Detailing Switzerland’s Tax System

The Swiss tax system is regarded as one of the finest in the world. Residents of Switzerland are taxed on their international income. Non-residents are only taxed on domestic income in Switzerland. Due to its advantageous tax policy, Switzerland attracts many international merchants and investors.

Taxation of Corporations in Switzerland

• Tax on Corporation Profits

The corporate tax system of Switzerland taxes corporations, proprietors, and shareholders separately. All organizations, including non-profits, must pay taxes on earnings and capital—Switzerland taxes companies with permanent establishments abroad or legal presences. A company has a point of effective management (POEM) in Switzerland if its senior executives make decisions there. Swiss-domiciled corporations are taxed on their worldwide income except for profits from international subsidiaries and foreign immovable property. Non-Swiss corporations with a permanent establishment, branch office, or other immovable property in Switzerland must pay corporate income tax. The corporate income tax rate on profits after taxes is 8.5%. The corporate income tax deduction reduces the tax rate to 7.83%.

• Capital accumulation tax

Switzerland taxes all sales profits as conventional income, irrespective of the age of the asset. In this sense, there is no “capital gains tax.” Tax gains may be reassessed if assets are sold to a related party for less than market value. Regardless of domicile, participation relief applies to progress on selling at least 10% of a business’s stock held for more than a year. Participation relief or exemption may apply to dividends from eligible participation. For a participation to be considered “qualifying,” the receiving company must own at least 10 percent of the paying company’s capital, or its value must exceed 1 million Swiss Francs.

• Reduced Overseas Taxes

Dividends from qualified participations are exempt from taxation, whereas offshore income is subject to taxation. The applicable tax treaty taxes all overseas income, excluding bonuses, interest, and royalties withheld, and does not provide a credit for foreign taxes paid.

• Tax Obligations for Corporations

The Swiss fiscal year corresponds to the calendar. Each business must file separate federal tax returns, but state and local tax returns can be combined. State governments always establish deadlines for filing taxes. Incomplete or late tax returns incur penalties. Tax authorities frequently issue advance tax rulings to businesses.

Taxation of Individuals in Switzerland

Swiss taxes apply when a person plans to reside in Switzerland permanently, stays for more than 30 days to trade or conduct business, or lasts for more than 90 days for no reason. Residents of Switzerland must pay taxes on their foreign income. Profits from international activities, foreign branches, and foreign real estate are not taxed in the native nation. Switzerland taxes non-residents’ salaries, company gains, and real estate sales.

Work and investment income are taxed. Swiss capital income is taxed at a lower rate than international capital income due to the non-refundability of foreign withholding tax. Switzerland’s progressive income tax rate ranges from 0.77 percent for individuals to 11.5 percent for couples filing jointly. Individuals and couples with taxable incomes of less than CHF 17,800 and CHF 30,800, respectively, are exempt from taxation.

• Monetary returns on investments

People pay taxes on capital gains and appreciation when they sell or dispose of assets due to the increase in a business’s tangible and intangible asset value. Payments on the transfer of stocks or land are exempt from taxation. State taxes do not apply to capital gains realized from the sale of non-business assets.

• Deductions and exemptions

Before calculating taxable income, one may deduct loan interest, spousal support, and charitable contributions. The taxpayer, spouse and dependent children may deduct personal allowances from their taxable income.

• Reduced Overseas Taxes

Except for dividends, all foreign income is subject to taxation under Swiss law. Except for non-refundable withholding taxes on dividends, interest, and royalties, no credit is given for foreign taxes paid according to a valid tax treaty.

• Tax on Taxpayer Filing

Couples in Switzerland pay both federal and cantonal taxes jointly, but cantonal filing deadlines vary. Employers in Switzerland withhold state income tax from temporary foreign employees and remit it on their behalf. Unfiled or late tax returns incur penalties. Individuals can request advance tax rulings.

Affirmed Taxes

Both inhabitants and non-residents are subject to a 35% dividend withholding tax. Residents are eligible for a withholding tax refund. Under the Switzerland-EU Agreement, cross-border dividend payments between related EU enterprises in EU member states are exempt from withholding tax if the capital involvement is at least 25%. Capital contribution reserves and nominal share capital are not subject to withholding tax. Interest, royalties, technical service fees, and branch office payments are exempt from withholding tax obligations. Investments eligible under Swiss tax treaties can save investors’ money.

Anti- Avoidance Rules

The tax avoidance regulations in Switzerland are permissive. Switzerland does not have a limit on interest deductions, restrictions on CFCs, or hybrid or economic substance rules. However, Switzerland adheres to specific regulations, including:

• Expenses for transfer

Even though Switzerland lacks transfer pricing legislation, it adheres to the OECD’s transfer pricing recommendations, which mandate arm’s-length pricing for all related party transactions involving Swiss firms.

• Preventing Every Tax Avoidance

Switzerland lacks a GAAR statute, but its highest court’s decisions have spawned an avoidance theory. All Swiss courts and tax officials must adhere to laws created by judges.

The conclusion

Swiss taxes are frequently business-friendly. Switzerland’s primary revenue source is its corporate income tax. Switzerland’s economy is driven by its flexible tax system and tourism. Despite its tax haven status, Switzerland attracts multinational corporations and affluent individuals seeking tax reductions.