1.1 Tax Regimes
The Swiss tax system includes three taxation levels, namely federal, cantonal and communal. The federal tax system is generally common to all taxpayers and besides income tax includes value added tax (VAT) and withholding tax (eg, on dividend payments). There is no wealth tax at federal level.
Due to the federal system in Switzerland, each of the 26 cantons has its own tax system. Most of the tax laws in the cantons were harmonised in 1995. However, the cantons still have a large degree of independence, particularly regarding tax rates and the interpretation of the tax laws. This results in significant taxation differences and tax competition between the cantons (see 3 Trusts, Foundations and Similar Entities below on tax rates and special tax regimes).
Cantonal and communal tax systems include income and wealth taxes as well as inheritance and gift taxes. Moreover, capital gains on the sale of real estate, including participation in real estate through other classes of assets (eg, shares in a real estate company), are subject to real estate capital gains tax at the cantonal level.
Capital gains on the sale of moveable assets held as part of an individual's private wealth are generally tax-exempt. Exemptions apply for real estate capital gains as well as professional securities dealing and commercial assets.
Limited and Unlimited Taxation in Switzerland
Individuals are residents for tax purposes when they have their tax domicile or tax residence in Switzerland. An individual has a tax domicile in Switzerland if they reside in Switzerland with the intention of remaining permanently. A tax residence in Switzerland is regarded as existing when an individual – regardless of temporary interruption – stays in Switzerland for a period of at least 30 days while being employed or, without employment, for at least 90 days. An individual with tax domicile or residence in Switzerland is subject to unlimited taxation on their worldwide income and wealth.
A limited tax liability in Switzerland may arise due to economic relations. Under domestic law, this tax liability can derive inter aliadue to ownership in or brokerage of real estate in Switzerland, the permanent establishment of a foreign business in Switzerland, or employment activities in Switzerland or membership of boards of Swiss companies. Thereby, generally only income and wealth attributable to Swiss sources are taxable in Switzerland.
Tax Rates and Special Tax Regimes
Income tax rates for income and wealth tax are progressive. Due to different cantonal tax systems and tax competition between cantons, marginal income tax rates vary between about 22% (eg, Canton of Zug) and 46% (eg, Canton of Geneva, as of 2017). Besides the taxable amount and tax residence within Switzerland (canton and municipality), family status and possible church affiliation have an impact on an individual's tax rate.
Swiss-sourced investment income (eg, dividends, interest on Swiss bonds and bank deposits with Swiss banks) is subject to a 35% withholding tax deduction on the level of the distributing or issuing company. This is fully recoverable by Swiss residents (whether Swiss or foreign), and may be fully or partially recoverable by individuals resident abroad (if a double taxation treaty is available).
Foreign nationals who do not engage in gainful employment in Switzerland can opt to pay an expenses-based tax (lump-sum or " forfait" taxation) instead of ordinary income tax and net wealth tax if they have (i) become resident in Switzerland for the first time, or (ii) returned to Switzerland after having spent at least ten years abroad. The tax basis is generally calculated using the annual worldwide living expenditure of the taxpayer and their family as a basis, taking into consideration particularly also federal and cantonal minimum amounts. In case of married immigrants, both spouses must fulfil the prerequisites.
A qualifying taxpayer can choose each year between lump-sum taxation and ordinary taxation. Taxpayers may choose ordinary taxation to benefit from applicable double taxation treaties, as not all treaties apply to lump-sum taxpayers. In some cantons (Zurich, Basel-City, Basel-Landschaft, Appenzell-Ausserrhoden and Schaffhausen), the lump-sum taxation regime has been abolished at the cantonal level, but it remains available at the federal level and in all other cantons.
Gift and Inheritance Tax
There are no gift or inheritance taxes imposed at the federal level. However, most cantons and some municipalities impose inheritance and gift taxes according to cantonal and (where applicable) communal laws if either the deceased person or donor had their last residence in that canton or the transferred real estate is located there.
Transfers to a spouse, descendants and recognised charities are tax-exempt in most cantons.
Trusts and Foundations
There is no Swiss tax law dealing explicitly with the taxation of trusts. However, the Swiss Tax Conference and Federal Tax Administration issued a Circular Letter dealing with the taxation of trusts in Switzerland. In practice, the qualification and thus the taxation of a trust is agreed upon with the competent Swiss tax authorities based on tax rulings. The taxation of a trust depends on the qualification of the trust (revocable, irrevocable fixed interest or irrevocable discretionary trust; see 2 Succession et seq below for more detailed information) which is the basis for the trust's treatment as transparent (typically the default position) or opaque from a Swiss tax perspective.
Swiss tax law generally provides for regular taxation of foundations as legal entities, that is, corporate income taxes (CIT) on federal, cantonal and communal level and capital taxes in most cantons and municipalities are levied. Whereas the statutory CIT at federal level is a flat-rate tax amounting to 4.25% of net profit (as of 2018), the CIT and wealth taxes at cantonal and communal level depend on the respective canton and municipality.
Under certain conditions, foundations (and all other legal entities) may benefit from tax privileges and exemptions if they qualify as pursuing public welfare, non-profit or religious purposes on a nationwide basis. Family foundations established under Swiss law are generally not tax exempt (see 2 Succession below for further information regarding Swiss family foundations).
If a Swiss foundation (or another legal entity) qualifies as solely a public welfare or non-profit tax-exempt entity, contributions made by an individual to the entity are deductible from income tax at federal level up to 20% of the individual's net income. Most cantonal tax laws provide for similar deductions or exemptions. Furthermore, the contributions may profit from an inheritance or gift tax exemption, particularly in domestic situations.
1.2 Stability of the Estate and Transfer Tax Laws
Switzerland has a stable and secure legal framework based on the rule of law and democratic principles. Legislation can only be amended in predefined and strictly regulated democratic processes. With respect to inheritance and gift taxes which lie to a great extent within the competence of the cantons (there is no gift or inheritance tax at federal level), no significant cantonal legislative changes are expected in the near future. Regarding the federal level, a federal popular initiative calling for the introduction of a federal gift and inheritance tax was rejected by a clear majority (71%) of the Swiss people on 14 June 2015.
Switzerland does not have a general transfer tax law for the transfer of private assets. In general, transfers of assets without consideration, namely as gifts or inheritance, are not regarded as realisation of profits in Switzerland. Accordingly, no capital gains tax is levied upon a transfer of a private moveable asset as a gift or inheritance. However, most cantons levy a gift or inheritance tax on the fair market value of the respective asset (there is no difference between aninter vivos gift and property that passes causa mortisfrom a transfer tax perspective). Thereby, transfers to the spouse, descendants and recognised charities are generally tax-exempt.
Certain transfer taxes may apply in case of the transfer of real estate.
1.3 Recent Developments or Forthcoming Regulatory Changes
Switzerland is an OECD member and a founding member of the Financial Action Task Force (FATF) and promotes transparency in tax matters and the fight against money laundering and terrorist financing. The revised Financial Action Task Force recommendations of 2012 have been implemented in the necessary national legislations, which entered into force either on 1 July 2015 or 1 January 2016 (with transitional periods).
Corporate Law: Increased Transparency Within Companies
Changes in the Swiss Corporate Law in particular will lead to new regulatory challenges. As of 1 July 2015, the identity of the ultimate beneficial owners of a corporation or LLC have to be reported to the respective company. All shareholders owning at least 25% of the registered shares of the company are subject to the reporting duty, and sanctions are imposed in case of non-disclosure of the ultimate beneficial owner (within the statutory time limits).
In the case of bearer shares, acquirers have to report their identity to the company, which de factoleads to an abolition of bearer shares.
Anti-Money Laundering Legislation
New due diligence obligations and reporting duties for traders have been implemented in Swiss anti-money laundering legislation which took effect on 1 January 2016. The new obligations and duties will generally be applied when traders accept cash payments of more than CHF100,000 in the course of trading activities. Thus, they are not applicable if payments are made via a finance intermediary (eg, a bank).
The obligations include inter alia the keeping of a register of the respective clients and notifying the Money Laundering Reporting Office Switzerland (MROS) in certain circumstances. Accordingly, anonymous cash payments (exceeding CHF100,000) are no longer possible.
The new duties certainly lead to more transparency in the concerned sectors – eg, in the art and luxury watch markets, which are of great importance in Switzerland. However, the new regulations imply compliance and regulatory efforts and costs for the traders concerned.
Furthermore, there is a possibility that some clients might be deterred from buying/investing in art or other investments as they deem absolute confidentiality and anonymity to be indispensable – without having any intention of contravening regulations. In this respect, however, it is important to note that the new due diligence and reporting duties are, of course, governed by strict regulations, particularly the Swiss data protection legislation.
Family and Ecclesiastical Foundations: Obligation of Entry in Commercial Register
Until 1 January 2016 an entry in the commercial register of family and ecclesiastical foundations was voluntary and had solely declaratory effect. In order to enhance transparency an obligation for family and ecclesiastical foundations to make an entry in the commercial register was introduced in Swiss law with effect from 1 January 2016 (with transitional periods). Thus, family and ecclesiastical foundations only acquire legal personality upon their entry in the commercial register.
Already existing family and ecclesiastical foundations keep their legal personality but have an obligation to make an entry in the commercial register within five years.
Regarding estate planning, this amendment may not be of great importance in practice as the use of a Swiss foundation for the maintenance of a family is very limited under Swiss law (see 2.1 International Planning below).
1.4 Income Tax Planning
Due to the relatively broad autonomy of cantons and municipalities in the field of taxation and the resulting tax competition, tax residence within Switzerland is generally the most crucial factor with regard to income and wealth tax planning (see 1.3 Recent Development of Forthcoming Regulatory Change above). Marginal income tax rates may vary between 22% (eg, Canton of Zug) and 46% (eg, Canton of Geneva).
Furthermore, depending on each case and the structure of investments, individuals can benefit from the tax exemption of gains derived from the sale of moveable assets held in the individuals' private wealth. Accordingly, depending on a case-by-case analysis and subject to Swiss legislation on practice regarding the so-called indirect partial liquidation and transposition, it might be beneficial from a taxation point of view to have investments with retained profits (and to sell the investment with a tax-exempt profit) rather than investments where profits are distributed (which would be subject to income tax).
However, it has to be noted that disposal of shares in a real estate company can give rise to property gains tax. Moreover, when selling real estate, securities, works of art and other investment options, a private capital gain will, according to legislation and practice, only be tax-exempt as long as the investment is not considered commercial and does not qualify as a self-employment activity. The mere management of private assets is not considered to be a self-employment activity. In order to assess whether an activity is considered commercial, the tax authorities and courts usually take into account, inter alia, the following criteria: nexus to taxpayer's professional activity; borrowing of capital; frequency of transactions; systematic approach to investing; and reinvestment of gains.
Finally, the income tax burden may be lowered due to special deductions. For instance, contributions to Swiss pension funds (private retirement schemes) are tax-deductible.
1.5 Efforts to Address Real or Perceived Abuses/Loopholes
Switzerland has a long judicial practice in the field of tax abuse and fraud cases both in national and international cases. The several principles derived from case law supplement the principles laid down in Swiss statutory law.
In recent years, especially, a tendency towards a stricter judicial practice regarding the criterion of beneficial ownership can be observed. The criterion of beneficial ownership is crucial both in national and international tax law, particularly in cases dealing with the refund of withholding taxes (eg, on dividend payments).
Download >> Law and Practice Switzerland
Originally published in Chambers Global Practice Guides, Private Wealth 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.