Swiss Tax Guide
The aim of this brochure is to give a brief overview of the taxation system in Switzerland. It is specifically designed for people who are considering commencing business operations in Switzerland. Therefore, part 2. provides an introduction to the various business entity forms in Switzerland before moving on to the corporate taxation principles (part 3. - 8.).
This document is also appropriate for people already doing business in Switzerland and for persons living in Switzerland, as it provides a brief overview of the basic taxation issues in Switzerland.
2. Business Structures in Switzerland
2.1 General remarks
Swiss business forms, especially partnerships and corporations formed under Swiss Law, are mainly regulated through the Swiss Code of Obligations.
Below, the common Swiss business structures are briefly discussed. Partnerships and proprietorships, in other words entities without separate legal status, are explained first and corporations are explained second.
2.2 Sole proprietorship ("Einzelunternehmung")
One-man businesses (sole proprietors, sole traders), which are of great importance to the Swiss economy, are not explicitly regulated by law and do not qualify as legal entities.
A one-man business can be defined as a business which an individual person runs in his or her own name and which is his or her own responsibility, which ultimately means that he or she has unlimited liability.
If the business is a commercial or production enterprise or an enterprise run in a commercial manner, the sole proprietor is generally obliged to enter it in the Commercial Register. If turnover does not exceed CHF 100,000 per year, the sole proprietor does not have to enter it in the Commercial Register; however, he or she may choose to do so.
The one-man business is still very popular today. Its main advantages are the flexibility and the simplicity of the organisational structure. Its main disadvantages exist with regard to funding as well as the issue of succession after the founder's withdrawal.
2.3 Entities without separate legal status
2.3.1 Silent partnership ("Stille Gesellschaft")
Silent partnerships are not explicitly regulated by law; however, they are quite common in the business environment. A silent partnership is a partnership arrangement in which the silent partner contributes capital and is entitled to a specific share of the partnership profits. However, the principal is the only one entitled to represent the company, only the principal, therefore, has any rights and duties towards third parties.
Within the partnership, the law is not so strict: for example, the silent partner may not have any participatory rights; however, he can explicitly ask for these. According to the practice, a silent partner may even dominate the internal decision-making process.
2.3.2 Simple partnership ("Einfache Gesellschaft")
If two or more persons join forces on a contractual basis for achieving a particular purpose of making a profit, a simple partnership is usually formed - if it is neither a general partnership nor a limited partnership.
A simple partnership is characterised by the unlimited liability of its partners for partnership debts. A simple partnership can have economic and non-economic aims; however, it must not do commercial business. It does not have the status of a legal entity, is not allowed to own a firm and it cannot be entered in the Commercial Register.
2.3.3 General partnership ("Kollektivgesellschaft")
In a general partnership, two or more natural persons join forces to form a common commercial or production enterprise or an enterprise run in a commercial manner. This kind of general partnership has to be entered in the Commercial Register. If such a partnership is not run in a commercial manner, it will only exist as a general partnership if it is entered on the Commercial Register.
Even though, according to the predominant theory, a general partnership is not considered having a separate legal status, it is allowed to acquire rights and assume obligations; it is also allowed to sue and it can be sued.
The general partners have unlimited liability (also with private wealth) for partnership debts.
2.3.4 Limited partnership ("Kommanditgesellschaft")
In a limited partnership, two or more persons also join forces for achieving a particular purpose. A limited partnership is comprised of at least one natural person who has unlimited liability for partnership debts and of one or more limited partners who are only liable to the extent of their capital contribution. A legal entity can be a limited partner. As a consequence, the limited partnership is more flexible than the general partnership.
2.4.1 Share corporation ("Aktiengesellschaft")
A share corporation is a corporation whose capital of at least CHF 100,000 is divided into tradable equity interests (shares). The share corporation is liable for company debts to the extent of its business assets. one share must have a nominal value of at least CHF 0.01 (1 centime) and at least 20%, or CHF 50,000 respectively, of the share capital has to be paid in.
The company's supreme corporate body is the general meeting of shareholders. It has to elect the Board of Directors whose task is to manage the business of the company. It is also possible that the Board of Directors consists of one person The majority of the members of the Board of Directors, however, have to be Swiss residents and Swiss citizens. Certain companies, such as international holding companies, can file an application for an exemption from this rule. Share corporations must have an auditor, who examines the financial statements annually.
The share corporation is still the most common legal entity in the Swiss business environment. The main reason for this phenomenon is most certainly the fact that the company is only liable for company debts to the extent of its assets and that shares can be transferred very easily.
2.4.2 Limited partnership with shares ("Kommanditaktiengesellschaft")
A limited partnership with shares is a partnership whose capital is divided into shares and one or more members of the partnership must have unlimited liability (as with an ordinary partnership).
This legal entity, however, has almost completely lost its importance in Switzerland.
2.4.3 Limited liability company ("Gesellschaft mit beschränkter Haftung")
A limited liability company (LLC) is also a company with a predetermined capital. The liability of the partners for the debts of the company is usually limited to the amount of the nominal company capital. The total company capital has to be at least CHF 20,000 and must not exceed CHF 2 million. At least 50% of the company capital has to be paid in.
The company's most important executive body is the partner's meeting. Unless otherwise provided, the partners manage the company; however, in the partners' meeting or in the articles, other persons can be appointed to manage the company. According to the law, the LLC does not need to be audited.
The LLC is actually intended to be used for small businesses. However, the share corporation is still a more popular entity for small businesses than the LLC. on the one hand, the LLC has the advantage that it does not need to be audited. The disadvantage, on the other hand, is that a public deed is required in order to transfer shares, which means that the right to trade shares is significantly restricted.
For American businesses, the LLC is an attractive business structure from a tax point of view due to the personal regulation: that is, for American tax purposes, the LLC may be qualified as a partnership according to the check-the-box rules. Accordingly, it would not qualify as tax subject for U.S. tax purposes, but would be consolidated with another legal entity.
2.4.4. Cooperative ("Genossenschaft")
A cooperative is an entity organised along corporate lines, which consists of an unlimited number of persons or commercial companies. The main objective of a cooperative is to promote and/or protect certain economic interests of its members. Thus, cooperatives may be seen as a means of fostering self-help. At least seven people need to join forces in order to form a cooperative. This form of entity pursues in general the open-door policy. According to this policy, new members should be able to join such a cooperative fairly easily.
Similar to a share corporation, a cooperative consists of the general meeting of members, the administration and the auditor. This type of business entity is often used in the agricultural industry or even in the form of a consumer's cooperative or purchasing cooperative. As a matter of fact profit-focussed cooperatives still exist today, even though the former large insurance and banking associations have mostly been converted into share corporations.
2.4.5. Association ("Verein")
The association is designed for organisations that pursue non-profit objectives. This entity may be used to run a commercial activity and the entity is only liable for debts to the extent of the association's assets except as provided otherwise in its articles. The association's corporate bodies are the general members meeting as well as the managing board.
The association is the ideal legal entity to use in order to pursue non-profit interests, since it can be adapted to suit individual needs, and also because it has independent legal status as well as the capacity to have legal rights and obligations.
2.5 Foundation ("Stiftung")
A foundation is a legal entity, but it does not consist of an union of people as compared to other legal entities. It is a legal entity that is established by dedicating funds for a specific purpose, either by way of a public deed or a will.
The dedication of property for this specific purpose is lasting and irrevocable. An amendment of the purpose is not permitted. Nevertheless, the foundation is found in the commercial law, in the form of so-called corporate foundation. In this case, the foundation is either the legal and equitable owner of the company or it is the main share holder of a company, which runs the business. Unlike in certain other countries, the corporate foundation, however, is a controversial topic in Switzerland.
3. Taxation Principles
3.1 General remarks
Swiss taxes are generally levied on a federal, cantonal and municipal level. Based on the Swiss Constitution, the Federal Government is entitled to the receipts from direct taxes (customs duties, excise taxes), whereas the cantons and municipalities are basically the recipients of direct taxes on income and capital. Since 1940, the Federal Government has had the right to levy a direct tax on income; however, the cantons and municipalities continue to be the principal recipients of direct taxes.
3.2 Legal principles
Due to Switzerland's federalist structure, each of the 26 cantons has its own specific constitution and tax law according to which taxes on income as well as capital are levied. Together with the federal law on the direct federal tax, there are accordingly 27 different tax laws in existence, which define the levying of a direct tax on income. A new law on the harmonisation of direct taxes of the cantons and municipalities was passed in 1990 and became effective throughout Switzerland as from 1 January 2001. The purpose of this law was to standardise the direct taxes on the cantons more, especially with regard to principles of assessment. The determination of the tax rates remains, however, in the sovereignty of the cantons, so that the total tax burden will continue to vary from canton to canton.
Contrary to the common continental system of civil law, some tax-based questions can often not be easily answered in Switzerland based on the tax laws itself. Similar to the Anglo-American case law, Swiss tax law has been determined by a series of revolutionary court rulings of the Swiss Federal Court, the highest court in Switzerland. As a supplement to the Swiss tax law, the Swiss Federal Tax Administration regularly publishes administrative regulations (circulars, leaflets, instructions).
Swiss tax law is characterised by a relationship of mutual trust between the tax authorities and taxpayers. As the Swiss tax laws seldom give detailed information with regard to their application, it is necessary to discuss in advance the interpretation of the tax laws with the tax authorities. As a result of these discussions, the tax authorities usually provide an advance tax ruling about the specific application of the relevant tax rules.
4. Direct taxation of companies
4.1 Taxation of partnerships
4.1.1 General remarks
Sole proprietorships, general and limited partnerships, simple partnerships and silent partnerships are subject to partnership taxation principles. Owners of such partnerships are considered as self-employed persons or free professionals.
Unlike legal entities, partnerships are not treated as independent entities for income and capital tax purposes. This means that the income of the proprietorship or partnership is taxed in the hands of the owner of the business or the partners. Taxes are also directly imposed on the capital or the assets of the owners or the partners. The profits and capital of partnerships (e.g. general or limited partnerships) are allocated to the individual partners proportionally.
Therefore, there is the need to distinguish for an owner of a one-man business and a partner of a general or limited partnership, whether his or her assets can either constitute business assets or personal assets. Such a distinction between business and personal assets can be of great importance under certain circumstances: for example, depreciation on business assets is tax-deductible, which means that the taxable income is reduced; depreciation on personal assets, on the other hand, is not tax-deductible. Capital gains on business assets, however, are subject to tax, whereas capital gains on personal assets are tax-free throughout Switzerland.
4.1.2 Determination of taxable income and capital
Income from commercial and industrial businesses, business establishments, agricultural undertakings and forestry operations as well as the income of professionals and all other self-employed persons can all be considered taxable income. Self-employment is defined as follows: generally, it is an independent business activity which is carried out at one's own risk and with the intention of making a profit by undertaking economic activities.
Capital gains from company asset sales, realisations or increases in the book value of business assets are also subject to tax. The transfer of shares from business assets to personal assets or to a foreign company is treated as a disposal for tax purposes. Furthermore, profits made from movable and immovable property, from pension funds and other income (income substitution benefits) are subject to tax.
Business or professional expenses are generally tax-deductible. Similar to the depreciation on assets for companies, depreciation is permitted as an expense for tax purposes for partnerships provided the expenses are commercially justified. Provisions in the balance sheet are also allowed. As is the case with corporations, partnerships are allowed to deduct losses from previous years from the profits of the current business year.
The taxable property includes the total net assets of the business (business assets less business debts).
4.1.3 Determination of tax liability
Since partnerships are not independent entities for taxation purposes, the business income and assets are allocated proportionally to the partners. The net profit of the business is then added to the individual's other non-business income and capital and is taxed at that individual's income an capital tax rates. This procedure ensures that the business income and capital are only taxed once. Tax rates are based on the income and capital tax rates set for self-employed persons.
4.2 Taxation of corporations
4.2.1 Tax subject
Corporations (share corporations, limited liability companies, limited partnerships with shares and cooperative societies) as well as foundations and associations are taxable entities for income and capital tax purposes on a federal basis as well as in the canton in which they have their domicile or a permanent establishments. Even though corporations do not have to pay capital taxes at the federal level, they are subject to capital taxes on a cantonal level. In addition the shareholders are subject to tax as income tax is imposed on their income from the company (dividends). Capital taxes are also imposed on their share of the company capital. As a result, there is double taxation of the corporate profits and capital.
All cantons levy corporate taxes on the basis of the current year assessment. This means that the tax year is the same as the business year and that the income tax is levied on the basis of the taxable income made in the business year. The capital tax is usually levied on the basis of the taxable capital recorded at the end of the business year.
4.2.2 Taxable income
Taxable income is based on the accounting income determined under normal accounting principles and approved by the annual meeting of shareholders. Such book income may be adjusted for non-deductible expenses and provisions. Some significant items of income and expenses and their treatment for Swiss income taxes are described hereafter:
Dividend income is basically ordinary income of a company and thus it influences the company's annual financial statements. If, however, the recipient company owns 20% of the capital of a distributing domestic or foreign corporation or if the participation exceeds a current fair market value of CHF 2 million (substantial interest), the dividend income is actually exempted from federal as well as cantonal and municipal income tax.
Inventories are, according to Swiss commercial law, to be valued at the lower of cost or market. Swiss commercial law also allows further write-downs to a certain extent. For example, a general reserve on inventories of up to one third of the total inventory value is allowed in most cantons.
Depreciation: All business assets may be depreciated, provided it is commercially justified. In addition, the Swiss tax authorities have passed "safe haven rules" which state that certain depreciation rates can be seen as commercially justified without the Swiss tax authorities questioning the nature of the claim. Some of the general depreciation rates as presently applicable for federal income tax purposes are as follows:
- Commercial buildings 2.0%
- Industrial buildings 4.0%
- Furniture and fixtures12.5%
- Machinery 15.0%
- Patents and goodwill 20.0%
- Office and EDP machinery/equipment 20.0%
- Tools 22.5%
The above guideline rates are applicable for the straight-line method of depreciation. For the declining-balance method, the depreciation rates can be doubled. A few cantons allow accelerated depreciation.
Expenses incurred and in the ordinary course of business are generally accepted as tax-deductible. Compensation which is excessive or which cannot be commercially justified is as added-up to the taxable income. Swiss income and capital taxes can be deducted in the year in which they are paid or due.
Interest and exchange losses/gains are tax-deductible or taxed respectively in the business period during which these items are recorded. The date of the effective payment of interest or of the effective realisation of exchange losses is generally not too significant. Normally, Swiss Commercial Law allows the recording and taxation of exchange gains only after their realisation.
Provisions to cover doubtful accounts and expected liabilities are generally tax-deductible as far as they are adequate and commercially justified. Provisions of an extraordinary nature have to be reported in the balance sheet in the year in which the event occurred.
Losses from the seven preceding business years can be carried forward and used against the taxable income for a business (tax) year.
4.2.3 Tax rates and principles of assessment
The direct federal income tax rate is proportionate and amounts to 8.5% of the taxable income. The rates for the cantonal and municipal income taxes are often on a progressive scale and therefore they usually depend on the rate of return. In all cantons, Swiss income and capital taxes can be deducted from the profit, which leads to a reduction of the pre-tax income.
As mentioned above, the cantons have the authority to impose cantonal and municipal taxes autonomously. Significant differences can, however, arise when you compare the income tax rates of the different cantons. This is highlighted by the fact that the present maximum income tax rate for the aggregate federal, cantonal and municipal income taxes is 29% for corporations located in Chur, in the canton of Graubünden, whereas the aggregate income tax rate is only 16,3% for corporations located in Zug, in the canton of Zug. An approximation of a company's total burden for Swiss federal, cantonal and municipal income taxes in the different cantons can be seen in Appendix 1.
4.2.4 Corporations subject to special tax treatment
All cantons (but not the Federal Government) grant certain tax concessions to corporations that perform only limited or no domestic business activities in Switzerland.
Pure holding companies, whose main statutory activities consist of the constant administration of participations and which do not exercise any domestic business activity, are completely exempt from cantonal and municipal income taxes if the participations or the income from participations make up at least two thirds of all shares or income respectively in the long term. Income from Swiss real estate is, however, not exempt from the cantonal and municipal income taxes.
Due to the federal tax concessions on dividend income from major participations, Swiss holding companies are virtually exempt from income taxes. Since capital gains from participations (where a capital investment of at least 20% is held and sold) are also largely exempt from direct federal taxes, a holding company domiciled in Switzerland can even sell participations on a largely tax-exempt basis. However, until 31 December 2006, this regulation only applies to participations acquired after 1 January 1997.
Domiciliary companies undertake administrative activities in Switzerland but do not undertake domestic business activities. They benefit from a complete exemption from any cantonal and municipal taxes on income from substantial participations. Other income from activities from abroad (e.g. income under license agreements on rights over immaterial property) is only partly taxed (usually 10% - 20%), whereas other domestic income is taxed according to ordinary Swiss taxation principles.
Mixed domiciliary companies
A mixed domiciliary company exercises most of its business activities abroad; domestic business activities are only exercised on a limited basis. Taxation is analogous to domiciliary companies.
Other tax concessions
For promoting new employment, newly formed manufacturing, trading or service companies can receive tax exemptions or concessions as investment incentives in certain cantons (e.g. increased amortisation rates or increased provision rates) for the purposes of cantonal and municipal income taxes for a period of up to ten years.
5. Other taxes and duties
5.1 Swiss withholding tax
5.1.1 Capital income as taxable income
Based on the Swiss federal law on withholding tax, profit distributions made by all corporations with a Swiss domicile are subject to a withholding tax of 35%. Such withholding taxes are to be borne by the recipient of the dividend; the corporation making the open or hidden profit distributions is consequently liable to withhold 35% of the gross amount and to remit this to the Federal Tax Administration.
Also subject to a withholding tax of 35% are certain interest payments, such as interest on bonds or notes issued by a Swiss corporation. Furthermore, all interest payments made by a bank on its customers' current accounts, savings accounts etc. are basically subject to Swiss withholding tax. Interest on mortgages or on intercompany current or loan accounts are generally exempt from Swiss withholding tax.
No Swiss withholding tax is presently levied on royalties paid by a Swiss corporation.
5.1.2 Relief applicable for Swiss withholding tax on capital gains
Shareholders and interest payment recipients who are resident in Switzerland can claim full tax relief from Swiss withholding taxes as long as the income is declared in the tax return. Foreign shareholders and recipients of interest payments may claim a partial or full refund only if a tax treaty between their country of residence and Switzerland has been concluded. A summary of the countries with which Switzerland has a tax treaty and a summary of the tax relief available to recipients of interest and dividends from Swiss sources is contained in Appendix 3.
5.1.3 Other tax triggering issues
The Swiss withholding tax is also levied on lottery prizes as well as on certain insurance benefits. Lottery prizes of CHF 50 and higher paid out by domestic lottery agencies and other similar organisations to domestic citizens and foreigners are taxed. Furthermore, capital sum benefits from life insurance policies as well as life annuities and pensions paid out to resident individuals are also subject to this tax. The Swiss withholding tax on lottery prizes is 35%, on life annuities and pensions it is 15% and on other insurance benefits it is 8%. A partial or full refund of the withholding tax on lottery prizes is possible, as is the refund of the withholding tax on dividend or interest income, whereas the withholding tax on insurance benefits is usually reported to the Federal tax authorities instead of withholding tax, so that the taxpayer would not need to ask for a refund.
5.2 Value added tax (VAT)
Following the European Union, Switzerland decided to substitute its former sales tax with the new value added tax effective from 1 January 1995. This tax, whose introduction was made as a matter of urgency, is now regulated by the federal law on the value added tax, which came into effect as per 1 January 2001. According to this law, the domestic supply of goods as well as the rendering of services are, among others, subject to value added tax. The general tax rate is 7.6%; however, goods for daily consumption, such as food and beverages, pharmaceuticals and newspapers, are subject to a lower rate of 2.4%. Services in the area of public health, education and culture are tax-exempt.
A tax liability is triggered by an independent or commercial enterprise, the purpose of which is to generate income, where the total of the enterprise's supplies, services and its self supply exceed CHF 75,000 per year. Furthermore, a tax liability also arises when services from abroad of more than CHF 10,000 per year are imported and also when goods subject to import duties are acquired.
The basis for calculation of the tax on domestic deliveries and services is the gross payment agreed upon or the amount collected (as appropriate). The taxpayer can deduct the amount of this tax, the input VAT, from the gross tax on its turnover. This alleviates the need for tax accumulation.
5.3 Stamp duties
A stamp duty liability arises in certain legal transactions involving particular deeds (particularly where securities are involved). The stamp duty is imposed according to the federal law on stamp duties. The issuing of shares and the processing of related deeds are events that give rise to a stamp duty liability.
The stamp duty is due on the issuing of participation rights and on the increase in par value of the shares in a Swiss share corporation, limited liability company and cooperative. The tax is 1% of the capital; no tax, however, is levied on the first CHF 250,000 of the capital stock. Also the contribution by the shareholder without corresponding consideration is a taxable event for stamp duty purposes, even though the nominal par value remains unchanged.
Furthermore, liability arises on any transactions involving the processing of the following documents: bonds, shares, participation certificates, profit sharing certificates and units in mutual funds). The stamp duty rate on foreign securities is 0.3%, whereas domestic securities are subject to duty at a rate of 0.15%. The duty is, however, only due and payable if a Swiss securities dealer (typically a Swiss bank) acts as a contracting party or intermediary.
Certain insurance premium payments are also subject to a stamp duty. For life insurance, the duty is levied at a rate of 2.5% of the cash premium; for all other insurances, the stamp duty is levied at a rate of 5% of the cash premium. There are, however, a number of exemptions from this tax. For example, the duty is not charged on policies covering illness, accidents, fire or theft.
6. International considerations
6.1 General remarks
International tax issues require careful consideration of the applicable tax ordinances in all countries involved. Therefore, the imposition of comparable taxes by two or more tax jurisdictions (double taxation) may result. The effect of double taxation may, however, be alleviated or mitigated by means of various double tax treaties. Some countries may also take individual measures to avoid or mitigate double taxation. For example, in Switzerland, foreign business sites, permanent establishments and real estates are generally not liable for Swiss tax. Or two countries may conclude a bilateral treaty in order to avoid or at least mitigate double taxation.
With regard to the avoidance of double taxation on income and capital taxes in Switzerland, only the Federal Government has the power to conclude treaties with other countries. Most of the double taxation treaties closely follow the OECD model convention. Double taxation conventions are governed by the rules of Public International Law. This means that the articles of a double taxation convention do not themselves generate a tax liability. They instead only allocate the right to tax to a country. The domestic law decides if taxes have to be paid.
There is also no international court of justice which is responsible for the resolution of double taxation issues. In case of an issue with a double taxation convention, the respective national authorities and the courts in these countries would decide on the problem.
A double taxation convention is a document which defines, for example, how to allocate profits from an international company to the countries involved as well as which country is entitled to tax dividends, interest and license fees. It also defines which country is entitled to impose an income tax on an employee who is transferred to another country and to what extent that country can tax the individual.
6.2 Measures against the abuse of tax treaties
6.2.1 Federal Council ruling of 1962
1. General remarks
Due to the stable political situation, the legal security, the monetary stability and the high standard of services, especially in the area of banking and insurance, Switzerland has always been a very popular location for foreign investors to establish a business. The combination of tax privileges and tax relief in Switzerland arising from the application of double tax agreements resulted in persons owning a Swiss company having an unfair advantage when it came to the application of international double taxation treaties, especially in connection with the refund or reduction of foreign withholding taxes. This situation was highly criticised, also internationally, so that the Swiss Government issued a special decree in 1962 against the misuse of tax treaties in order to curtail the most common misuses. This decree led to the following regulations:
A Swiss corporation is usually not allowed to pay out more than 50% of the treaty-benefited income in the form of charges, such as interest or royalties to non-qualified persons. This means that the operating expenses (including depreciation) in connection with income benefiting from the relief on foreign withholding tax due to a Swiss double taxation treaty must not exceed 50% of this income. If this corporation also has income from non-treaty countries, no more than 80% of that income may be paid out in the form of similar tax-deductible charges to non-qualified persons.
Furthermore, a foreign-controlled company has to pay out at least 25% of its treaty-benefited income to the (foreign) shareholders as a dividend.
Relief that has been granted may be considered to have been misused if a Swiss corporation is financed by foreign debt. Therefore, Swiss authorities have implemented some thin capitalisation rules and, on an annual basis, they publish a maximum interest rate according to which a corporation can be debt-financed by related parties.
3. New decree implemented
Swiss authorities significantly loosened the above-mentioned regulations regarding certain corporations with the passing of a new decree (Circular of 17 December 1998). As a result, businesses that are active in Switzerland are allowed to pay out more than 50% (usually up to 80%) persons which are not qualified for such benefits under a tax treaty; furthermore, the minimum dividend payout duty for foreign-owned corporations does not apply. Corporations whose majority of shares (according to voting rights and par value) are officially listed on a recognised stock exchange and which are regularly traded will qualify for the exemption, as well. They also apply to companies which solely manage and finance share investments (pure holding companies).
Mixed holding companies that also undertake other businesses activities aside from their main activities cannot benefit fully from the exemption. The 50% limit still applies to them. Nevertheless, they are exempt from the minimum dividend payout duty, which, however, still applies to other foreign-owned corporations.
6.2.2 Bilateral regulations
The tax treaties that Switzerland has concluded with Germany, France, Belgium and Italy each contain specific regulations regarding the misuse of the treaty. Since the international treaties always override domestic law, these bilateral regulations against misuse will always override all Swiss laws (including the relief that came into existence with the Circular of 17 December 1998). However, these regulations are very similar to the original Swiss regulations; for example, there is a ban on paying out more than 50% of the treaty-benefited income derived from the above countries as well as a minimum dividend payout duty of 25% of this income where the Swiss corporation is foreign-owned. The Swiss regulations regarding the misuse of treaties are still valid, despite the existence of the special rules with the above-mentioned four countries.
On the other hand, the double taxation treaty between Switzerland and the United States features some regulations on abuse that render the Swiss regulations invalid. This tax treaty extensively controls the abuse of tax relief. A series of tests shows if the treaty entitlement stands. This may be the case due to an official listing on a stock exchange or the undertaking of active business.
6.3 Transfer pricing
Due to international globalisation, the number of multinational groups consisting of more and more affiliated companies in different countries is rising. These affiliated companies often take over a specific function of the group, and some even exclusively render services internally among foreign group companies. Due to the increasing tendency to allocate profits among group companies in the international environment, the OECD has issued guidelines on intercompany transfer pricing in order to counteract this problem.
The purpose of the OECD guidelines is to avoid double taxation for the company and to make sure that the international tax authorities receive their fair share of the profits. A significant part of these guidelines concentrates on the transfer pricing methods; these methods that allow the parties involved to determine the arm's length price, such as the comparative price for independent third parties.
Compared with other countries, Switzerland has not issued any specific transfer pricing rules. Therefore, there are neither specific documentation guidelines for international enterprises nor separate monetary fine regulations for unfair pricing. In order to determine transfer prices, Switzerland relies on the OECD guidelines in order to determine appropriate pricing ('to ensure the parties deal with each other at arm's length'). Usually, the taxpayer has to prove that the price really corresponds to what an independent third party would pay.
In Switzerland, the taxpayer basically has to decide according to which criteria the price is finally to be determined. The most commonly used method is the so-called comparable uncontrolled price method.
7. Taxation of individuals
7.1 Income and net worth tax
7.1.1 General remarks
People who are not self-employed are taxed according to their residency, their abode or according to whether they own real estate in Switzerland. They have to pay income taxes on a federal, cantonal and municipal level; net worth taxes, however, are only due on a cantonal and municipal level.
Taxable income includes the income from employment, investment income (e.g. interest, income from real estate and dividends), income from pension funds (e.g. annuities or lump-sum compensation) as well as all other income (e.g. compensation for the inability to work such as sickness benefits, payments from indemnity insurance or accident insurance policies, lottery prizes or support payments for divorcees).
Income that is not taxable includes inheritances, gifts and marital settlements as well as private capital gains. Moreover, the Swiss tax system provides tax relief for certain other events due to socio-political or retirement-related reasons.
Expenses which are incurred directly in the generation of income can normally be deducted for tax purposes. Furthermore, Swiss tax laws allow social security deductions, e.g. for the support of children or other individuals in need of support.
Due to the cantonal autonomy with regard to the determination of tax rates, the tax burden on individuals may vary greatly from domicile to domicile. For example, a single, non-denominational person domiciled in Freienbach, canton of Schwyz, with a taxable income of CHF 100,000 per annum would pay an income tax of CHF 9,838 for the year 2001, whereas, if the person were domiciled in Zweisimmen, canton of Bern, he or she would have to pay an income tax of CHF 27,700.
There may also be substantial differences in the amount of net worth tax payable, due to the different cantonal and municipal taxing rules. When the net worth of an individual reaches a certain level, taxes are mostly imposed on a proportional basis and they generally constitute up to 1 % of the taxable capital.
7.1.2 Special regulations for foreigners
In order to ensure that international assignments are not unnecessarily complicated by taxation matters, the Federal Government as well as some of the cantons, e.g. the canton of Zurich, have implemented some special regulations for expatriates. Consequently, some expenses arising from the transfer of employees abroad can be deducted from the taxable income of the employee as additional professional expenses, provided that they are not compensated by the employer.
For individuals who are not Swiss citizens, Swiss tax law offers opportunities. If such individuals make Switzerland their domicile for the first time or if they make Switzerland their domicile after a period of absence of at least ten years and who do not perform gainful activities, they can opt for a tax based on his or her living expenses instead of an income tax. These expenses correspond to the taxable income and are subject to a tax based on the common income tax scales.
Since it is often difficult to determine the exact sum of the living expenses, the tax authorities often use a multiple of the rent or the rental value of an individual's home in order to determine the expenses. Common practice is to accept expenses as being five times this value.
Irrespective of what the living expenses amount to, the hypothetical taxable income, however, has to be at least as high as all the income from Swiss sources with the inclusion of the income for which the taxpayer claims relief from foreign taxes due to a double taxation convention concluded by Switzerland.
7.2 Inheritance and gift taxes
Inheritances and gifts do not qualify as taxable income for income tax purposes; however, they can still be taxed. The cantons have the right to decide upon the levying of such taxes. With one exception, all cantons levy inheritance taxes; also most of the cantons levy gift taxes. The tax rates for inheritance and gift taxes depend on the degree of the relationship and the size of the inheritance.
7.3 Digression: Social security
7.3.1 General remarks
The Swiss social security system consists of three elements (so-called pillars). The purpose of these three pillars is to provide social security via different measures for old age, death and invalidity. The first pillar, old age and disability insurance (AHV), is supposed to ensure that the essential basis for gaining a livelihood is appropriately covered for the whole Swiss population. The second pillar, the compulsory occupational retirement and disability insurance (BVG), is supposed to ensure, together with the first element, that the standard of living of all employees can be maintained. The third pillar, individual savings, provides an individual with the opportunity to close any possible gaps in the first and the second pillar or to help in obtaining a higher level of income or benefits for retirement, death benefits or invalidity benefits.
7.3.2 First pillar - Old Age and Disability Insurance (AHV)
Old age and disability insurance is an insurance compulsorily required by the government. It insures each individual who is gainfully employed in Switzerland. In the instance of retirement or invalidity, this insurance provides the insured person with a pension. In order to finance this insurance, every individual employed in Switzerland has to pay a regular premium based on his or her salary. AHV premiums are 10.1% of the total salary and the liability is normally equally shared between the employer and employee. For the purposes of determining the premium, there is no upper limit on the salary; however, the subsequent maximum yearly pension payments are currently CHF 24,720.
Furthermore, premiums have to be paid for compulsory governmental unemployment insurance (ALV). These premiums are also based on the salary and belong to the first pillar. The premium for the ALV is 3.0% of the salary up to where the annual salary is CHF 106,800 or less and the responsibility for the payment of the premium is also equally shared between the employer and employee. For annual salaries between CHF 106,800 and CHF 267,000, the premium is 2.0%; for parts of salaries exceeding CHF 267,000, there is no requirement to pay a premium.
All premium payments in respect of the first element (i.e. the premium payments made by the employer as well as the employee) are fully tax deductible.
7.3.3 Second pillar – Occupational Retirement and Disability Insurance (BVG)
Employees with an annual salary between CHF 24,720 and CHF 74,160 are required to have occupational retirement and disability insurance (BVG). Moreover, the employer is required to establish a pension fund for the employees who are required to be insured or instead the employer may add these employees to an already existing pension fund scheme. Pension funds are mostly foundations that are not subject to tax provided that they satisfy the requirements for a pension fund. It is possible for voluntary contributions to be made when an individual's salary exceeds CHF 74,160.
In order for the pension fund to be tax-exempt, certain criteria have to be met. For example, a pension fund is tax-exempt if its assets serve irrevocably for the payment of pensions. Furthermore, the pension fund for a corporation must operate on a timely basis and be of an appropriate nature for all the company's employees. Employees must in general be treated equally.
The size of the payments, which are to be paid by the employer and the employee, is determined by the pension fund scheme. The payment made by the employer must be at least as high as the total amount of the payments of all his employees. The employer's premiums to insure the compulsory salary are usually between 5% and 10% of the salary. If the pension fund of the corporation meets the above-mentioned requirements, the premiums paid by the employer and the employee will be tax-deductible.
7.3.4 Third pillar – individual savings
Compared to the second pillar, which is primarily a collective pension fund scheme, the third pillar is an individual pension fund or a 'secured' fund. Officially recognised pension fund structure can only be in the form of a 'secured' fund with an insurance organisation or a 'secured' pension plan arrangement with a bank. Premiums paid to a 'secured' fund have to serve irrevocably for the payment of pensions. Pension may only be paid out five years before reaching the pensionable age (men 65 years, women 63 – 64 years) at the earliest. Early pension payments are only allowed in the instance of total invalidity, when an individual joins another tax-exempt pension fund or another officially recognized pension fund scheme as well as upon starting or terminating one's own business. Furthermore, premium payments can be paid out in order for an individual to finance and purchase a residency respectively. They can also be paid out when an individual gives up his residency in Switzerland.
The premiums paid to a pension fund establishment are limited and depend on the individual's income. If the employee does not have the appropriate occupational retirement and disability insurance, the premiums must not exceed a maximum of 20% of the business income, or currently no more than CHF 29,644, respectively, per year. If the employee does have the appropriate occupational retirement and disability insurance, premiums currently must not exceed CHF 5,933.
The premiums mentioned above are tax-deductible. on the other hand, if an early payout of this individual savings is made, the money received would be subject to (privileged) taxation.
8. Real estate
8.1 General remarks
In Switzerland, the purchase of real estate is subject to legal restrictions and foreigners without a permanent residency permit (permit C) sometimes need a special permit to purchase property. The purchase of agricultural real estate is usually limited to farmers. Swiss residents as well as foreigners with a permanent residency permit are usually allowed to purchase blocks of land without a special permit.
Foreigners who do not hold a permanent residency permit usually need a special permit issued by the respective cantonal authorities in order to purchase single or multi-family homes, condominiums or blocks of land.
In special cases, the purchase of real estate does not require a permit: e.g. if the real estate serves as the permanent establishment for a company or as the main residence in Switzerland for the acquirer (foreigners with a renewable one-year residence permit, permit B). There are also other exceptions, e.g. with regard to the transfer of ownership of real estate following an inheritance.
A permit is also required in order to purchase a vacant block of land, unless construction that does not require a permit commences on the property within about a year of acquisition (e.g. where the property will be an individual's main residence or the property will be used by the company, as mentioned above) or else when the land will be used as a permanent establishment for a business (e.g. as storage room, parking lot or access road).
A purchase is always looked at from an economic point of view. Therefore, each legal transaction which gives a non-resident the control over a piece of real estate with the need for a special permit, is seen as being equal to the direct purchase of a piece of real estate. An example of such a transaction is the purchase of the majority of shares in a real estate company.
8.2 Real estate tax / Real estate transfer tax
Approximately half of all cantons not only impose income and net worth taxes on property, but they also impose a real estate tax, which is charged periodically (annually). The fair market value is usually used to assess the tax. The tax burden is usually imposed on a proportional basis and it varies between 0.03% and 0.3% of the fair market value.
Furthermore, the transfer of real estate is usually subject to a special tax, the real estate transfer tax. This tax is strictly assessed according to the current disposal value or, if higher, according to the fair market value of the real estate. The tax burden is mainly proportional and usually between 1% and 2%.
8.3 Taxation of gains on disposal of real estate
All cantons levy a special tax on gains arising from the sale of privately owned real estate. The amount by which the consideration on disposal exceeds the acquisition costs (purchase price plus expenses) is taxed. Legal transactions which, from an economic point of view, have the appearance of a sale are considered to be sales. An example is the sale of the majority of shares in a real estate company. The amount of the tax on real estate gains is inversely proportional to the period of time the real estate is owned, which means the longer the period of ownership, the lower the tax. If a piece of real estate is transferred as a result of an inheritance, a pre inheritance or if it is a gift, the payment of any tax is deferred.
If a gain arises on the disposal of real estate held for business purposes, the tax on the gain is, as described above, also subject to a separate real estate tax in some cantons. In the remaining cantons, the gain on disposal would be subject to ordinary income tax.
9. Final remarks
As can be seen above, and as the following tables show, Switzerland cannot be considered as a country with lowest taxation. When compared internationally, however, Switzerland's tax rates are remarkably moderate (despite the differences between the cantonal tax systems), and it is for this reason as well as due to the good and stable economic climate that international business people and organizations select Switzerland for their activities. The decision to establish a Swiss corporation or branch for business operations should primarily be made after evaluating the general economic conditions, the present environment and status, of which taxes are an important element. The stability of the political system in Switzerland together with a wide variety of internationally oriented services combined with the available network of tax treaties with all major industrial counties represent sound reasons for undertaking activities through a Swiss business entity.
Thorough advance planning and an evaluation of all potential tax savings opportunities should essentially be performed prior to the formation of a company, the transfer of domicile, before a financial re-organization, etc. and also prior to the undertaking of any substantially-sized business transaction.