All residents of Swizterland must pay the Swiss income tax by declaring income from any origin for federal, cantonal and communal taxes. Income, wealth, capital gains, inheritance and donations are subject to tax in Switzerland. The taxes paid depend greatly on the canton of residence.
Additionally, in certain cases there is a possibility of flat rate tax which expands the spectrum of possibilities.
It should also be noted that the Swiss withholding tax is deducted at source and paid in advance.
1- Ordinary Swiss income tax
Swiss income tax
This tax covers all income from any origin (worldwide income system) and any category (including income and capital gains). Income tax is the only tax which is charged at the federal, cantonal and communal levels.
Expenses incurred directly to acquire, maintain and retain receipts are deductible. Additional deductions are possible for children, dependents and insurance premiums. Interest is also deductible but is capped. Deductions are not the same for federal, canton or municipal taxes.
Canton and municipal taxes vary widely from place to place with a minimum tax of 17% for certain cantons (Schwyz, for example) whereas it can reach 30% for others (like Zurich). These taxes are added to the federal tax rate which can reach 11.5% of taxable income.
Swiss wealth tax
Swiss wealth tax is the oldest tax levied in Switzerland in the cantons and municipalities. It was abolished at the federal level.
Residents are subject to the Swiss wealth tax for assets held anywhere in the world. However, properties located outside the country are usually exempt.
Wealth is usually estimated at market value, however, in some cases it is estimated at the intrinsic value, but it should be noted that each canton has its own rules for determining wealth. The current debt and social security deductions at the canton level are deductible from the gross wealth.
The progressive tax rates vary according to the municipalities and the cantons. The rates vary from 0.1% to 0.9% depending on the canton.
Swiss capital gains tax
Apart from real estate, capital gains are tax exempt.
Capital gains on real estate depend on its classification as private wealth or as a business asset. If the property is classified as private wealth, it is exempt from the capital gains tax except for a special tax which is levied in certain cantons. If it is classified as a business asset, it is taxable income from independent business activities. Swiss capital gains tax is therefore levied at all levels: federal, cantonal and municipal.
Swiss inheritance tax
Net inherited wealth is subject to a Swiss inheritance tax at the canton and municipal levels.
The surviving spouse is exempt in all cantons. The direct descendants are also exempt except for 6 cantons.
This progressive tax rate depends on the degree of kinship and the amount transferred. A progressive surcharge can be added to that amount.
2- Swiss flat tax
Swiss flat tax is the estimated tax of net income taxable as a lump sum which is estimated based on the taxpayer's contribution. It may be the more advantageous option.
Conditions for applying the flat tax
- In order to use the flat tax, the following conditions must apply:
- Switzerland must be your primary residence for the first time or after an absence of at least 10 years.
- Switzerland is your primary residence and you have a residence permit. In order to obtain this permit, you must have sufficient funds. It is easier for a resident of the EU to obtain this permit after a bilateral agreement with Switzerland and the EU in 1999.
- You must be a foreign citizen. Swiss citizens or those with double nationality cannot take advantage of the flat tax for their first year in Switzerland.
- You must not have any business activity in Switzerland.
Determining taxable income
The amount is negotiated with the canton authorities and is the higher of one of the two following sums:
- lifestyle costs (verified by the administration)
- 5 times the sum of the annual rental value or the annual rent of the Swiss residence.
A control calculation is then performed to take into account the total wealth, age, family situation and place of residence. This control can result in a taxable income which is greater than the one already determined, as certain cantons have a minimum taxable value.
In terms of wealth tax, it is generally limited to the property values held in Switzerland.
This tax is agreed upon for an unlimited period, but the taxable base is checked regularly, usually every year.
Effect of Swiss tax treaties
People taxed in Switzerland with the flat tax benefit from the protection of tax treaties signed by Switzerland.
However, certain treaties add certain conditions in order for people to be able to benefit from this tax.
For example, the Switzerland/France treaty requires that taxable income be more than 5 times the estimated rental value. A group of countries (the 'seven countries') require that the entire income coming from these countries be taxable in Switzerland.
The canton of Zurich has eradicated the flat tax, but the vote on November 28, 2010 blocked the proposition of “creating an equitable tax” to limit the competition between cantons and require a minimum tax rate for income greater than 250,000 CHF.