Published: 23.12.2019 news
Form of government:Confederation
Area:41 284 км2
Currency:Swiss Franc (CHF)
Taxation in Switzerland
Taxes in Switzerland
The economy of Switzerland is one of the most liberal and competitive economies in the world. The success of Switzerland is directly connected to the liberal economic system, political stability and close economic cooperation with other countries.
The Swiss tax system fully reflects the federal structure of the country, consisting of 26 independent cantons, which have about 2650 independent municipalities. All cantons have the full right of taxation, with the exception of those taxes, the collection of which is the prerogative of the federal government. As a consequence, Switzerland has three levels of taxation - federal, cantonal, community (municipal). ‘]
Corporate income tax - federal level
Profits tax in the Swiss Federation is levied at a fixed rate of 8.5% of the income of corporations and cooperatives after deduction of tax. For unions, foundations and other legal entities, as well as for investment trusts, the uniform rate is 4.25%. Capital taxes are not charged at the federal level. The tax that is levied on legal entities which are residents in Switzerland, i.e. Swiss corporations, limited liability companies and corporations with unlimited number of partners, cooperatives, funds and investment trusts directly owning immovable property. As partnerships are “transparent” for tax purposes, partners are taxed on an individual basis. Companies that are registered or have actual government in Switzerland are considered as residents. Non-resident companies are taxed on profits derived from Swiss sources. Such profits are excluded from the Swiss tax base and are only taken into account for the purpose of establishing a progressive rate in those cantons in which progressive tax rates continue to be used.
Switzerland has a set of rules for under-capitalization, operating under certain conditions and extending to debt obligations that arise between related parties; these rules do not apply to financing between independent parties. In particular, a unique test of the composition of assets is provided for the determination of the adequacy of the company’s financing. The rules of under-capitalization require each class of assets (usually estimated at fair market value, but in many cases rather lower values of book value) to correspond to a certain share of its own capital. The indebtedness of an interconnected party, exceeding the allowable amount calculated in accordance with the established interest rate management, is reclassified as equity and added to the taxable capital for the purpose of calculating the annual cantonal/community tax on capital. This principle applies if it is impossible to prove that the used terms of debt financing are more applicable to this particular case.
In addition, the allowable deduction of interest on indebtedness can be determined by multiplying the allowable amount of debt to the interest rates provided for by the rules of under-capitalization. If interest payments of related parties exceed the amount that can be paid on the basis of the allowable debt, the excess amount is added to the taxable profit. Moreover, such interest payments are treated as a hidden distribution of profit (taxable withholding tax at a rate of 35%).
Corporate income tax - cantonal/ community level
Due to harmonization of taxation at the cantonal / community level, in most cases the tax rules are identical or substantially similar to the above rules that apply at the federal level (for example, exemption on the basis of a shareholder’s participation, rules for transferring losses to subsequent periods and, in most cases undercapitalization rules).
Special tax regimes
The cantons provide for special tax regimes, these regimes supplement taxation at the federal level and operate subject to compliance with the law on tax harmonization. Tax regimes that are internationally significant and dominant in Switzerland are:
A) Holding company
The status of a holding company for a Swiss company is provided if the company’s main objective, in accordance with its Articles of Association, is the possession and management of long-term investments in the equity of affiliated companies. This company should undergo an additional audit of the composition of assets or income, according to which two-thirds of the company’s assets must consist of substantial holdings of shares or equity interests, or two-thirds of the total income of the company should consist of profits from shareholder participation (dividends or income from increase in the value of capital). The holding company which responds all the established requirements is exempted from payment of all cantonal/community income taxes, with the exception of property income in Switzerland, which is taxed after deduction of standard mortgage costs associated with such real estate. In principle, the effective tax rate applicable to the holding company is 7.83% (that is, the federal income tax rate) before granting exemption regarding dividends and income from the increase in the value of capital. A reduced tax on capital is applied at the cantonal /community level.
B) Mixed trading company
A mixed company can carry out limited commercial activities in Switzerland. As a rule, at least 80% of income of commercial activity should come from the sources outside Switzerland (i.e., no more than 20% of income should be received from the sources in Switzerland). There is an additional requirement in many cantons that 80% of the costs should be related to activities carried out abroad.
If the company implements the above requirements, then it may apply for tax status in accordance with the following conditions:
- income from equity participation (including dividends, income from gains and revaluation gains) that meet certain conditions are exempt from taxes;
- other earnings received in Switzerland are taxed at standard rates;
- commercially reasonable costs associated with certain types of income and proceeds are deductible. Losses related to equity participation are counted only in taxable profits from equity participation (i.e., profits not exempted from tax);
- income earned abroad is subject to partial cantonal/ municipal taxation, depending on the size of the company in Switzerland;
- preferential tax rates on capital are applied.
This tax is levied only in cantons once a year. The basis for calculation of capital tax is, in general, net equity of the company (that is, equity capital, paid overcapital, statutory reserves, other reserves, undistributed profits). In some cantons, there is also an offset for cantonal corporate income tax against capital tax. Different tax rates operate in the cantons, which depend on the tax status of the company. In 2009, the rates were in the range from 0.0010 to 0.5288% for the companies taxed in the general procedure, and from 0.0010% to 0.4028% for companies entitled to special tax regime.
Tax benefits are provided for at both federal and cantonal levels in Switzerland. However, it should be noted that federal tax benefits may be granted only in certain regions.
A list of less centralized and economically less developed regions has been established at the federal level by the government that are entitled to provide benefits to commercial entities, including partial or full reduction in corporate income tax rates for a period of up to 10 years. Tax privileges are granted for investment projects that meet certain conditions, for example, when creating new jobs in the sphere of production, acceptance of obligations not to compete with existing enterprises.
The cantons offer a partial or full reduction in the tax rate for tax purposes at the cantonal level for a period of up to 10 years, depending on each case. In particular, benefits may be granted for the creation of a new enterprise or a project to expand an existing enterprise of particular economic significance for a present canton. But first of all, tax incentives for commercial enterprises are usually provided in connection with the creation of new jobs in the region, namely, in most of the cantons, in connection with the creation of 10-20 jobs.
Taxes Deducted at Source
Federal taxes deducted at source are levied on the gross amount of dividends paid by Swiss companies on bonds and similar debt obligations of Swiss issuers as well as on certain payments made by Swiss investment funds and on interest payments on deposits in Swiss bank institutions. Tax at source is also retained from lottery winnings and insurance payments.
The tax at source is a final tax liability for non-residents of Switzerland. Nevertheless, a partial or full refund of tax payments may be granted on the basis of an international agreement on avoidance of double taxation or a bilateral agreement concluded between Switzerland and the country in which the recipient of the income is a resident.
International tax agreements provide for a reduction of the national rate of 35% for dividends. The reduced rate is usually 15% for portfolio investors and 0%, 5%, or 10% for major corporate owners. Some agreements require that income received from Swiss sources be taxed in the country of residence of the recipient; otherwise no tax reduction is provided. With regard to interest payments, most agreements generally allow a tax rate to be reduced to 10%. According to some agreements, a full tax refund is provided.
Switzerland has established the principles for charging VAT in accordance with the Sixth Directive of the EU Member States on the harmonization of legal norms related to VAT (“Sixth EU Value Added Tax Directive”). The current value added tax (VAT) rate is 7.6% (for certain types of goods and services, reduced tax rates apply). Swiss companies trading in goods outside of Switzerland are not subject to registration for VAT in Switzerland. However, they can register as a VAT payer at their own discretion, and thus deduct the incoming tax. Every legal or natural person, organization, partnership or association without a legal entity status, institution, etc., engaged in entrepreneurial activities (receiving income from commercial or professional activities) is subject to taxation if its taxable turnover exceeds 100,000 CHF per year. All branches of the Swiss parent company located in Switzerland represent a single taxpayer in conjunction with a parent company. Each of the permanent representations of a foreign parent company is considered as an independent taxpayer.
If the taxpayer’s income (turnover from taxable supplies of goods and services) is less than 100,000 CHF per year (for sporting societies and non-profit organizations 150,000 CHF), then such a person is exempted from paying the tax. Nevertheless, the taxpayer is entitled to refuse exemption from the tax obligation. After registering with the Federal Tax Administration, the taxpayer receives a six-digit VAT payer number.
Summary: All taxes existing in Switzerland.
- income tax, direct taxes:
- Income tax, profit tax, estimated tax, compensation of military service, state duty.
- Consumer taxes:
- VAT, tobacco excises, beer excises, alcohol excises, excise taxes on petroleum products, automobile tax, customs duties.
- Income tax, property tax, other taxes:
- Income tax, property tax, poll tax, personal tax, household tax, taxes on income and capital, tax on inheritance and gifts, land tax, tax on the transfer of land ownership to other owner, property tax, tax on winnings in the lottery
- Consumer taxes, property tax:
- Motorbike tax, dog tax, tax on amusement institutions, state duty, tax on outdoor advertising, tax on water stations, etc.
- Income tax, property tax, other taxes:
- Income tax, property tax, poll tax, personal tax, household tax, tax on income and capital, tax on inheritance and gifts, land income tax.
- Consumer taxes, property tax:
Tax on dogs, tax on amusement institutions, etc. But despite such a complex tax system in Switzerland, the maximum aggregate taxation does not exceed 25 percent of the profits. Compared to most European Union countries, the USA and even Ukraine, where taxes ranging from 30 to 55 percent, this factor has an attractive property.
The tax system corresponds to the federal structure of Switzerland. In Switzerland, taxation is carried out at three levels: municipal, federal and cantonal. The Federation has 26 cantons and more than 2,700 communities, which are entitled to levy taxes in accordance with their own laws. In order to simplify the procedure, direct taxes for all three levels are usually charged by the cantons or communities, thus, only one tax declaration should be submitted for all three levels of direct taxation.
As tax rates are different in cantons and municipalities, the right choice of canton for company registration is important for tax planning. Combined system with two or three tax rates depending on the amount of profit or profitability of capital is used in 9 cantons. Canton Zug is the most popular among them. Here 3% is charged from the first 100 thousand CHF (81,800 EUR), and 6% - from the profit exceeding this amount. Under the Corporate Income Tax among territorial units using a proportional system, the lowest rate applies to the canton of Lucerne. It is 1.5% of taxable profit. The highest is used in the canton of Geneva (10%). The nominal rate of federal income tax in Switzerland is only 8.5%. However, each canton has its own tax legislation as well as local taxes. If, for example, the company is holding, the real tax rate in the canton can be reduced to 5% for it.
The tax at a rate of 35%, in particular, is subject to payment of dividends of Swiss companies, interest payments on certain bonds, bills or debentures issued by Swiss debtors and interest payments on deposits in Swiss banks. Switzerland does not levy tax at source on license fees and payments between companies provided that the parties are independent.
The standard VAT rate is 8%; however, some goods (eg food, drinks, medicines, etc.) are subject to a reduced rate of 2.5%. Many hotel services are subject to a special VAT rate of 3.8%. All persons engaged in entrepreneurial activities must pay VAT irrespective of profit motivation, legal form, or purpose. However, tax exemption is possible for businesses, if the annual turnover does not exceed 100,000 CHF (81,800 EUR). Switzerland is one of the leading high-performing financial centers in the world. Such services as currency exchange, precious metals trading, underwriting and asset management, along with local banks, are offered by international financial institutions here. Interest rates in comparison with other countries are significantly lower. It has a beneficial effect on the attractiveness of opening business in Switzerland.
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