarily engaged in business activities abroad. Its purpose is to bring together functions from abroad (financing, management of intangible assets, advice on marketing) in organizational terms, or it is active only abroad (buying/selling of goods from/to a foreign country).
Taxation of corporations and limited liability companies
A corporation is taxable on its profit and capital; depending on the purpose of the corporation, it is taxed either normally or preferentially. This applies also to the limited liability company (GmbH).
Earnings or profit tax
The calculation of taxable net income begins with the profit and loss statement to which certain adjustments may be made. The Federal Government and most Cantons allow deductions for losses carried forward, dedicated reserves (research, restructuring) and paid taxes. Depreciation provisions are generous. Depreciation rates vary as a function of the asset life.
In the Cantons, income tax is usually calculated on a progressive scale. Relevant for the tax rate is the earnings intensity, i.e. the ratio of the taxable net income relative to the capital resources plus reserves. Minimum rates are applicable in all cases. Taxation at the Federal level is proportional and is 8.5% of taxable net income.
The tax burden in Switzerland is lower than in most countries of the EU and in the USA where the tax is between 30% and 55% on net income. On average, total taxes amount to approx. 25% (Federal, Cantonal and municipal taxes combined), even though the nominal tax rates are generally higher. The reason is that in Switzerland taxes themselves can be deducted as an expense.
Capital tax
The capital tax of the Cantons is calculated on the basis of proportional tariffs. For tax purposes, the paid-in nominal capital and the general reserves, as well as certain hidden reserves, are taken into account. At the Federal level, the former tax has been eliminated for legal entities as part of the tax reform. The capital tax ranges between three and nine per million, depending on the Canton. The currently applicable rate can be found in the information leaflet of the Cantonal Economic Development Offices.
Taxation of holding companies
Both the Cantons and the Federal authorities give preferential treatment to holding companies. Companies holding at least 20% or CHF 2 million of the nominal capital of other companies pay a reduced tax on the earned dividend. The reduction of the tax due is based on the ratio of the (net) dividend income to gross profit. The equity holding deduction is granted at the Federal as well as Cantonal level. The end result is that there is largely no Federal tax on pure holding companies.
The Cantons relieve holding companies from all income taxes (holding privilege). The holding company is, therefore, not dependent on an equity holding deduction. The net result is that all dividends, and any profit from the sale thereof, and even interest income, etc. are tax-free. A holding situation exists if as a rule 2/3 of the assets are equity investments or 2/3 of the income is equity investment income.
Taxation of domiciliary companies
The cantons grant domiciliary companies extensive tax privileges. Profits (and capital) are taxed at a reduced rate. The precondition is that the company has no (direct) business activities in Switzerland. The Federal Government gives domiciliary companies no relief on the net income tax. At the Cantonal level a domiciliary company pays a tax of between 0 and 15% of the regular Cantonal net income tax. The domiciliary company be may controlled by either Swiss or foreign nationals.
Taxation of branches
Under tax law, a branch is a business entity belonging to a physical person or a corporation based abroad. Accordingly, liability to taxation in respect of economic links to Switzerland is limited. A branch of a foreign corporation or a foreign partnership is taxed in Switzerland like a joint stock company.
For a business entity to exist in tax law, there must be a permanent business facility that contributes to the profits of the company on its own account, or is important for the operation of the business. Swiss branches are taxed only on earnings attributable to the operation in Switzerland. The division of profit between the parent company and the operating facility is based on the accounts of the branch.
3. Taxation of physical persons
Physical persons who have their domicile in Switzerland or work in the country, are subject to Swiss taxes. The Federal Government taxes income only, while the Cantons and municipalities also levy a net worth tax.
Taxes are not normally withheld by the employer but collected subsequently after an assessment process carried out by the municipal authorities where the taxpayer resides. Physical persons who neither permanently nor temporarily reside in Switzerland may nonetheless have limited obligations with respect to taxes in Switzerland arising from their economic attachment. This applies, among others, to members of the senior management of foreign firms, which have operations in Switzerland.
Income tax
Income tax is always levied on total income, i.e. earned income, ancillary income, substitute income, investment income, etc. Expenses directly linked to earning the income, such as social security premiums, can be deducted from gross income. Net income is taxed progressively but there is a maximum tax rate. For single and married persons, there are different rates, with the latter being more favorable. Profits from the gain of private property are exempt from tax, except on the sale of real property.
Depending on the Canton, a salaried individual, married, without children, paid in 1999 the following aggregate taxes (Cantonal, municipal, Federal tax):
Gross income Progressive tax rate National average
CHF 50,000 3.7% to 9.0% 6.8%
CHF 100,000 8.0% to 16.3% 13.9%
CHF 200,000 15.0% to 26.1% 23.1%
In every Canton, and for Federal taxes, there is an upper limit beyond which the progression no longer increases. This limit is between CHF 300,000 and CHF 1,000,000. By international comparisons, the tax burden of an industrial worker in the form of income taxes and social insurance contributions is low in Switzerland.
Expatriates are assessed and taxed either through the regular procedure, or they are subject to withholding tax.
Net worth tax
The net worth tax is based on the total assets less total liabilities. It is calculated by most Cantons based on progressive tax rates. The Federal Government does not have any networth tax.
The net worth tax is less than 1%. Depending on the Canton the following rates were applicable in 1999:
Taxable networth Tax burden
CHF 50,000 Normally exempt
CHF 100,000 Exempt in half of the Cantons
CHF 1,000,000 1.8‰ to 7.5‰
4. Inheritance tax
The majority of the Cantons still have an inheritance tax; there is no such tax at the Federal level. The tax is based on the net assets transferred to the statutory or designated heirs or other beneficiaries. More and more Cantons are in the process of eliminating the inheritance tax altogether, at least for descendants. Where it still exists, the inheritance tax is low in comparison with other countries.
5. Tax deducted at source
Expatriates who work in Switzerland as salaried employees and do not have permanent residence status, pay source withholding tax. Only if they are married and are living together with a Swiss national or a foreign national with permanent residence status, will they be taxed through the ordinary procedure. The tariffs take into consideration certain standard deductions for professional expenses, insurance premiums and family allowances; the tax is deducted directly by the employer.
6. Anticipated tax
The anticipated tax at Federal level is a source withholding tax of 35% on the income of capital assets. It is passed on from the debtor of the capital to the creditor (investor). Taxed are interest on bank accounts and bonds, as well as dividends and other distributions to shareholders of a pecuniary value. For recipients of investment income who live in Switzerland, the anticipatory tax is credited through the regular taxation procedure against total tax liability, if they declare the corresponding assets and income. Persons with domicile in a foreign country can file for a full or partial refund, if this is provided for in the double taxation treaty with Switzerland and their country of residence.
7. Double taxation
To avoid or to alleviate the effects of double taxation in Switzerland and abroad, Switzerland has executed double taxation treaties with over 60 countries, including almost all Western industrial nations.
For physical persons, these treaties relate to income tax and the net worth tax. Double taxation treaties largely follow the OECD specimen treaty, which defines where the income or the assets are to be taxed and also describes the method for avoiding double taxation. Switzerland uses the tax exemption method and does not tax income or net worth that is assigned to the source country. This income and net worth is included only for arriving at the tax rate (progression).
On certain investment income (dividends, interest and license fees) the right of taxation belongs, on the one hand to the state in which the income arises, and on the other to the state of the recipient's residence. In the source state this taxation right is now limited, which can lead to a relief from 20 to 35%.
The remaining tax in the source country can normally be deduced from the Swiss tax liability (offset method). This offset method applies in Switzerland only on an exception basis whereas in foreign countries it is the norm. The offset method always has the effect that taxes are pushed up to the higher level (in the source country or the country of residence).
8. Other taxes
In connection with establishing a business domicile and entrepreneurial investment projects, certain additional taxes may be of significance:
Real estate taxes
In about half of the Cantons, real property is not calculated as part of the net worth or capital tax but through an annually levied land or real property tax. It is principally levied by the municipalities. The tax is always payable to the municipality in which the real property is located. It is always proportional and the rate is moderate; the tax rate varies between 0.30 and 3 per thousand of the market value or the capitalized income value.
Real estate transfer tax
The real estate transfer tax is levied in almost all Cantons whenever title to real property changes. It is always based on the sales price. The tax is usually payable by the buyer. The tariffs on the Cantonal and municipal tax are usually proportional and are between 1% and 3% of the sales price.
Motor vehicle tax
Annually payable motor vehicle taxes are levied by all Cantons and depend on the power and weight of the vehicle. For passenger cars, the average in Switzerland is just over CHF 400.00 with the most expensive Canton being 40% higher and the least expensive 35% lower.
9. Value added tax
Switzerland has by far the lowest value added tax in Europe. The rate is usually 7.6%, or 2.4% on goods for personal consumption and 3.5% on hotels. Certain services and goods (medical treatment, education) are completely exempt from VAT. Taxable are sales in Switzerland, imports from abroad and goods for personal consumption. The tax is calculated on the sales revenue of the company. Smaller companies with an annual turnover of up to CHF 250,000 are exempt if their tax burden is less than CHF 4,000.
Every company that is subject to VAT can deduct VAT paid at earlier stages in the economic process. To reduce the administrative burden, companies with a turnover not exceeding CHF 3 million and an annual tax liability of less than CHF 60,000 can settle on the basis of fixed rates (known as net-tax rates). This reduces the administrative burden, particularly for small and newly established companies.