Switzerland is a very popular country with expats from around the world who aren’t just looking for job opportunities and a low tax regime, but who are also wanting to enjoy a relaxed lifestyle.
It would therefore be helpful to give someone thinking of moving to Switzerland an idea of the tax rate they are likely to pay on their income but, unfortunately, the tax system in Switzerland is a complex one.There are 2,300 municipalities, along with 26 cantons (which are the local government regions), and each one has its own tax-raising powers for residents.
As if that is not complex enough, the three national churches – Protestant, Roman Catholic and Christian Catholic – can also levy on their members a church tax in most cantons.
It’s important to appreciate that the Swiss authorities only require one tax return per household so the family is taxed as an economic unit rather than taxing each family member individually. This means that the wealth and income of the spouse as well as the wealth and income of the underage children are combined for the purpose of a tax return which is submitted by the family member who has parental authority.
Permanent and temporary residents
Essentially, anyone who is a permanent or temporary resident of Switzerland is subject to tax, and this extends to the Swiss resident legal entities. Under the tax system, a residence is defined as being the place where someone lives and has intention of settling permanently, so that Switzerland becomes the centre of their business and personal interests.
This means that the amount of tax an expat will pay will depends on where they live, though there is a VAT rate of just 8% on most goods and services, with some items such as newspapers and foodstuffs having a 2.5% VAT rate.
For example, for an expat who is married and lives with their spouse and two children in Zug and has a joint income for the tax year of 2015 of CHF 150,000 then their tax liability would have been CHF 7,557. If the same couple lived in Zurich, a popular destination for expats, their tax bill would be CHF 15,350.
The tax bill takes into account the demand from the municipalities as well as their church tax.
For a married couple with two children who earned less than CHF 100,000, their tax bill in Zug would have been CHF 2,033 but in Zurich it would have been CHF 5,494.
To put this into further context, an expat couple with two children with a household income of CHF 1 million would be paying CHF 213,730 in Zug and CHF 344,252 in Zurich.
There is a very helpful tax calculator on the website of the Swiss federal tax authority to help expats appreciate where their tax money is going.
Tightened regulations
However, the Swiss tax authorities have tightened up on some regulations, particularly in defining what an expat employee is, since they are able to make deductions that Swiss nationals cannot make from their taxable income.
Since January 2016, an expat employee is more clearly defined and they must have a home country contract and a letter of assignment from an employer to claim their deductions. Those expats with a limited local contract will find it more difficult to claim allowances and deductions.
For instance, expats can claim their accommodation costs while living in Switzerland but only if they keep their overseas home and it is permanently available for their use – which would rule out anyone renting out their home while they work and live in Switzerland, for instance.
It’s also not possible now for an expat who is tax resident abroad and who commutes into Switzerland to claim the allowances for school fees and moving expenses, although they can claim for the cost of travel.
There’s also a system that caters for expats who have retired to Switzerland or who do not have ‘gainful employment’; they can opt to be taxed on their expenditure rather than income. This is a simplified process for assessment and leads to a ‘lump sum tax’, but this route is not available should the expat enter ‘gainful employment’ or become a Swiss citizen.
However, it has proved to be unpopular with Swiss taxpayers since the tax being paid was minimal and it is no longer allowed in five cantons, while other cantons have brought in stiffer rules for eligibility.
It should also be noted that the Swiss tax year corresponds to the calendar year, so their year-end for tax purposes is 31 December. Most cantons will allow a tax return to be filed within the next three months of the tax period ending; it’s also possible to get a free extension to the deadline but any extra ones will cost money.
To be considered as a resident of Switzerland for taxation, an expat must live in the country for more than 90 days, of which 30 of these days are defined as working days, even if they do not have a job.
As mentioned previously, the cantons can levy a supplementary tax on inheritance and a gift tax – but this does not cover an expat’s direct descendants or their spouse. The cantons can also tax the proceeds of a property sale along with other taxes.
This could be crucial since high-earning expats who are working and living in Switzerland and who earn more than CHF 120,000 a year – or CHF 500,000 in Geneva – must detail all of their worldwide assets and income on their tax return.
Expats working in Switzerland
Most expats working in Switzerland, that is those without a ‘C permit’, will have an amount deducted from their salary every month by their employer and these will be at rates lower than those for assessed income taxes since they are on gross income.
These deductions as well as allowances are standard and take into account the expat’s earnings since the more they earn, the more they will pay tax. Other considerations include whether they are single or married, have children or will be subject to a church tax.
Again, the withheld money should cover most taxes that the expat will incur. Those who have tax deducted from their salary but are not required to file a tax return should submit a claim for the withheld tax. This may lead to some tax being refunded.
However, the claim form will request a range of information including the cost of rent, health costs, support and alimony payments, travel expenses, donations and childcare costs, among a long list of other things.
Again, the expat will be able to file a claim in most cantons, though some may require a full tax return to be completed so the deductions can be made. Also, there is a fixed deadline for most cantons – which cannot be extended – for this form to be submitted: it must be sent by 31 March of the next year.
Expats who earn less than CHF 120,000 a year but who have other sources of income and assets, for instance rental income from a buy to let property in the UK, must also file a tax return. This can be a confusing area since not every canton will require it but others will, so assets and extra income must be assessed accurately for tax purposes.
‘C permit’ for permanent residence
Expats who have the ‘C permit’ for permanent residence or who have married a Swiss citizen must also file a tax return every year. Some cantons will also request details of the expat’s ownership of any real estate in their jurisdiction.
Any self-employed person in Switzerland or any expats with a foreign employer must also file a tax return.
Failure to file a tax return on time in Switzerland may lead to an expat being subject to default taxation, which means the authorities will assess the expat’s tax bill as a ‘reasonable estimate’. In most cases, this tax bill will probably be much higher than the actual tax due since the tax base the authorities use will be for higher earners.
Should an expat find themselves in this situation it is crucial that they lodge an appeal within 30 days (though in some cantons it is just 20 days) because they will not be allowed to do so after this point. They may also be liable for the tax due as well as the potential for non-filing penalties.
How to calculate taxable income in Switzerland
Swiss tax authorities calculate an expat’s taxable wealth and income on a number of criteria including their income from employment as well as self-employment.
They also take into account compensatory income which will include pensions and annuities as well as any secondary come such as tips and allowances. Interest received from bank accounts and income from real estate will also need to be declared.
It should also be appreciated that the tax return will demand the expat to reveal the market value of all the properties they own, and this issue will cover assets as well as rights that have a monetary value, and these will be subjected to a wealth tax – though for tax purposes it’s just the expat’s net wealth which is used for any allowances and deductions.
Again, the value and range of social deductions and personal allowances that can be made against wealth tax will vary between cantons.
However, it’s also possible to have expenses deducted from an expat’s gross income and other deductions too including those for insurance premiums, pension plan contributions, social security payments and interest payments on a private debt.
There are also deductions available for single-parent families and married couples as well as for dependents and children.
Allowable deductions
There are some deductions that an expat living in Switzerland can make. These include their accommodation costs but these must be reasonable, and they must have a permanent residence outside of Switzerland.
They can also claim for their moving costs to the country and then back home, as well as claiming travel expenses from the country for family members at the beginning and ending of their work assignment.
It’s also possible to claim school expenses in a foreign language private school, but only if there is no government-run school that will offer adequate education.
To confuse matters further, expats living in some cantons can claim a monthly allowance of CHF 1,500 every month for their deductions rather than claiming for individual items. However, they cannot claim any of the allowance if the home they own in their home country is rented out, since this property must be available for them to live in at any point in the year.
Federal withholding tax
Expats also need to be aware of a federal withholding tax of 35% of other income including dividend payments, lottery prizes and interest on bank accounts. This means they will receive their income net and then must request the balance be refunded or deduct the amount from their tax return.
There’s also stamp duty to be paid, which is a federal tax on some commercial transactions and covers things like shares and bonds as well as a transfer tax which is paid on some securities by qualified traders. There’s also a tax of between 2.5% and 5% on some insurance premiums.
Expats should also appreciate that any money they win on pools or lotteries worth more than CHF 1,000 will also need to be declared as taxable income.
As mentioned previously, the cantons can bring in their own forms of income and corporate tax including a levy for inheritance tax, a gift tax and the profits made on the sale of property. Some cantons also impose a tax on vehicles, the ownership of dogs, lotteries, public entertainment events and overnight stays in some tourist destinations.
Essentially, for an expat who is looking to live and work in Switzerland it is crucial that they seek professional financial advice from an adviser who has experience of taxes where the expat is living and also of their home country, since they may be liable to a double taxation treaty and may be able to deduct their Swiss taxes from their home country’s tax regime.
