Global Registration

Switzerland’s Tax Regime: A Complete Guide

Switzerland’s Tax Regime is one of the most attractive tax regimes and stands atop the list of most preferred tax havens. The worldwide income of the tax resident individuals is liable to be taxed in Switzerland. Whereas the income of non-tax residents is taxed in Switzerland only if it arises in Switzerland. The Switzerland’s Tax regime has low tax rates for foreign corporations and individuals, making it a lucrative option for foreign investors and entrepreneurs to invest in the country.

Corporate Taxation – Switzerland’s Tax Regime

• Corporate Income Tax (CIT)
  The Switzerland’s Tax regime provides for a corporate tax structure in which a corporation and its owners and shareholders are taxed individually. Further, all legal persons except charitable organizations are subject to tax on their profit and capital. Corporate taxation is levied on companies having a legal existence or place of effective management (POEM) in Switzerland. A company is said to have a POEM in Switzerland if substantial business decisions are taken there. Resident companies are taxed in Switzerland on their worldwide income apart from incomes that are exempt from tax like profits arising from foreign branches and foreign immovable property. The Permanent Establishment (PE), Branch Office (BO), or any other immovable property of a non-resident company is taxed in Switzerland. The corporate income tax rate is levied at the rate of 8.5% on profit after tax. The corporate income tax is deducted for tax purposes thereby reducing the rate of tax before profits to approximately 7.83%.
• Capital Gains Tax
  In Switzerland’s tax regime, capital gains arising from the sale of assets are considered ordinary income irrespective of the time for which the assets were held. Thus, there is no concept of specific capital gains tax. However, where assets are sold to a related party at a price below the market price, then the gains arising may be reassessed for tax purposes. Where capital gains are derived from the sale of participation of at least 10% in a company that was held for more than one year then benefit from participation relief is provided irrespective of the fact whether the capital gain arises from a resident or a non-resident company. Participation relief or exemption is a relief or exemption granted to dividends received from qualifying participation. Qualifying participation means that the recipient company owns not less than 10% of the capital of the payer company or that the value of participation is at least 1 million Swiss Franc (CHF).
• Losses
  If a company is undergoing loss then it may carry forward the loss for seven years and set off the losses against any income or capital gain.
• Foreign Tax Relief
  Any income arising from a foreign source is included in the taxable income and later relief is granted on dividend income arising from qualifying participation. All foreign source income is taxed and no credit is provided on foreign tax paid except for withholding tax on dividends, interest and royalties under the applicable tax treaty.
• Corporate Tax Compliance
  In Switzerland, a tax year is same as a calendar year. Each company is required to file a separate return but the tax return at the federal and state/canton level is filed in a combined form. The deadline for filing tax returns is fixed by the state. In case of failure to file a return or delay in filing a return, penalties are imposed. Companies can obtain advance rulings from tax authorities on various tax matters.

Individual Taxation under Switzerland’s Tax Regime

Under the Switzerland’s tax regime, the tax liability of an individual arises when an individual intends to stay permanently in Switzerland; or when an individual is physically present in Switzerland for at least 30 days to carry out a professional activity; or is physically present in Switzerland for at least 90 days if there is no other purpose for stay. If a person is a resident of Switzerland then his worldwide income will be taxed in Switzerland. However, profits from foreign business, foreign branch offices and foreign immovable property are exempt from tax and therefore not taxable. Swiss employment income, business profits, and profits arising from immovable property located in Switzerland of a non-resident are taxable in Switzerland.

Income arising in the form of compensation for work performed and from capital both are taxable. The gross income from Swiss capital is taxed whereas any income arising from foreign capital is taxable only after deducting non-refundable foreign withholding tax. Switzerland has a progressive rate of income tax which range from a minimum of 0.77% for single taxpayers and 1% for married taxpayers to a maximum rate of 11.5%. Further, if the taxable income of an individual is below CHF 17,800 and that of a married couple is below CHF 30,800 then they are exempt from tax.

• Capital Gains
  In the case of individuals, capital gains and capital appreciation are subject to tax if they arise from the sale or realization of assets through the increased value of tangible and intangible assets of a business. However, gain from the sale of shares or real property is not subject to tax. A separate capital gains tax can be levied at the state level on the sale of property but no state can levy tax on personal capital gain arising from a movable property that is not an asset of the business.
• Deductions and allowances
  While computing taxable income, various expenses including interest on loans, alimony and certain donations are deducted. Personal allowances to taxpayers, their spouses and dependent children are also deducted while computing taxable income. 
• Foreign Tax Relief
  Income arising from a foreign source is taxable in Switzerland and relief is granted only for dividend income-qualifying participation. However, no credit is provided for foreign tax paid except for non-refundable withholding tax on dividends, interest, and royalties under the applicable tax treaty.
• Individual Tax Compliance
  Under the Switzerland’s Tax Regime, a married couple is assessed jointly and the due date for filing a return varies from state to state and applies to both center and state taxes. Wages of foreigners working temporarily in Switzerland are taxed at source at the State level by the employer directly from the salary of the foreign worker and remitted to the tax authorities on behalf of foreign employees. Penalties are levied for late filing or non-filing of returns. The option of obtaining an advance ruling from tax authorities is also open for individuals.

Withholding Tax

A withholding tax at the rate of 35% is levied on dividends paid to residents and non-residents. The residents are allowed to obtain a refund of withholding tax. As per the Switzerland-EU Agreement^[1], withholding tax is reduced to 0% on cross-border dividend payments between related companies that are resident of EU member countries subject to a condition that the capital participation is 25% or more. Withholding tax is not applicable on repayment of nominal share capital and capital contribution reserves. No withholding tax is levied on interest, royalties, fees for technical services, and branch office remittance. The tax treaties with Switzerland provide reduced rates for qualifying investments.

Anti-Avoidance Rules

Switzerland’s tax regime is liberal when it comes to having anti-avoidance rules. Swiss does not have any limit on interest deduction, no controlled foreign company rules, and no special rules governing hybrids or economic substance requirements. However, Switzerland does follow some rules on the following:

• Transfer Pricing
  Switzerland does not have a formal legislation on transfer pricing however, it follows the OECD transfer pricing guidelines according to it all related party transactions with Swiss entities should be carried out at arm’s length price.
• General Anti-Avoidance Rules (GAAR)
  Switzerland does not have a formal legislation on GAAR but a general avoidance theory has developed based on the Apex Court judgments. The judge made laws are followed by all courts and tax authorities in Switzerland.

Conclusion

The Switzerland’s tax regime is usually very lucrative for corporate to carry on their business. The corporate income tax is the most valuable contribution to Switzerland’s economy. Switzerland’s tax regime offers various financial flexibility which makes it a vibrant economy, apart from the tourism. Being a tax haven, Switzerland’s tax regime may not be transparent and accurate but it still is one of the most attractive destinations for business and wealthy entrepreneurs to save tax.

Also Read: How to Incorporate a Company in Switzerland?