If the very name of Switzerland conjures up visions of idyllic natural beauty, snow-clad valleys, political peace, financial stability, ultramodern business facilities, a tax haven for international companies, and global banking, this is only a fitting tribute to the country. Before we discuss the salient features of the tax system in Switzerland, it might lend our discussion a meaningful context if we were to briefly acquaint ourselves with certain basic facts and figures about the essential nation that Switzerland is.
The Latin name for the Swiss Confederation is Confoederatio Helvetica, and the Swiss country code, CH, signifies this. Switzerland is located in the central Alpine area of Europe. Switzerland is adjoined on its various borders by Italy, Austria, Liechtenstein, Germany, and France. The landlocked Switzerland has no access to the sea.
The Alps and glaciers make up over 60 percent of Switzerland’s total surface area of 41,300 square kilometers. Switzerland has an equable, temperate climate. The average daily temperatures range between 18°C and 28°C in July and August. Temperatures plunge to between -2°C and +7°C in January and February. Southern Switzerland is characterized by mild climate all through the year.
Switzerland had a population of 7,604,467 as in July, 2009 (CIA, 2010). Foreigners account for about 21 percent of the resident population of the country, indicating its cosmopolitan character. The nation is relatively young, with a median female age of 42 years, and median male age of just 41 years. The median overall life expectancy is 80.85 years. Only 71 percent of the Swiss population believes in God, and religion appears to be waning as an influence over the years. The urbanization figure for the nation stands quite high, at 73 percent. Switzerland ranked seventh in the 2005 Human Development Index 2005, with a superlative ranking of 0.955.
The Swiss emblem is the white cross on a red background, symbolizing independence and neutrality in the global arena. It has been officially recognized so since 1815, though historical references to the Swiss cross date to 1339. The international country code that identifies Switzerland is +41.
Switzerland has the direct, republican democratic form of government. Bern has been its capital city and the seat of its government since 1848. For purposes of administration, the nation is divided into 26 cantons and 2636 communes, as in 2009.
The nation has the following four official languages: German, French, Italian and Romansh; and these are respectively spoken by approximately 64 percent, 20 percent, seven percent, and half percent of the population. Over eight percent of the population has other languages as their mother tongue.
The Swiss currency is the Swiss franc, denoted by CHF, with one franc consisting of a hundred 100 centimes. However, euro is accepted in major stores and petrol stations. A tidbit is that in Switzerland, vehicles are supposed to drive on the right-hand side of the road.
Three Levels of Swiss Taxation
The tax system in Switzerland clearly reflects the federal nature of the country. Direct taxes are leveled at three different stages; firstly, at the federal level, next, by the cantons, and finally, by the communes too. Thus, there are three successive levels of taxation in Switzerland. It may be added that the Swiss Confederation consists of 26 sovereign cantons and approximately 2,636 independent communities.
All cantons offer certain tax privileges to companies, which have their basis in the tax laws, and need to be negotiated. The tax privileges are usually granted for an unlimited period of time, unless the company’s circumstances alter materially. A canton may also offer certain tax incentives to businesses to relocate their business to it. These incentives may variously be a tax-holiday for a period of 10 years, loans at a low interest rate for building and fixed assets, easy access to a contingent of work permits, and the like. Though a harmonization of cantonal tax rates has taken place in recent times, there are still variations among their tax rates. Since the communities have the right to define the rate of surcharge on the cantonal tax, the tax rates differ among the various communities within the same cantons too.
Various Types of Swiss Taxes
In Switzerland, the taxes are levied each year on the basis of a system of current year assessment. There are several types of taxes levied in Switzerland. These may be briefly enumerated as follows.
Income and Wealth Taxes: These include the income tax, wealth tax, personal or household tax, inheritance tax, gift tax, capital gains tax on properties, and real estate tax as a part of wealth tax.
Taxes on Legal Transactions: These include stamp duty and conveyance charges.
Consumption Taxes: These are indirect taxes, and include value added tax, tax on tobacco, beer tax, mineral oil tax, tax on import of automobile, taxes on spirits, and customs duties.
Taxes on Possessions and Expenditure: This category includes such taxes as vehicle tax, dog tax and entertainment taxes.
Those Liable to Pay Taxes
The people who have an unlimited liability to pay taxes in Switzerland are persons who are domiciled or resident in the country. One is deemed to be resident in Switzerland for the purposes of taxation if she or he:
Is resident for a minimum of 30 days in Switzerland, and is in gainful employment; or
Is resident for a minimum of 90 days in Switzerland, without being in gainful employment.
However, people who are domiciled abroad have only a limited liability to pay taxes, which they may require to from such economic ties with Switzerland as the ownership of property or business premises there. Thus, non-Swiss employees who don’t have a settlement permit – the C permit – do not need to pay tax if they earn less than CHF 120,000. In their case, the tax is levied and collected through the respective employer.
Swiss Income Tax: Key Features
The key features of the Swiss income tax may be listed as follows (KPMG, 2009).
Higher marginal rates apply at lower levels of income.
The top effective federal tax rate of 11.5 percent begins at CHF 712,500 for single taxpayers. This is exclusive of cantonal, communal or church taxes, which can vary substantially.
The collective highest income tax rate fluctuates between 20 percent and 43 percent.
The year-end for tax purposes is December 31.
The deadline for filing taxes varies among the different cantons, but is usually March 31, with provision for seeking minor extension.
The employee social security rate is 5.05 percent uncapped, and one percent capped, at an annual income of CHF 126,000.
The sale of securities generally does not invite capital gains tax in Switzerland, unless one happens to be regarded as a dealer in securities.
However, most cantons levy a capital gains tax on profits accruing from the sale of immovable property in Switzerland.
A wealth tax is levied in Switzerland. It is generally progressive in nature, and varies among the different cantons.
Family Tax Payable in Switzerland
The salient features of the Swiss taxes applicable to families are as follows. The separate incomes of spouses, who have been legally married and are presently living together as wife and husband, are added together. The income of a minor child gets added to the income of the person who happens to be exercising parental care over it. However, the income that a child earns from gainful employment is treated as an exception and is liable for a separate tax. What are the minimal earnings at which income tax, by way of federal direct taxation, becomes payable? The federal income tax must be paid if a person’s taxable income is CHF 29’200 CHF or exceeds it, in the case of a married couple, or is CHF 16'900 or more with regard to other individuals who are liable to pay tax.
Taxable Legal Entities in Switzerland
Besides, all such legal entities as limited companies, cooperatives, associations, and foundations, which operate their registered office or locate their de facto management in Switzerland, are also liable to pay tax here. The legal entities may be broadly categorized into the following two types:
1. Limited Companies: These may variously be joint stock corporations, limited partnerships, limited liability companies, and cooperatives; and
2. Other Legal Entities: These include associations, foundations, public corporations and institutes, and investment funds with assets including real estate.
The legal entities in Switzerland customarily pay a corporate profits tax at the federal level, and a corporate profits tax as well as a capital tax at both the subsequent cantonal and communal levels too.
Low Swiss Corporate Tax Rates
Switzerland fares handsomely if the average corporate tax as a percentage of the profits is compared, for various European countries. As per KPMG’s Tax Rate Survey 2009, the corporate tax, as on January 1, 2009 in Switzerland was 21.17 percent. This compares very favorably with several other nations that one might offhand consider.
To illustrate, the analogous corporate tax rates on the same date in a few other countries were respectively as follows: United States: 40 percent; Luxembourg: 28.50 percent; Norway: 28 percent; Sweden: 26 percent; Netherlands: 25.5 percent; United Kingdom: 28 percent; Malaysia: 25 percent; India: 33.99 percent; Mexico: 35 percent; United Arab Emirates: 55 percent; and the like. However, the various countries with lower corporate tax rates than Switzerland include Russia (20 percent) and Singapore (18 percent). (KPMG, 2010).
Swiss Corporate Taxes: Salient Features
The rate of federal corporate income tax in Switzerland is a flat 8.5 percent. The cantonal tax rates show considerable variations. The taxes are usually progressive, depending on various relevant factors. The tax rates specified in the cantonal tax laws are often susceptible to other cantonal and municipal multipliers as well.
Another welcome feature of the corporate tax laws in Switzerland is that all the taxes are deductible, unlike the practice in most other countries. If the aggregate of all the corporate taxes in Switzerland amounts to, e.g. 30 percent, of which 8.5 percent represents federal tax, then the effective tax rate would only be about 23 percent, providing for about 7.8 percent federal tax.
The statutory financial accounts of a company, or the branch office accounts of a foreign company, serve as the basis for computing the companies’ taxable income. There are only minor differences between a company’s statutory profit and the taxable income. These differences are usually accounted for by the existing tax loss carry forward rules, the thin capitalization rules, and the application of the exemption from participation. The loss carry forward period in Switzerland is of seven years, and there is no provision for a loss carry back.
A company that maintains an administrative office in Switzerland, but does not engage in any business activities within the country becomes eligible for domiciliary tax privilege. In considering this tax privilege, the sort of business that is conducted beyond Switzerland is not deemed a relevant factor. A company benefiting from this tax privilege is usually subject to an effective tax rate of 7.8 percent to 11 percent on its income from foreign sources.
Pure Holding Companies and Mixed Holding Companies
Switzerland is a popular domicile for international holding companies. There are two major reasons for this. Firstly, the holding income or dividend from subsidiaries is not taxed in Switzerland. Secondly, Switzerland has double tax agreements with most of the developed countries, whereby the withholding tax on the distribution of dividends by the holding company gets lowered to five percent or nil. A pure holding company is taxed only on its capital at the cantonal level. The cantons levy a tax rate that may fluctuate between 0.5 percent and 1.5 percent, according to the local laws. The other attractions of Switzerland for international holding companies include stable political ethos, a stable currency, and easy accessibility from most global cities.
A Swiss holding company is required to meet three conditions. Firstly, the main purpose of the company must be the holding and management of longterm investments in its subsidiary companies. Next, the company must refrain from engaging in any commercial activity in Switzerland. Finally, two-thirds of the company’s total assets must consist of qualifying shareholding. Alternatively, two-thirds of the company’s total gross income must be derived from dividends of qualifying shareholdings. Barring the fully taxable income from Swiss real estate, a holding company is entitled to tax relief at the federal level only. The applicable tax rate is 7.8 percent only. If the income of the holding company is eligible for participation exemption, or is otherwise exempt from federal tax, then no tax at all is levied on it.
The Swiss companies that possess substantial participations are eligible for tax relief in form of exemption from participation at the federal and cantonal or municipal levels. The participation exemption works by way of lowering the tax that is due from the companies, thus, it does not constitute a reduction in the taxable base of the company. The reduction in tax due is computed on the basis of the percentage or proportion of the net income from the qualifying participations to the company’s total net income. The following incomes may become eligible for a reduction in tax:
Dividends earned from participations of minimum 20 percent in the capital, or a minimum CHF 2 million as the fair market value; and
Capital gains derived on participations hold for at least one year if a minimum of 20 percent has been sold, subject to other considerations too.
Substantially less restrictive tax conditions are applicable in the case of venture capital companies. Companies that do not qualify as holding companies but have dividend income are allowed to be taxed as a fraction of their dividend or privileged income to their unprivileged income, which includes business income, interest, and so on. However, such participation must be high, over 20 percent of the subsidiary’s share capital.
The cantons are more lenient towards mixed holding companies, and may allow them the status of a holding company even if it derives other than dividend income to an extent of 49 percent, or even 25 percent, depending on the relevant cantonal laws. The capital gains from sale of subsidiaries are exempt from taxes at the cantons, but the federal taxes of less than 10 percent would continue to apply. The distribution of profits by the holding company attracts a withholding tax liability of 35 percent, which may be drastically reduced or even eliminated altogether as a result of the various double taxation treaties that Switzerland has entered into with several countries.
Moreover, all cantons – though not the federation – allow pure holding companies a holding privilege. This translates into an almost total exemption from tax at the cantonal and municipal levels, including other than participation income. The general criteria for a company to avail itself of this tax respite include:
It must be a pure holding company; it should not be undertaking any other active business;
Either two-thirds of its total assets must consist of participations; or
At least two-thirds of its total income must comprise income from participations.
These tax provisions mean that the qualifying pure holding companies merely pay the mandatory 8.5 percent federal tax – which works out to an effective rate of 7.8 percent – on the income that does not qualify for the participation exemption.
Thus, “administration companies are not normally taxed on capital income that does not qualify as participation income, except if the country of source requires – by virtue of the respective Double Taxation Treaty – full taxation in Switzerland.” (Carey, Gordon, Thalmann and OECD, 1999). Switzerland is, therefore, attractive in its tax savings for holding companies. “Every tax avoider is a special case and needs a particular kind of haven. Thus, Switzerland offers something to most tax avoiders.” (Doggart, 1993). The obvious popularity of Switzerland in the global corporate sector rests upon such tax benefits available to companies operating on its soil, which draws companies to open their offices here.
Cantonal Level Net-worth Taxes
Net-worth taxes are levied at the level of the cantons only. The cantons levy this tax on the net equity of a legal entity, which refers to its share capital, additional paid-in capital, and retained earnings. Related party loans, and disallowed accruals and provisions also figure in the tax base.
The tax rate varies among the different cantons, and is between 0.07 percent and 0.6 percent for companies liable for usual taxation, and between 0.006 percent and 0.3 percent for companies enjoying tax privileges.
Most Favorable EU VAT Rate
VAT or value-added tax is a federal tax in Switzerland. This is among the lowest in the whole of Europe. The standard rate of VAT in Switzerland is 7.6 percent. The VAT for everyday necessities is as inviting as 2.4 percent, while the VAT applicable to accommodation services is 3.6 percent. The subsidized 2.4 percent VAT is applicable to such product categories as: food and beverages, cattle and poultry fish, seeds, living plants, cut flowers, grains, medicines, fodder, newspapers, magazines and books, and radio and television services of a noncommercial nature.
This appears in the right perspective when we consider that the average VAT rate has surged in the European Union from 19.5 percent in 2008 to 19.8 in 2009 (KPMG, 2010). Besides, the VAT applicable in various other countries may be mentioned as follows: Norway: 25 percent; Sweden: 25 percent; Germany: 19 percent; United Kingdom: 17.5 percent; Netherlands: 19 percent; France: 19.6 percent; Italy: 20.0 percent; Austria: 20.0 percent; Ireland: 21.0 percent; Belgium: 21.0 percent; and Denmark: 25 percent (European Commission, 2010). It is little wonder that Switzerland is extremely popular in the corporate sector for its attractive tax system!
Stamp Duty Levied in Switzerland
The issue and increase of equity capital in Switzerland invites stamp duty at the rate of one percent on the fair market value of the equity created. An exemption is allowed for the first CHF 1 million of paid in share capital, regardless of whether it is initial or subsequent contribution. There are specific rules that allow companies to resort to reorganizations, share-for-share deals, or spin-offs, without triggering off stamp duty, on certain conditions being met. Migration to another jurisdiction within Switzerland can usually be undertaken without attracting stamp duty. Stamp duty also gets levied on the issue and transfer of share and debenture certificates, on all written acknowledgements of debts for fixed amounts for collecting capital, and on insurance premiums too.
Several International Double Tax Treaties
Switzerland has concluded more than 70 double tax treaties with most of the developed countries and several others. These treaties have been generally based on the OECD model convention. Double tax treaties with Austria, Denmark, France, Germany, Luxembourg, Sweden, Finland, Venezuela and Faroe Islands allow full relief from the Swiss withholding tax on various intercompany dividends. Switzerland has also concluded an EU Swiss savings agreement with the European Union. This results in zero percent withholding tax with regard to payments of dividends, interest and royalties.
Switzerland has unilaterally put in place a misuse decree, to discourage non-Swiss residents from seeking undue benefit from the Swiss network of treaties, except under bona fide circumstances. Claims to benefits from the treaties may accordingly be considered abusive in various circumstances and be denied to the applicants.
Double taxation results when a taxpayer becomes liable to tax for the same item in two different fiscal jurisdictions. Double taxation occurs in Switzerland in both the intercantonal and international relations. Double taxation conflicts among the cantons are resolved by the Federal Supreme Court. In the international realm, Switzerland has in the course of time, mustered up over 70 double tax treaties with various countries to iron out such tax aberrations.
There are two main modes of avoiding double taxation. The exemption mode exempts certain items from being taxed in a country, if it is being taxed in the other. The other mode is the credit mode. In the credit mode, both the countries involved reserve the right to tax the item, but the country of residence is to tax the source country’s tax against its own tax.
A more comprehensive, alphabetical list of the nations that Switzerland has signed double tax treaties with is as follows: Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Belgium, Belarus, Bulgaria, Canada, China, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Ivory Coast, Jamaica, Japan, Kazakhstan, Kirghistan, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Mexico, Moldova, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Tajikistan, Thailand, Trinidad & Tobago, Tunisia, Turkmenistan, Ukraine, United Kingdom, United States, Uzbekistan, Venezuela, and Vietnam.