The structure of the Swiss tax system

The structure of the Swiss tax system: the Confederation, the cantons and the communes

The Swiss tax system stems from the country’s federalist structure. The taxation powers and the revenue from tax are shared between the Federation, the 26 cantons and the 2,350 communes in Switzerland.

Sharing taxation powers

Unlike many countries, in which tax law is based on general legislation which sets the framework for all taxes and amounts, the structure of the Swiss tax system is based on three different types of tax law. Corporations and individuals are taxed at three levels:

• National level:Federal taxation
• Cantonal levelCantonal taxation
• Commune levelMunicipal taxation

In order to prevent double taxation from occurring within the country, and to avoid excessive taxation, the Federal Constitution shares the respective taxation powers of the “three sovereignties”.

• As such, the Confederation can only collect the taxes attributed to it by the Federal Constitution.
• The cantons, on the other hand, have a more general jurisdiction. In principle, they may collect all taxes which do not fall within the exclusive jurisdiction of the Confederation.
• Finally, communes have limited powers of taxation, due to the fact that the cantonal laws define which taxes they can collect.

For example, only the Confederation can levy withholding tax. Conversely, wealth tax can only be imposed at cantonal and municipal (commune) level.

Disparities in the tax burden

Although Switzerland has harmonised its tax system with regard to direct taxes, notably through the Federal Act on the Harmonisation of Direct Taxes (LHID), the Swiss tax structure continues to represent a source of disparity in the tax burden throughout the country.

The main reason for this is that the cantons remain responsible for fixing the scales, rates and amounts exempt from tax. As a result, the level of taxation and the tax burden vary from canton to canton.

The different taxes

Like the majority of countries, Switzerland has a number of direct and indirect taxes. The tables below list the various Swiss taxes and tax jurisdictions.

CORPORATE TAXATION

Corporate taxation applies to all corporate entities, such as joint-stock companies, cooperatives, associations, foundations, etc.

TAX ON PROFIT

As its name indicates, this tax applies to the net profit generated by the company over the entire fiscal period.

The general system

Companies are required to pay corporate tax on profit, composed of federal tax at a proportional rate of 8.5% (4.25% for associations and foundations) and cantonal and municipal tax, at a rate which varies between 2% and 24% depending on the canton.

In theory, the tax on profit is a proportional tax at a fixed rate. Some cantons, however, have chosen to set up a mixed system with a two- or three-tier scale, depending on return or profit. This is the case, for example, in the canton of Zug.

It is important to note that joint venture companies may, under certain conditions, benefit from reduced taxes for stakeholders, in order to avoid cascading taxation.

Some of the cantonal tax rates for 2015:

• Zurich : 8%
• Zoug : 3% on the first 100,000 francs and then 5.75% on profit of more than 100,000 francs
• Neuchâtel : 6%
• Genève : 10%

However, it is important to be aware that the actual tax rate is lower than the sum of the federal rate and the cantonal and municipal rates. Indeed, the federal, cantonal and municipal tax on income is considered a business expense. As a result, the total tax on income is deductible.

Example of a tax on profit calculation in Geneva for the 2015 tax period:

The various types of tax relief

Joint venture companies, holding companies and management companies benefit from a number of tax breaks.

Tax relief for joint venture companies
The corporate tax on profit paid by a joint venture company is reduced in proportion to the ratio between the net return, the participation rights and the total net profit. If the company in question (a) owns at least 10% of the capital of another company, (b) shares at least 10% of the profit and stocks of another company or (c) holds participation rights with a market value of 1 million francs, this is considered sufficient.

Holding companies
Once the net return from the holding company stakes is greater than or equal to the net profit thereof, holding companies whose sole purpose is to ensure the sustainable management of stakes in other companies do not pay tax on profit.
The tax liability is entirely removed.

Management companies
At cantonal level, management companies enjoy particularly advantageous treatment.
The returns on shares, the capital gains and the re-evaluation profits from these holdings are fully tax-exempt.
Revenues from foreign sources are taxed according to the scope of the administrative activity carried out in Switzerland.

Tax on capital

The tax on capital is imposed on the equity owned by the company – or in other words, for joint-stock companies and cooperatives, on the share capital or paid-up share capital, open reserves and hidden reserves, obtained through the taxed profits. Hidden equity – shares in foreign funds – is also taxable. The taxable equity is established on the basis of the status of this at the end of the tax period.

The general system

In 1 January 1998, tax on capital was abolished at federal level. From now on, only the cantons and communes will levy this tax, in accordance with the methods established by the LHID.

As is the case with tax on profit, tax on capital is always proportional, with two exceptions: the cantons of Grisons and Valais have implemented a slightly progressive (dual rate) system.

On the other hand, in the cantons of Uri and Basel-City, companies that are subject to standard taxation are not liable to be taxed on capital.

Some of the tax rates for 2015:
The base cantonal tax rates on equity for joint stock companies and cooperatives are as follows:

• Geneva: 1.8% or 2% if the company does not have any taxable profit.
• Neuchâtel : 2,5‰
• Zug : 0,5‰
• Bern : 0,3‰
• Zurich : 0,75‰

Imputation of tax on profit on the tax on capital:
The law obliges the cantons to levy tax on capital. However, the adoption of the second corporate taxation reform has enabled the cantons to provide for the imputation of tax on profit on the capital tax.

This imputation, which enables the cantons to waive the tax on capital up to the amount due for the tax on profit, is effective in the cantons of Bern, Schwyz, Solothurn, Basel-Landschaft, St.Gallen, Appenzell Ausserrhoden, Aargau, Thurgau, Vaud, Neuchâtel and Geneva (with some limitations).

It should be noted, however, that the imputation only applies to the cantonal share of the tax – the municipal tax on capital is still due.

The various types of tax relief

As is the case for tax on profit, joint venture companies, holding companies and management companies benefit from relief with regard to tax on capital.

Tax relief for joint venture companies
In principle, joint venture companies are subject to capital tax at the same rate as other companies.
However, the cantons of Aargau, Schaffhausen, Appenzell Ausserrhoden, St. Gallen and Lucerne grant a reduction in the tax on capital payable by these companies.

Holding companies
All cantons impose reduced preferential rates of tax on holding companies.

Management companies
Most cantons give preferential treatment to management companies.

Tax relief for new businesses

At cantonal level, 10-year tax breaks for newly-established companies apply.
This tax relief, which may vary from one canton to another, relates to taxes on profit and capital.

• TOTAL OR PARTIAL EXEMPTION FOR A MAXIMUM OF 10 YEARS
  • Bern, Lucerne, Glarus, Fribourg, Solothurn, Basel-City, Schaffhausen, Graubünden, Aargau, Thurgau, Ticino, Vaud, Valais, Neuchâtel and Jura
  • Geneva (with some restrictions)
• PARTIAL EXEMPTION ONLY OR PROVISION OF TAX RELIEF OVER PERIODS Of 10 YEARS OR MORE
  • Zurich, Uri, Schwyz, Obwalden, Nidwalden, Zug, Basel-Country, Appenzell Ausserrhoden and Innerrhoden and St. Gallen

This legislation makes Switzerland attractive to businesses, especially since total or partial exemption is granted not only to new companies, but also to existing companies whose commercial activity has changed significantly, or which have entered into a new field of production.

Minimum tax

Some cantons have introduced a so-called “minimum tax”: in cases where this is higher than the standard taxes on profit and capital, this is payable in place of the latter.

The objective of this alternative tax is to enable taxation of companies that are not aiming to make profit, but which nonetheless have a certain degree of economic importance.
The Confederation has no minimum tax, and neither do certain cantons, including Zug, Zurich, Neuchâtel and Geneva.

The minimum tax rate and the tax base differ from one canton to another.
These can be based on land ownership, gross revenue and invested capital.
In most cantons which apply this minimum tax, a fixed charge is stipulated for all joint stock companies and sometimes for cooperatives too, where their social benefits are under the minimum threshold.

Federal withholding tax

This is a tax that serves as a guarantee for another.

Withholding tax is a guarantee tax levied at source by the Confederation, which aims to combat tax evasion. The cantons have no taxation powers in this area.

This tax is imposed on certain types of investment income of Swiss origin, specifically interest and dividends, insurance benefits for which the policyholder or beneficiary is a Swiss tax resident, as well as lottery winnings.

The tax rate varies according to the nature of the income, and amounts to:

• 35% of the taxable benefit for returns on investment income (and lottery wins)
• 15% of the taxable benefit for life annuities and pensions
• 8% of the taxable benefit for other insurance benefits

This rate may exceptionally be reduced by the Confederation to 30%.

The legislator selects the debtor to be liable for the taxable benefit; essentially, this is the entity most likely to correctly fulfil the relevant tax obligations.

The debtor must pay tax to the Swiss Federal Tax Administration (FCA) and then transfer the remaining taxable benefit to the beneficiary. Accordingly, a company that decides to distribute €100 of dividends to an associate will only actually pay him or her € 65. The remaining €35 will be returned to the FCA.

Although the tax is deducted at source, the taxpayer must also “cooperate”: it is the taxpayer’s responsibility to ascertain his or her liability, to voluntarily inform the FCA of this, and to provide the latter with the relevant statements and supporting documents, as well as paying the withholding tax.

As a guarantee tax, its purpose is to ensure that taxpayers report their income correctly. For this reason, under certain conditions, this tax is fully refundable for all beneficiaries resident in Switzerland.
Corporate entities with registered offices in Switzerland may claim a refund of the withholding tax held on their account by the debtor, provided that the securities that produced the returns that were subject to tax appear in the accounts.

In principle, foreign taxpayers are not entitled to reimbursement. However, it is worth checking whether a tax treaty is in force between Switzerland and the country of residence, to see if this provides for full or partial reimbursement of the withholding tax.

It should be noted that any person who fails to pay the tax due to the Confederation, who does not fulfil the obligation to declare their tax liability or who obtains a refund where this is not due shall incur a fine which can amount to three times the tax withheld.

How about a reform to the withholding tax regulations?

PROFESSIONAL TAX – SPECIFIC TO GENEVA

Professional tax is a direct municipal tax which is only levied by the communes within the canton of Geneva.

It allows communes to tax any natural person or corporate entity working on a gainful self-employed basis or engaging in a commercial, artisanal or industrial activity in the commune, or with a branch or a permanent facility located therein.
Any natural person or corporate entity pursuing a gainful activity within the territory of the canton must declare this voluntarily and without delay to the tax authority for the commune in question.

Corporate entities exempt from cantonal taxes are also exempt from corporate tax (with the exception of any part of the activity which is of a commercial nature), as are companies whose sole activity consists in renting unfurnished property belonging to them. This also applies to farms, or more specifically, to agricultural activities that are not of an industrial or commercial nature.
Although these entities are exempt, they must still file a return

Where the activity takes place in several communes, in the interests of simplicity, only one declaration must be completed by the taxpayer, specifying the activity undertaken in each commune. The main commune, in which the most significant portion of the activity takes place, is responsible for sending the declaration form to the taxpayer and calculating the tax due, after which each commune will then send the relevant tax form to the taxpayer.

Corporate tax is calculated on the basis of the average turnover for the previous two years, the average rent paid for premises and land occupied, and the average number of persons working in the business, to whom a taxation coefficient applies.

The coefficients applicable to the turnover must not exceed:
– 1.7% on wholesale trade or manufacturing company turnover;
– 3% on retail trade turnover;
– 6% on commissions, service payments and fees.
The rent taxation coefficient is 5%.
The taxation coefficient for the staff employed corresponds to 10 francs per person.

TAXATION ON PHYSICAL PERSONS/ INDIVIDUAL TAXATION

Income tax

The Confederation, the cantons and the communes levy an income tax which is calculated in principle on the basis of the total income received by the taxpayer, whatever the source of this.

The sources of income which comprise gross income are as follows:

• Income from gainful employment (such as wages)
• Income from property assets
• Income from movable assets
• Income from compensation (welfare etc.)
• Capital gains (here, the distinction must be made between gains on private wealth and gains on business assets)
• Lottery winnings
• Other income categories such as recognised capital gains on business assets, maintenance payments and maintenance contributions paid in the form of capital

Swiss legislation provides for various gross income deductions, classified into three categories – organic, general and social deductions – and these enable the total net income to be determined.

The principle of family taxation is specific to Switzerland.
In Switzerland, income tax is based on the principle of family taxation, or in other words, the incomes of spouses and registered partners living in a common household are added together, regardless of their marital status.
Nevertheless, the so-called dual scale or income splitting systems provide tax relief for married taxpayers.

The federal tax rate
Federal law provides for a progressive rate which is subdivided into two scales; a standard scale and a scale for married individuals.

• STANDARD SCALE
  • Applicable by default
  • Subdivided into 10 tranches
  • Taxation on an annual income of 14,500 francs and above
• SPECIFIC SCALE
  • Only applicable to:
    – Spouse living in common household
    – Widowed, separated, divorced or single taxpayers living in a common household with their children
  • Subdivided into 15 tranches
  • Taxation on an annual income of 28,300 francs and above

The cantonal tax rate
Only the cantons of Basel-Country and Valais adopt the federal model and have a scale. As a rule, the amount of tax due is composed of the rate, which is fixed by law (base scale) multiplied by the tax coefficient, which is fixed by the cantons.

The municipal tax rate
The ways in which communes apply tax rates differ greatly from one to another, but in principle, communes levy their taxes in the form of supplements in addition to the cantonal taxes due, via a municipal multiple.

Wealth tax

Wealth tax is applied on top of income tax, and is levied by all cantons and communes on physical persons.

“Wealth” refers to movable and immovable property, as well as the rights and claims belonging to the taxpayer or of which the latter is a usufructuary. Taxation is based on net assets, with debts deductible from these. Social and personal deductions and those relating to children are also applicable.

The elements which make up the taxable assets of an individual are generally assessed at market value.

As is the case for income tax, the family taxation principle also applies in this instance. This combination of assets can result in a sharp increase in the tax burden to be borne by a couple. In order to avoid excessive taxation, the cantons provide tax relief in the form of a special deduction or the introduction of a dual scale with a preferential rate, which is applied to married taxpayers.

Tax is calculated through a series of scales. Wealth tax is a progressive tax; only five cantons apply a proportional rate.

Tax on inheritance and donations

Tax on inheritance is applicable to any assets being transferred to an heir or heirs. The tax on donations is due in all cases of free transfer of ownership with animus donandi (the intention of giving a gift).

The federal government does not have the power to levy tax on inheritance and donations, but virtually all the cantons have chosen to introduce this.

The canton of Schwyz is an exception, and does not have a tax on inheritance and donations. The canton of Lucerne, meanwhile, does not impose tax on the majority of donations.

Some cantons have also delegated the power to levy such taxes to the communes, although in most cases, the latter simply share in the proceeds of this.

From an inter-communal perspective, the canton in which the deceased last lived and the canton in which the donor is or was resident respectively are in charge of levying the tax on movable assets. Property assets, conversely, are taxed in the canton in which they are located.

Two different forms of direct taxation exist in Switzerland. The first, which is also the most common, consists in imposing hereditary shares. Each beneficiary of succession to an estate or of a gift is liable to be taxed.
The second form of direct taxation is on the estate itself, and as such, the tax rate does not take into the account the degree of kinship between the beneficiary and the deceased. In the canton of Graubünden, inheritance tax is levied just once, on the whole estate

Special rules are provided for cases of constitution of a trust and usufruct.

In contrast with the majority of direct taxes payable each year – income and wealth tax in particular – inheritance and gift tax is a single tax, levied only once on the market value of the assets at the time of death, or on completion of the donation.
Certain exemptions and deductions are provided for the benefit of the spouse, descendants and ascendants. The surviving spouse is exempt in all cantons.

With the exception of Geneva, the tax rates are identical for both taxes, and are often progressive.

The special case of expenditure-based taxation

Expenditure-based taxation, also known as flat-rate tax, provides foreign individuals with the right to be taxed on the basis of their expenditure, rather than paying income and wealth tax.

The possibility of benefiting from this scheme is restricted, and can only be applied to:

• Natural persons of foreign nationality
• Those who make Switzerland their home (and become liable for unlimited taxation for the first time, or after an absence of 10 years)
• Those without gainful employment
• Spouses living in the same household must both comply with the aforementioned conditions.

Taxpayers wishing to settle in Switzerland can benefit from the flat rate in all cantons except Zurich, Schaffhausen, Appenzell Ausserrhoden and Basel, all of which have abolished expenditure-based taxation.

The tax is calculated on the basis of the annual expenditure in Switzerland and abroad to maintain the lifestyle of the taxpayer and the persons in his/her care.
For example, the calculation considers accommodation, household maintenance, leisure, travel and cultural expenses, as well as taxes and other miscellaneous costs.

However, for taxpayers who move to Switzerland from 1 January 2016, the tax due on expenditure may not be less than the highest tax amount between:

• 400,000 francs or the amount established by the canton
• For heads of household, seven times annual rent or rental value,
• For other taxpayers, three times the annual amount spent on housing and food,
• The sum of the various different elements of income and wealth of Swiss origin, as well as the income from Social Security (control calculation).

The tax base used is then taxed at the federal, cantonal and municipal (commune) levels, according to the same scales and rates used for income and wealth tax.

Finally, only the tax base differs from that used for income and wealth tax.

In order to benefit from expenditure-based taxation, the taxpayer must voluntarily file a request for flat-rate taxation with the tax authorities. The flat-rate tax generally applies for five years, although this period may be reduced when circumstances warrant this.

VALUE-ADDED TAX (VAT)

At each stage of the production and distribution process, the Confederation collects a tax on consumption, or VAT.

The applicable VAT rates in Switzerland are as follows:

• 8%: normal rate
• 2,5%: tReduced rate. This applies mainly to food products, beverages, medicines and print media without advertising.
• 3,8%: Special reduced rate for accommodation services.

Any Swiss company or other organisation performing services on Swiss territory must determine whether or not they are liable to pay VAT under Swiss law.

However, companies working in Switzerland with an annual taxable turnover of less than 100 000 francs may be released from liability to pay VAT.

Companies with their headquarters or with a permanent facility in Switzerland that are managed on a unified basis can request to be treated as a single entity for tax purposes. This special “tax group” status can be established at the beginning of any tax period.

The benefit of the tax group approach lies in the fact that services provided between the group companies are not taxable.