Overview of the tax system (tax rates from 2020):
Current tax law is in place since 2020. After pressure from the European Union, Switzerland had to eliminate special benefits for companies with activities outside the country. They introduced a uniform corporate tax in every canton and some additional benefits for innovation.
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 (a wealth tax for companies).
The tax return for corporate tax must be submitted within 9 months after the end of the calendar year in which the accounting period ends, and it is possible to apply for extensions. The taxable income is calculated in CHF; to pay the tax (and later for prepayments), the cantonal tax department issues a provisional calculation based on past declarations, which includes the tax to the confederation, the canton and the municipalities (the local tax rate differs a little between the communes).
Withholding tax (e.g. on interests or on dividends): 35% withholding tax. For foreign corporate shareholders, 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 favourable 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.
In case of dividends, the company first has to pay 35% withholding tax (tax at source) to the federal tax administration (FTA) within 30 days from the date of the dividend payment.
If a double tax treaty defines a lower rate as maximum withholding tax, then the recipient has the right to receive the difference as a refund using the following procedure:
- Minutes of the General meeting that decides about the dividends and mentions amounts, date and method of payment.
- Dividend warrant that includes gross amount, withholding tax, and net amount of dividend
- Payment must correspond to the dates in the dividend warrant.
- Declaration: Form 103 for AG, Form 110 for GmbH; attached the dividend warrant. It can be submitted online.
- Refund claim: the federal tax administration publishes different forms depending on the country of residence of the recipient. If there is no special form, then form 60 shall be used for private person to claim parts of the withholding tax back.
- The form must then be stamped by the tax administration in the residence country (who may consider and tax the dividend depending on their local legislation) and the original of the form with original signatures must be submitted to the Federal Tax Administration in Switzerland. After the authority checks it and eventually asks some more questions, the repayment can take place.
For foreign individual shareholders, there are only little improvements in the double tax treaties reimbursement or crediting is bureaucratic and associated with high costs. Another obstacle is the “old reserve practise”: if the company has old capital reserves and changes from private to corporate shareholding, a different handling may be established by the authorities: old dividends shall be taxed according to the original structure, and only new dividends can be taxed according to the new structure. There are still solutions, but they are sophisticated, slow, and cost intensive.
To avoid withholding tax, there are additional options, resulting mainly to avoid dividends:
- If the Swiss company expands quickly and/or has costs abroad, there remains no profit and the problem is solved.
- If a foreign entity establishes a branch in Switzerland, this branch is part of the foreign entity in terms of civil law. Therefore, the remittance to the main seat is no dividend and there is no withholding tax. Usually, the remittance from the branch does not constitute income at the main seat.
- If the main seat is in a country that has no tax on outgoing dividends, there still may be a tax for the shareholders in their country of residence. Therefore, one should consider structuring the transfer from corporate to private level, too.
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. For companies, there are little obstacles to receive a VAT number,but if declarations are not submitted in time,the tax office quickly issues an assessment based on estimations.
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.
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 EU 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|
Swiss residents can avoid social charges if a legal entity collects the revenue for them and if the structure does not qualify as quasi- employment. However, inspections expect an adequate salary. In case of high income, they can reduce social charges by having an employment outside Switzerland and no employment in Switzerland.
For residents in the EU, a person may have first his country of residence in an EU country with a low ceiling for social charges. Then he may be posted temporarily to Switzerland according to the European Directive 883/2004. This means, he can declare with form A1 to continue to pay social charges in the original country, let it be stamped there and present it to the Swiss authorities.
Residents outside the EU can benefit, if their country has no agreement on social charges with Switzerland. They simply can invoice their services and receive their payments.
There is a withholding tax (“Quellensteuer”) on employment income of foreign nationals residing in Switzerland without a permanent residence permit.
Taxation of dividends: 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 wealth 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)|
Steps and Conditions for Company Formation in Switzerland – Click here !
Reimbursement of Expenses and Vehicles in Switzerland
Employees of a company who have an employment contract are entitled to be reimbursed for business expenses that are incurred in the interest of the employer. For executives who have no employment contract, an analogous procedure is usual (residual risk depending on the amount).
Persons who are not in employment are reimbursed for work related expenses for accommodation, transport and customer invitations according to the same rules as employees, whereby the original receipts have to be attached to the invoice.
1. Effective expense allowances
- Overnight expenses: against original receipt; costs for wife or husband who accompanies on the trip can be deducted if it is a business trip
- Public transport (train, plane, etc.): Refund against original documents, costs for wife or husband who accompanies on the trip can be deducted if it is a business trip
- Use of private vehicle: payment of max. CHF 0.70 per km, proof by logbook. Gasoline bills, etc. are then not charged to the company as expenses, since the amount is already included in the CHF 0.70
- Customer invitations: will be duly settled against original receipt, giving the name of the customer and the cause.
- Meals: costs up to CHF 30 for a main meal (single case lump sum without proof) or CHF 35 for lunch or dinner (with proof). With two meals it is possible to charge a lump sum and one for a receipt, as an evidence working reports are suitable. A proof of the journey itself and its business reason is always required. (From a legal point of view, the expense allowance shall compensate for the additional costs of the food compared to home-based meals, which is part of the cost of living.)
2. Flat rate expense allowances for small expenses and representation expenses
- Small expenses of less than CHF 20 (e.g., for parking fees, postage, coffee breaks, etc.) and representation expenses (e.g., for private invitations at home) can be paid to employees in the form of flat-rate expenses up to a maximum of 5% of the gross salary, depending on their function within the company, in addition to the effective expense remuneration shown above. If a lump-sum compensation is made, the individual bills should not appear again in the accounting.
- Diets or overnight stays, as are customary in Germany or Austria, are not permitted in Switzerland. This also applies to business trips to countries where such billing would be possible.
3. Private share (fringe benefits) for the use of company vehicles
- The determination of the private share for the private use of a company vehicle takes place according to the so-called flat rate method. The amount to be declared amounts to 0.8% of the purchase price per month (excluding VAT, for used cars the purchase price of the used car). In case of leased vehicles, instead of the purchase price, the cash purchase price of the vehicle that is stated in the leasing contract (excluding VAT) shall be charged. For long-term rentals, the value that the car had at the starting time of the rental applies. The private share shall be at least CHF 150 per month.
- The registration of company vehicles can also play a role: In many cantons, companies with a c/o address can only register a car if they can prove that they have a parking space. In the case of a regular office address, it is at the discretion of the authority. When a company registers a vehicle, it can define that a particular person mainly uses that car (for example, an employee who visits customers from their place of residence). If this person resides in another canton, the vehicle must be registered with the canton of residence. In these cases, proof of a parking space is usually not required, but the processing of the private share must be carefully agreed.
- The private share is to be regarded as an additional wage payment and is burdened with taxes and social security contributions. In the case of private use of a vehicle of the own company, it is therefore often recommended to settle the private share directly with the company and to pay the amount to the company in order to avoid being burdened with taxes and social security contributions. To ensure that no additional payment of social security contributions, VAT and withholding tax results in case of an inspection, the accounting must show every period that the private share has been calculated by the company and paid to it.
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 (FTA, EStV) in Bern. Later, a Swiss resident recipient can require a tax credit if he proves that he has declared interests or dividends in his tax statement. If there is a double tax treaty, there may be a reduction for shareholders that are foreign companies. In case of private shareholders who reside in a country with a favourable treaty, the tax system does not allow to pay just the reduced withholding tax rates, and the tax has to be fully paid to claim the refund. 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 fulfil 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.
Structures shall follow the business activities, so please look at our guideline how to organize an international business group.
Legal Documents and some Double Tax Treaties: Downloads & Links
Organization of Swiss tax authorities
The tax system is a decentralized structure, most taxes are administrated by the cantonal tax administration. The cantonal tax administrations are audited by federal administration.
Compared to other countries, Switzerland receives a lower share of its government revenue from VAT and social security contributions and a larger share from corporate and private income tax. Because of the progressive tax rate, a small number of taxpayers contributes a high proportion of federal and local tax. Therefore, the 26 cantons compete and address different target groups with their tax offers. Generally, Switzerland welcomes multinational corporations with qualified employees. Even if they pay little tax, their employees have higher taxable salaries, pay therefore progressive tax rates, and contribute to the social system.
The cantonal tax offices are responsible for collecting federal, cantonal, and municipal taxes on income and capital. They forward a part of it to the Federal Government. For the local part, there is a different tax rate depending on the Canton and on the village. Tax rates are linear within a Canton, and some Cantons offer rather low tax rates, other ones a more flexible in the acceptance of expenditures. For the tax base, the Cantons have some local rules and cantonal laws; knowing them can help to reduce the tax base and to understand exemptions. There are also differences 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 (however, such rulings nowadays have to be registered).
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 Federal VAT administration, a special department of the Federal Tax Admininistration in Bern. They assess and collect VAT and they organize rather tough VAT inspections.
(Updated July 2021)