Overview of the tax system (tax rates from 2019):
Taxation of companies:
Taxation of income and capital: direct federal tax: 12% – 14% corporate income tax depending on the canton. Part of it is federal, cantonal or municipal tax. As the tax itself is deductible, so in fact the rate is between 10,71% (12/1,12) and 12,28% (14/1,14). Also, there is a capital tax
Withholding tax (e.g. on interests or on dividends): 35% withholding tax, there is a possibility to avoid this totally or partial if there is an active parent company in an EU country (because with art 15 of the Switzerland- EU savings agreement, Switzerland takes part in the former version of the parent-subsidiary directive of the EU- ownership: 25%, 2 years), or in a country that has a favorable tax treaty with Switzerland. Also, the “Denkavit” practice allows to distribute dividends immediately to a mother company in an EU member state, and to pay as a deposit the withholding tax that is defined in the double taxation treaty, which will be refunded later, when the criteria of the Savings Tax Agreement are met. However, Swiss administration is famous to impose bureaucratic hurdles, so the company paying dividends first has to hand in form 823C, then answer to an extensive questionnaire without falling into a trap, and then wait for 3 years approval before deciding a dividend. After the approval finally arrives, decisions about dividends can be communicated with form 809 and 810.
VAT: 7,7 % to transactions received by Swiss recipients, special rates for special tax objects; no VAT on export of goods and services; imports of services are subject to the reverse charge system.
Taxation of partnerships:
Partnerships usually are taxed transparent: not the company, but the owners are taxed directly according to their share on income and on capital (see also below). Partners are taxed personally on their share of income in the canton where the partnership is located. Then there is a mechanism to relate this income and this tax to other income. Within Switzerland, there is an inter-cantonal coordination, and internationally, the Double Tax Agreements in relation with the local tax law are relevant (for example article 23 shows, if the credit method or exemption method is applicable)
A General partnership and a Limited Partnership are taxed similar, however there are cases where limited partners can have a higher loss than their capital.
For planning purposes it is important to know that a general partner must be a physical person and profits of both the general and the limited partners are subject to social charges. Options to avoid this are a foreign general partnership with branch in Switzerland (in a country where the general partner can be a legal person), a foreign legal persons as limited partners (to avoid social charges) or limited partners that can waive Swiss social charges using form A1.
Taxation of branches and taxation of income and foreign companies:
In general, branches of foreign companies are taxed similar to a corporation, but money can be transferred free to the main seat from the branch, because it is no dividend.
Income of foreign companies arising in Switzerland is taxed there when a permanent establishment exists or when the income is connected to local real estates
Social contributions and taxation of natural persons:
Social welfare system: first pillar (AHV/IV) for employees, entrepreneurs and limited partners mandatory, second pillar (BVG) mandatory for employees over a certain income. The first pillar is calculated linear without upper limit, so it is recommended to choose a structure to avoid part of this burden.
The limited partners of a limited partnership are subject to social charges, too. However, the EU and Switzerland have an agreement on the organization of social contributions and rights that is based on the EU directive 883/2004. This agreement defines the country of competence, and in attachment 9, there is a good overview (e.g. if someone is resident and employed in country A, it is country A).
|Working country||Country of competence if resident in CH||Country of competence if resident in EU|
|CH/EU: one or several CH employers||CH||CH (EU if the main part of the work is performed in the residence country)|
|CH/EU: one or several EU employers with seat in the same country||CH if the main part of the work is performed in CH, else EU||EU|
|CH/EU: several employers in different EU countries||CH||ЕU|
|CH/EU: CH employers and EU employers||CH if the main part of the work is performed in CH, else EU||CH if small part in residence country and EU employer with seat in residence country (else: EU)|
|EU/EU: one or more CH employers||CH||EU if the main part of the work is performed in the residence country|
|EU/EU: one or several employers in the same EU country||ЕU||ЕU|
|EU/EU: several employers in the different EU countries||CH||ЕU|
|EU/EU: CH employer and CH employer||ЕU||CH if small part in residence country and EU employer with seat in residence country (else: EU)|
|Self employed||Employed and self employed||CH||ЕU|
|CH/ЕU||CH if main activity in CH, else EU||CH if main activity in CH, and no main activity in the residence country, else EU|
Although the limited partner of a limited partnership in Switzerland are subject to social charges, there are structuring options: EU residents who live in a country where they are resident without domicile can be limited partners in a limited partnership with a Swiss branch. Profits can remain tax free if not remitted to their country of residence, and there can be an exemption for social charges in Switzerland using form A1.
There is a withholding tax (“Quellensteuer”) on employment income of foreign nationals residing in Switzerland without a permanent residence permit.
Taxation of dividends:the canton can allow partial taxation is possible of 70% on federal tax and 50% on cantonal tax level.
Taxation of income and wealth are calculated based on the family, and tax rates vary between cantons and communities. In most cases there is a progressive scale. Taxation: Direct federal tax plus cantonal tax plus communal tax.
|Taxable income||x||tax rate of canton||=||basic tax rate||x||tax rate % of the community (varies depending on the canton)||=||community tax rate||Total = effective tax (see: tax calculator)|
Tax incentives in Switzerland:
- Planning security: companies and citizens have the right to a mandatory pre-tax assessment (“Ruling”) for planned projects.
- Participation exemption: this is explained in detail in the circular (“Kreisschreiben”) Nr. 9 from July 9th, 1998. If a company holds more than 10% of another company, there is a tax exemption on dividends (there is no restriction “subject to tax”).
If a company holds more than 10% of another company for more than one year, there is a tax exemption on capital gains, and in addition, net income can be reduced further by flat 5% administrative costs.
- 50% additional R&D cost deduction: maximum relief may not exceed 70% of profits subject to cantonal tax. R&D costs must arise in Switzerland, either as personnel costs or as third party costs (if the third party does not use the same 50% deduction)
- patent box: income from domestic and foreign patents and similar rights can be taxed separately with a maximum reduction of 90%, but maximum relief may not exceed 70% of profits subject to cantonal tax.
- Swiss branches of foreign companies will be able to claim a lump-sum tax credit for foreign withholding taxes under certain circumstances
- rules concerning hidden reserves upon migration to/from Switzerland and transitional rules upon change of status of preferential regime companies
- Capital gains from the sale of an enterprise or part of an enterprise by private individuals:profits from such deals are taxable in the country of residence. If the residence is in Switzerland, such profits are usually tax free, if the person is not commercially a company dealer (this would constitute a fiction of a non- registered sole proprietorship. This would have to pay social charges and profit taxes).
- Inheritance tax: in most cantons, there is no inheritance tax for direct descendants.
- Other incentives:because of the tax competition, cantons try to attract specific target groups by offering them some tax incentives. Such incentives can be tax credits for qualified new residents for some of their expenses in the first years, short depreciation periods or the acceptance of certain costs as a flat percentage of sales.
- there are transitional provisions for companies that previously used the holding privilege, the privilege for domiciliary companies or for mixed companies.
- Withholding tax: when a company pays interest or dividends, it has to deduct 35% withholding tax and pay it to the federal tax administration in Bern. Later, the recipient can require a tax credit if he proves that he has declared interests or dividends in his tax statement. If there is no double tax agreement, foreigners lose the withholding tax. Therefore it is important to design appropriate legal structures using double tax agreements to avoid losing the withholding tax.
- “AHV/IV”: social costs at the basic level run linearly with income (pay- as –you – go system, half of it has to be paid by the employer) and therefore have an effect similarly to taxes. Limited partners living or working in Switzerland also are subject to AHV. No AHV has to be paid from corporations (except for their employees) or from persons who have social insurance in an EU country and fulfill the requirements to apply for an exemption in Switzerland (because of the social security agreement between the EU and Switzerland).
- “ALV”, “UVG” and “BVG”: social costs of employees include unemployment insurance (half of it to be paid by the employer), an accident insurance and the second pillar of the pension system (% of gross salary, raising with the age, half of it to be contributed by the employer).
- Social Security cost-comparison: at first glance, social burden looks rather low. However, this figure does not include health insurance that is mandatory for all residents of Switzerland
- Anti abuse clauses for capital gains: tax free capital gains are an incentive, but obstacles are special rules of transposing and of indirect part liquidation, which we do not explain at this place.
In the menu “Advisory” we offer clients to benefit from our know-how in international tax planning and international tax law.
Structures shall follow the business activities, so please look at our guidelines for Company Structures.
Organization of Swiss tax authorities
The tax system is a decentralized structure, most taxes are administrated by the cantonal tax administration. The cantonal authorities are audited by federal administration.
The cantonal tax offices are responsible for taxes on income and capital. They are subject to federal and cantonal laws. There are differences in cantonal laws but also in the way local authorities deal with discretionary matters.
The staff of the cantonal tax offices usually is correct, friendly and cooperative. Taxpayers are not treated as a subject, but as a business partner. It is a fundamental right of citizens to clarify tax issues in advance and obtain a written “ruling” that binds the administration.
The withholding tax is administered by the Federal Tax Administration in Bern and levied on the income from movable capital assets. It is paid by the payer of interest or dividends and taxpayers have a claim on tax credit. Concerning withholding tax, the responsibility of the cantonal administration is limited, and the review by Bern is very accurate.
The VAT is also levied by the Swiss Federal Tax Administration in Bern.
(updated updated April 2020)