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Income Tax in Switzerland



Personal Income Tax: Over View

Either a progressive or proportional income tax is levied by the Confederation and by the cantons on the income of natural persons. The income tax is imposed as a payroll tax on foreign workers without a residence permit, and in the form of a withholding tax on certain transient persons, such as foreign musicians performing in Switzerland.

Taxable income includes all funds accruing to a person from all sources, in principle without deduction of losses or expenses, and including the rental value of a house lived in by its owner. However, capital gains on private property (such as profits from the sale of shares) are tax-free, except where the cantons levy a tax on real estate capital gains. Certain expenses are also deductible. These include social security or pension fund payments, expenses related to the gain of income (such as employment expenses and maintenance costs of real estate) and alimonies. Gifts and inheritances are also exempt from the income tax, but are subject to separate cantonal taxes.
Non-working foreigners resident in Switzerland may choose to pay a "lump-sum tax" instead of the normal income tax. The tax, which is generally much lower than the normal income tax, is nominally levied on the taxpayer's living expenses, but in practice (which varies from canton to canton), it is common to use the quintuple of the rent paid by the taxpayer as a basis for the lump-sum taxation.This option contributes to Switzerland's status as a tax haven, and has induced many wealthy foreigners to live in Switzerland.

In 2011, the federal income tax varied from a bracket of 1% (for single tax payers) and 0.77% (for married taxpayers) to the maximum rate of 11.5%. Individuals earning below 13,600 and couples earning below 27,000 Swiss francs were exempt. On cantonal level, tax rates varies heavily, Obwalden adapted a 1.8% flat tax on all personal income following a cantonal referendum in 2007. In most cantons, the rate is proportional with a maximum rate of 6.5% in Bern, whereas in Zurich it was 13% and in Geneva 17.58-.76% (depending upon taxes as single or jointly).

Personal Income tax rate for 2017:

Direct Federal Tax:

Single Taxpayers:

Taxable Income
Tax on Column 1 (CHF)
Percentage on Excess
From
To


0
14,500
-
-
14,501
31,600
-
0.77
31,601
41,400
131.65
0.88
41,401
55,200
217.90
2.64
55,201
72,500
582.20
2.97
72,501
78,100
1096.00
5.94
78,101
103,600
1,428.60
6.60
103,601
134,600
3,111.60
8.80
134,601
176,000
5,839.60
11.00
176,001
755,200
10393.60
13.20
Above 755,200
86848.00
11.50

For taxable income above CHF 755,200 the overall tax rate will be 11.5%.

Married Taxpayers and Single with minor children

Taxable Income
Tax on Column 1 (CHF)
Percentage on Excess
From
To


0
28,300
-
-
28,301
50,900
-
1
50,901
58,400
226
2
58,401
75,300
376
3
75,301
90,300
883
4
90,301
103,400
1,483
5
103,401
114,700
2,138
6
114,701
124,200
2,816
7
124,201
131,700
3,481
8
131,701
137,300
4,081
9
137,301
141,200
4,585
10
141,201
143,100
4,975
11
143,101
145,000
5,184
12
145,001
895,900
5,412
13
Above 895,900
103,040
11.5

For taxable income above CHF 895,900 the overall tax rate will be 11.5%.

Zurich cantonal tax (basic tax):

Single Taxpayers

Taxable Income
Tax on Column 1 (CHF)
Percentage on Excess
From
To


0
6,700
-
-
6,701
11,400
-
2
11,401
16,100
94
3
16,101
23,700
235
4
23,701
33,000
539
5
33,001
43,700
1,004
6
43,701
56,100
1,646
7
56,101
73,000
2,514
8
73,001
105,500
3,866
9
105,501
137,700
6,791
10
137,701
188,700
10,011
11
188,701
254,900
15,621
12
254,900

23,565
13

Married taxpayers and single taxpayers with minor children

Taxable Income
Tax on Column 1 (CHF)
Percentage on Excess
From
To


0
13,500
-
-
13,501
19,600
-
2
19,601
27,300
122
3
27,301
36,700
353
4
36,701
47,400
729
5
47,401
61,300
1,264
6
61,301
92,100
2,098
7
92,101
122,900
4,254
8
122,901
169,300
6,718
9
169,301
224,700
10,894
10
224,701
284,800
16,434
11
284,801
354,100
23,045
12
354,100

31,361
13

Calculation of effective taxes:

For Zurich cantonal taxes, the above rates can be applied directly. For the additional municipal taxes, the above rate has to be multiplied by the respective municipal tax factor, which varies between 0.75 and 1.34 (City of Zurich: 1.19). For church tax the basic tax above is multiplied by the church tax factor, which is between 0.06 and 0.15.

Geneva cantonal tax (basic tax):

The Geneva tax table is quite complex as it does not apply a tax bracket system. The tax rates are increasing continuously in small increments with each increase in income. The table below therefore only provides a general overview.

Taxable Income
Tax Rate
From
To
0
17,663
0
17,664
21,281
8.00
21,282
23,409
9.00
23,410
25,537
10.00
25,538
27,665
11.00
27,666
32,985
12.00
32,986
37,241
13.00
37,242
41,498
14.00
41,499
45,754
14.50
45,755
73,420
15.00
73,421
120,238
15.50
120,239
161,736
16.00
161,737
183,017
16.50
183,018
261,757
17.00
261,758
278,782
17.50
278,783
392,636
18.00
392,637
615,022
18.50
More than 615,022

19.00

Taxable Income:

Employment income:

All gross remuneration from employment, whether in cash or in kind, is subject to taxation at the time the employee has received the remuneration or has received an irrevocable right to the remuneration. It is irrelevant whether the remuneration results from a Swiss or foreign employment or whether the remuneration is paid to a Swiss bank account or not.

Payments made to an employee to compensate for business related expenses are not taxable as long as these payments are not considered as covering cost of living expenses for the employee or persons related to the employee.

Assignment related income:

Generally, income exclusively relating to an assignment of an employee to Switzerland is subject to taxation. However, various cantonal and federal regulations exempt certain types of income from taxation, if they can be considered special expenses for the expatriate. These exceptions are strictly limited. Depending on how the benefits are delivered and on the individual circumstances, such expatriate benefits may either be tax-free income or allow the expatriate to claim a special deduction in the tax return.

·  Relocation costs: Actual moving costs to and back home from Switzerland (e.g. transportation of household goods) as well as travel expenses for expatriates and their families at the beginning and at the end of the assignment.

· Housing: Reasonable housing costs in Switzerland, if the expatriate maintains the principal residence in the home country during the assignment (not rented out). Limitations between CHF 2,000 and CHF 6,500 per month apply, with cantonal differences.

· School fees: Actual tuition fees for private/international schools if the public schools cannot provide adequate education to the children of expatriates, usually due to the difference in languages.

· Commuting costs: Actual costs of the expatriate’s home leave if the family of the expatriate remains in the home country.

Please note that in the canton of Geneva a lump-sum 10% tax deduction can be applied on gross salary income to cover for various expatriate expenses (capped at CHF 100,000).

Only expatriates are entitled to these deductions. The law defines an expatriate as a managerial employee or a specialist temporarily seconded to Switzerland for a period of up to five years, i.e. the (assignment) contract has to be limited in time for a maximum of five years. An employee with a local contract may also be considered an expatriate if the duration of the contract is limited for a period of up to five years maximum and the foreign employer guarantees re-employment afterwards. Foreign and Swiss employer must be of the same group of companies. Other foreign local hires are usually not considered expatriates and cannot claim these special deductions.

Equity compensation:

Income from stock options that were acquired privately is generally exempted from income taxation. However, if stock options, or other equity participation instruments, were acquired through employment, income derived from such equity participation instruments is qualified as employment income and subject to income taxation.

There is a new Swiss law on the taxation of equity based compensation, which has entered into force as of 1 January 2013. The law basically mirrored the practice developed by many cantonal tax authorities with respect to taxing equity compensation. Based on this law, taxation of stock options generally occurs at exercise, and taxation of restricted stock units (RSUs) at vesting. In international cases (move of tax residency to Switzerland or leave from Switzerland during the lifetime of an equity compensation instrument), a pro rata temporis taxation, based on the Swiss portion of the vesting period, generally applies. It should be noted that there are some details and specialties regarding the taxation rules, which generally require detailed analysis of the specific terms and conditions of the instruments.

Business income:

If an individual is performing a self-employed activity, then basically the net profit, e.g. the gross revenue minus all business related expenses, is taxable.

Capital gains:

Private capital gains on movable assets (e.g. shares) are normally tax-exempt throughout Switzerland as long as an individual does not qualify as being a professional securities dealer.

Capital gains realised upon selling Swiss non-movable assets, i.e. real estate, is however subject to a cantonal capital gains tax. The tax rate varies per canton and is usually progressive depending on the gain itself. Often surcharges apply for short holding periods (less than two to three years) and reductions are granted for longer holding periods (more than five years).

Dividend income:

Dividend income derived from investments is taxed at the ordinary rates together with the other income. In general, dividends from Swiss sources are subject to a 35% WHT that can be credited against the Swiss income tax liability, if such dividend income is declared correctly and in full.

Interest income:

Interest income derived from investments is taxed at the ordinary rates together with the other income. In general, certain interest from Swiss sources (e.g. Swiss bank accounts) is subject to a 35% WHT. Swiss WHT can generally be credited against the Swiss income tax liability if such interest income is declared correctly and in full.

Rental income:

Rental income derived from investments is taxed at the ordinary rates together with the other income.

Income from real estate located in Switzerland is subject to tax at the ordinary rates. The owner of self-used real estate is deemed to generate income (i.e. deemed rental income). Foreign rental income is exempted with progression in Switzerland. Therefore, the actual or deemed rental income, and any maintenance or repair costs and respective mortgage interest, must be declared on the Swiss tax return to determine the applicable tax rate.

Intellectual property:

Royalties are also subject to income taxation in Switzerland.

Exempt income:

In principal all income is subject to income taxation. For some specific circumstances, federal and cantonal tax law specifically states that no income tax is due, for example:

· Assets received due to inheritance, gifted assets, or if received through settlement of matrimonial property (but possibly subject to gift or inheritance tax).

·   Compensation for personal suffering.

·   Some private or governmental social welfare payments.



Corporate Income Tax: Overview

Switzerland has a "classical" corporate tax system in which a corporation and its owners or shareholders are taxed individually, causing economic double taxation.

All legal persons are subject to the taxation of their profit and capital, with the exception of charitable organisations. Tax liability arises if either the legal seat or the effective management of a corporation is in Switzerland. To the extent non-resident companies have Swiss sources of income, such as business establishments or real estate, they are also liable for taxation. Conversely, as a unilateral measure to limit double taxation, profits from foreign business establishments or real estate are exempted from taxation.

Profit tax:

A proportional or progressive tax is levied by the Confederation (at a flat rate of 8.5%) and the cantons (at varying rates) on corporate profits. The tax is based on the net profit as accounted for in the corporate income statement, as adjusted for tax purposes. For instance, expenditures that have no business reason such as excessive depreciations, accruals or reserves, as well as disguised dividends are taxed as profits.

A number of provisions limit the double taxation of profits at the corporate level and contribute to Switzerland's tax haven status. To begin with, a "participation exemption" is granted to companies who hold 20 percent or more of the shares of other companies; the amount of tax due on the corresponding profit is reduced in proportion to the percentage of shares held. At the cantonal level only, a "holding privilege" applies to pure holding companies. They are exempt from the cantonal corporate profit tax. Moreover, cantonal law confers a "domicile privilege" on companies who are only administered in Switzerland, but whose business is conducted abroad; including shell corporations. The cantons tax only around 10 percent of the worldwide profits of such companies.

Capital tax:

A proportional tax is levied by the cantons (at varying rates) on the Eigenkapital (ownership equity) of companies. Thinly capitalised companies are taxed, moreover, on the liabilities that function as equity. This also means that debts paid on such liabilities cannot be deducted for purposes of the profit tax, and are subject to the federal withholding tax.

Tax Rates:

Resident companies are subject to Swiss corporate income tax (CIT) on their taxable profits generated in Switzerland. CIT is levied at the federal, cantonal, and communal level. Foreign-source income attributable to foreign permanent establishments (PEs) or real estate property located abroad is excluded from the Swiss tax base and only taken into account for rate progression purposes in the cantons that apply progressive tax rates.

Non-resident companies may be subject to Swiss CIT if they are (alternatively) partners of a Swiss business, have a PE in Switzerland, own real estate property in Switzerland, have loan receivables secured by a mortgage on Swiss real estate property, or deal with or act as a broker of Swiss real estate property. Non-resident companies are taxed on their income generated in Switzerland only.

Federal level:

Switzerland levies a direct federal CIT at a flat rate of 8.5% on profit after tax. Accordingly, CIT is deductible for tax purposes and reduces the applicable tax base (i.e. taxable income), resulting in a direct federal CIT rate on profit before tax of approximately 7.83%. At the federal level, no corporate capital tax is levied.

Cantonal/communal level:

In addition to the direct federal CIT, each canton has its own tax law and levies cantonal and communal income and capital taxes at different rates. Therefore, the tax burden of income (and capital) varies from canton to canton. Some cantonal and communal taxes are imposed at progressive rates.



Overall tax rates:

As a general rule, the overall approximate range of the maximum CIT rate on profit before tax for federal, cantonal, and communal taxes is between 11.5% and 24.2%, depending on the company’s location of corporate residence in Switzerland.

Taxable Income:

The statutory accounts of a Swiss company (or in the case of a non-resident company, the branch accounts) serve as the basis for determining taxable income. There are generally very few differences between statutory profit and taxable profit apart from the participation relief for dividend income and capital gains, adjustments required by the tax law, and the usage of existing tax loss carryforwards.

Inventory valuation:

Swiss CIT treatment does, in principle, follow underlying Swiss statutory accounting treatment. Inventory valuation is therefore determined according to the accounting rules of the Swiss code of obligations. As the Swiss code of obligations, hence the Swiss accounting rules, favour the prudence principle, a valuation allowance is allowed to be recorded on the inventory in excess of the actual devaluation of the inventory due to a lower market value. Such valuation allowance is accepted for tax purposes at up to a maximum of one-third of the inventory’s acquisition costs or its productions costs, respectively its lower market value.

Accordingly, the maximum inventory value represents the inventory’s acquisition costs or its production costs. In case these costs exceed the inventory’s market value at the balance sheet date, the latter lower market value must be applied. In order to determine the inventory’s acquisition or production cost, various methods exist.

It is at the corporate taxpayer’s discretion to determine which method shall apply (e.g. weighted average method, first in first out [FIFO], last in first out [LIFO], highest in first out [HIFO]).

Participation relief:

Participation relief is the name generally attributed to the tax relief on qualifying dividend income and capital gains from the disposal of a subsidiary. Participation relief is not an outright tax exemption, but rather a tax abatement mechanism. It is therefore also commonly referred to as 'participation deduction' or ‘participation exemption’.

Participation relief is a percentage deduction from CIT that is equal to net participation income divided by taxable income. Net participation income consists of the gross participation income from qualifying dividends and (usually) qualifying capital gains less related administration and financing costs and any depreciation of the participation that is linked to the dividend distribution. In most cases, participation relief results in a full exemption of participation income from CIT, or one close thereto. Note that participation relief may be diluted in certain cases (e.g. if tax loss carryforwards are offset).

The participation relief on dividend income is mandatory at the federal CIT as well as at the cantonal/communal level. The participation relief on capital gains is voluntary for cantonal/communal tax purposes, but nonetheless implemented by all cantonal tax acts. Specific privileged cantonal/communal tax regimes may foresee more favourable rules for dividend income and capital gains than the participation relief.

Dividend income:

Dividends qualifying for participation relief are those from participations representing at least 10% of the share capital or 10% of profits and reserves of another company or those having a market value of at least CHF 1 million. Note that there is neither a minimum holding period nor a requirement that the dividend paying subsidiary is liable to income tax in its jurisdiction of residence.

Capital gains:

Capital gains derived from the disposal of a qualifying participation are generally entitled to participation relief if the following conditions are cumulatively met:

·  The participation sold was owned by the company for a period of at least one year.

· The participation sold constitutes at least 10% of the share capital or 10% of profits and reserves of the underlying subsidiary. If a residual participation is less than 10% due to a previously qualifying partial sale, further participation relief on a capital gain is only possible if the residual participation’s market value at the beginning of the year amounted to at least CHF 1 million.

It is noteworthy that capital gains are only entitled to participation relief to the extent the sales price exceeds the original investment costs (commonly also referred to as 'acquisition costs') of the participation, whereas the so-called 'recaptured depreciation' (i.e. the amount of former depreciations) is taxable.

Interest income:

Interest income earned is taxable income. It is of no relevance whether the payment of the interest was made by a related party (affiliated company or shareholder) or by a third party.

Royalty income:

Royalty income represents taxable income. It is generally subject to ordinary CIT at the federal, cantonal, and communal level. As an exception to the rule, the canton of Nidwalden has introduced a patent box regime. This regime provides for a lower taxation of royalty income from the exploitation of intangible property at the cantonal and communal level.

Foreign exchange gains:

Realised foreign exchange gains in relation to a transaction (transaction gains) are included in the tax basis of a corporation as taxable. Realised and, as a result of the prudence principle of the Swiss accounting rules, unrealised transactional foreign exchange losses are tax deductible. Based on a federal court decision in 2009, foreign gains (or losses) resulting from the translation of financial statements in a foreign (functional) currency to Swiss franc (presentation currency) are not taxable (respectively tax deductible).

Foreign income:

Swiss tax resident corporations are basically taxed on their worldwide income. However, income attributable to a foreign PE (i.e. a PE outside of Switzerland) is not taxed in Switzerland. It may only be taken into account to determine the applicable tax rate, in case progressive tax rates apply. The same rule applies for income from real estate property situated abroad.

Dividends, interest, and royalties from Swiss or foreign sources are included in taxable income. However, in certain cantons, special methods of assessment may apply for dividend and other income originating outside Switzerland. For dividend income, a relief generally is available at the federal income tax level as well as at the cantonal/communal level. The irrecoverable portion of foreign WHT of most treaty countries can be credited against the related Swiss income taxes on the same income. Foreign WHT of non-treaty countries generally is not creditable, but is deductible for income tax purposes.

There are no controlled foreign company (CFC) rules in Switzerland. Consequently, undistributed income of foreign subsidiaries is usually not taxed in Switzerland.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.


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This blog is Created by CA Anil Kumar Jain.