Residence and domicile
How does an individual become taxable in your jurisdiction?
Individuals domiciled or resident in Switzerland are subject to unlimited taxation in Switzerland.
The concepts of domicile and residence may have different meanings and different translations in respective languages. In the context of the present contribution, an individual is considered domiciled in Switzerland if he or she resides there with the intention of permanent establishment (or when federal law gives him or her a special legal domicile there). The intention is decisive, while the duration of stay, in itself, is not. An individual is considered resident in Switzerland for tax purposes if he or she resides there without any appreciable interruption for (1) at least 30 days in gainful employment or (2) at least 90 days without gainful employment. In the case of residence, the only relevant matter is the duration; the intention is not relevant.
Individuals who are neither domiciled nor resident in Switzerland for tax purposes may nevertheless be subject to tax in Switzerland but in this hypothesis only to limited taxation. This is the case if such individuals:
- are owners, associates or usufructuaries of companies in Switzerland;
- have business establishments in Switzerland;
- are owners of funds in Switzerland or have real or personal rights of enjoyment over them; or
- trade in real estate located in Switzerland or act as intermediaries in these real estate transactions.
Besides the aforementioned internal rules, in the international context it is necessary to consider the provisions of the double taxation agreements concerning income tax concluded by Switzerland (in particular, article 4 thereof and respective tie-breaker rules).
What, if any, taxes apply to an individual’s income?
Income tax is levied at federal, cantonal and communal level at progressive tax rates. While federal tax is the same all over Switzerland, cantonal and communal tax rates vary substantially (and, moreover, communal taxes of the same commune may vary each year). The maximum total tax rate among the various cantons and communes is currently around 40 to 45 per cent and the minimum is around 20 to 25 per cent.
In principle, the same income tax rate applies to all kinds of income.
The general principle is that all kinds of income (employment income, pensions, lease, interests, royalties, dividends, etc) are actually added up in order to assess the taxable income and the applicable tax rate. In case of foreign source income allocated for taxation to a foreign country by virtue of a double taxation agreement, the respective amount is considered in Switzerland for the purpose of assessing the tax rate then applied (only) to the income subject to tax in Switzerland.
The main exceptions to the aforesaid general rule of same taxation for all kinds of income are:
- qualifying dividends (dividends deriving from participation of at least 10 per cent of the capital benefit of a reduced taxation);
- capital payments from provident funds (reduced taxation, with very relevant difference among cantons);
- some specific kinds of income that are expressly exempted from income tax (eg, inheritances, donations, payments by private redeemable insurance policies, reimbursements for moral wrongs, etc); and
- capital gains.
Tax law provides for certain specific deductions for the purpose of computing the total taxable income and specific rules apply for individuals taxed on the basis of the respective bookkeeping.
Finally, a non-Swiss individual who meets the respective requirements may benefit in most cantons from the lump sum taxation. Such requirements vary between EU and non-EU citizens and also, in practice, among the cantons. However, it is fair to indicate that the most relevant requirement, or condition, applicable to any applicant in any canton is the absence of any working activity in Switzerland. In the case of lump sum taxation, income tax is basically computed on the effective yearly expenses of the taxpayer, instead of income. There is, however, a minimum yearly taxable income, which is currently 40,000 Swiss francs (for non-EU citizens, however, in practice to be further discussed); moreover, there are several computations of control performed each year by the Swiss tax authorities to assess the taxable income for the specific tax year.
Besides the aforementioned internal rules, in the international context it is necessary to consider the provisions of the double taxation agreements concerning income tax concluded by Switzerland, which in principle allocate the right to tax to the different states depending on the kind of income and, at the same time, impose upon both to eliminate any double taxation.
What, if any, taxes apply to an individual’s capital gains?
The general principle is that capital gains realised with the sale of private moveable assets are exempted from taxation. There are, however, several exceptions to this general principle, sometimes deriving from express provision of the law and sometimes deriving from (increasingly strict) case law. The main exceptions to exemption are the following:
- where a person buys and sells securities from his or her private portfolio according to extraordinary methodology, intensity, frequency, for example, and he or she may be considered a professional trader (in securities)
- where a person sells shares to a company of which the seller, after the sale, controls at least 50 per cent, for a price higher than the nominal value (transposition);
- where a person sells at least 20 per cent of the capital to a third party and in the following five years the company distributes, with the collaboration of the seller, substance not necessary for the exercise of the company’s business and such substance did not necessary exist at the time of sale and at that time could have been distributed as a dividend under commercial law (indirect partial liquidation); and
- where a person sells shares to the company that issued them (‘own shares’) in view of a capital reduction or the person sells the ‘own shares’ not in view of a capital reduction, but in this case the company does not resell these shareholdings within two to six years (direct liquidation).
In all of these cases, the respective capital gain is considered ordinary income deriving from movable assets and therefore is subject to ordinary taxation.
Capital gains realised with the sale of private immovable assets located in Switzerland are subject to a special taxation levied at cantonal and communal level. Taxable basis and tax rates vary among the cantons, but in general the longer the duration period, the lower the applicable tax rate.
Besides the aforementioned internal rules, in the international context it is necessary to consider the provisions of double taxation agreements concerning income tax concluded by Switzerland (in particular, article 13 thereof).
What, if any, taxes apply if an individual makes lifetime gifts?
Donation tax is levied at cantonal level only.
Taxable basis and tax rates vary among the cantons, but in general tax rates are progressive and increase with the donation’s value and moreover with the receding of kinship between donor and donee (depending on the canton, important donations between third parties may be subject to more than about 40 per cent taxation). Donations to spouses and civil partners are tax free in all cantons; donations to direct descendants and ascendants are tax free in most cantons. Only the cantons of Schwyz and Luzern do not impose any donation tax.
In general, donation tax is due by the donee; the donor is, however, jointly liable with the donee.
Most cantons only have the right to tax if the donor is resident in the canton (but not if only the donee is resident there); there are, however, cantons that may impose in both cases. Besides that, most cantons have the right to tax if the object of the donation is a real estate situation in their territory.
If donor and donee are resident in different cantons, in order to determine which canton has the right to tax, it is necessary to refer to the case law of the Federal Supreme Court (in principle, the right to tax pertains for moveable assets the canton of residence of the donor and for immoveable assets the canton of situation of the real estate).
Besides the aforementioned internal rules, in the international context it is necessary to consider the provisions of the (few) double taxation agreements on donations concluded by Switzerland.
What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?
Inheritance tax is levied at cantonal level only.
With respect to taxable basis, tax rates and the principles of taxation at intercantonal and international level, the rules are the same as for donation taxes. Inheritance transfers to spouses and registered partners are tax free in all cantons; inheritance transfers to direct descendant and ascendant are tax free in most cantons. Only the canton of Schwyz does not impose any inheritance tax.
What, if any, taxes apply to an individual’s real property?
Real estate is always subject to taxation in the canton in which it is located.
Real estate is subject to wealth tax, which is levied at cantonal level only, at progressive tax rates. Capital amounts of mortgages are deductible.
In addition to this, there may be several rather limited taxes on the value of the real estate, levied at cantonal and communal level.
In the event of sale, donation or inheritance of the real estate the respective capital gain is taxed (capital gains, lifetime gifts, inheritance).
Income deriving from a lease of real estate directly owned by individuals resident in Switzerland is subject to ordinary income tax.
If the taxpayer is living in his or her own property, he or she is taxed on the rental income, which is in principle the income that he or she would receive pursuant to arm’s-length principles should he or she rent the property. Passive interests on mortgages and costs are deductible (if the individual resident in Switzerland rents the apartment or the house, he or she cannot deduct the amount of the lease).
Finally, if the individual owns real estate not directly but through a Swiss or foreign vehicle, substantially different rules apply for tax purposes.
Besides the aforementioned internal rules, in the international context it is necessary to consider the provisions of the double taxation agreements concerning income tax concluded by Switzerland (in particular, articles 6, 13 and 22 thereof).
What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?
In principle, the import of goods is subject to ordinary Swiss VAT at 7.7 per cent.
Special rules and lower VAT are applicable to alcoholic beverages, tobacco and certain specific agricultural products.
Imports for personal use are exempted from VAT on imports up to 300 Swiss francs per person and per day.
Moreover, import of goods, irrespective of their value, in the context of personal relocation in Switzerland are exempted from VAT on imports provided that certain specific conditions are met (formal requirements and evidence of prior ownership in the previous country for a specific minimum period of time).
What, if any, other taxes may be particularly relevant to an individual?
Individuals resident in Switzerland are subject to wealth tax, which is levied at cantonal level only, at progressive tax rates. All kinds of assets and goods (bank accounts, participations, real estates, cars, boats, gold, planes, etc) are added up; private debts are in principle deductible. Tax rates vary substantially from one canton to another (and, moreover, communal taxes of the same commune may vary each year). The maximum total tax rate among the various cantons and communes is currently around 1 per cent and the minimum is around 0.1 per cent.
Lump sum taxpayers are also subject to wealth tax but pursuant to quite different principles, which vary among the cantons.
VAT is also due at federal level with a standard tax rate of 7.7 per cent and some exceptions subject to a lower tax rate.
Trusts and other holding vehicles
What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?
Many (cumulative) facts and circumstances are to be considered in relation to taxation of trusts. In particular:
- the kind of trust: revocable, irrevocable, discretionary or fixed interest;
- the residence of the different ‘participants’, namely, the settlor and beneficiaries;
- for individuals resident in Switzerland (ie, settlor and beneficiaries), the kind of taxation: ordinary taxation or lump sum taxation;
- the location of the assets and income of the trust: Swiss or foreign source;
- the kind of assets: moveable or immoveable assets; and
- the practice applied by each tax administration to the combination of the above-mentioned facts and circumstances.
It is to be noted that revocability or irrevocability of a trust is assessed by the tax authorities following their own rules and principles, irrespective of legal aspects.
Assuming that the settlor and beneficiaries are resident in Switzerland and the trust only owns moveable assets (Swiss and non-Swiss), the main principles and rules could be summarised as follows:
- Revocable trusts: these trusts are transparent for tax purposes. Establishment and contribution are therefore non-events for tax purposes. The assets continue to be considered as owned by the settlor. Distributions and liquidations by the trust are considered as performed directly by the settlor. In the case of the death of the settlor, the same rule applies.
- Irrevocable discretionary trusts: taxation at the establishment depends on the canton and on whether the settlor is subject to ordinary taxation or to lump sum. In certain cantons the trust is ignored, (ie, is treated as if revocable); in other cantons, the trust is accepted as such and therefore the contributions of the settlor to the trust are subject to donation tax. At the time of distributions, if the trust is considered as revocable, the consequences are the same as in cases of revocable trusts (see above); if the trust is recognised as such also for tax purposes, the taxation of beneficiaries resident in Switzerland depend on whether they are subject to lump sum taxation or ordinary taxation. If they are subject to lump sum taxation, the respective rules apply (Swiss source or foreign source distribution); if they are subject to ordinary taxation, in principle, they are subject to income tax, but special rules may apply if the object of the distribution is the capital originally contributed to the trust by the settlor. At the time of the settlor’s death, if the trust was transparent, see above (tax rate, however, to be checked). If not transparent, in principle, there is no event for tax purposes.
- Irrevocable fixed interest trusts: in principle, trust is accepted as such and therefore donation tax at the establishment, unless there is exemption. After the establishment, beneficiaries resident in Switzerland and under ordinary taxation taxed as income, unless they can bring evidence that (1) the subject matter of the reimbursement is the capital of the trust contributed by the settlor or (2) the origin of the income was capital gain. At the time of the settlor’s death, in principle, there is no event for tax purposes.
A new legislation on trusts, which also includes certain specific tax provisions, is currently under discussion, but the final text and entry into force is not yet known.
How are charities taxed in your jurisdiction?
Swiss charities (typically foundations) are, in principle, exempted from taxation at federal, cantonal and communal level, provided that they have a truly public or charitable purpose and they meet some additional conditions set forth by the tax authorities.
Donation and inheritances to exempted charities are also exempted from donation and inheritance tax.
Anti-avoidance and anti-abuse provisions
What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?
Switzerland has one of the broadest networks of double taxation agreements worldwide.
In the international context, most anti-abuse provisions concern the rights of individuals resident in Switzerland holding participations in foreign entities or individuals resident abroad holding participations in Swiss entities to apply double taxation agreements concluded by Switzerland and therefore reduce or eliminate the respective withholding tax. In this respect, legislation, case law and international rules tend to mainly focus on the concepts of ‘beneficial owner’, and the ‘abuse of law’ (or the like). Tests like the limitation on benefit or principal purpose test are applied. The idea is that an individual is only entitled to apply double taxation agreements if he or she is the real beneficial owner of the entity, the entity was not established only or mainly for tax purposes and, moreover, the same entity cannot be considered as a conduit company or the like.
In addition to this, Swiss courts widely apply concepts like the abuse of law, tax evasion and economic interpretation of the facts in almost all areas of taxation.