Tax Guide for US Expats Living and Working in Switzerland
Who Is Liable For Income Taxes in Switzerland
Switzerland’s complex tax structure has been shaped by the country’s three levels of government, which are federal, cantonal and municipal. The following two distinct taxes are levied:
- Federal taxes
- Cantonal and municipal taxes
Swiss federal tax law is uniform throughout Switzerland, but each of the 26 cantons has a separate law for cantonal taxes. Municipal taxes are levied as a multiple of cantonal taxes. Because tax laws and tax rates vary widely among cantons and among municipalities, the choice of residence is an important element of tax planning.
No average tax rates can be calculated because of the multilayered tax system. Taxes are calculated based on specific figures for specific cantons and municipalities. The maximum overall rate of federal income tax is 11.5%. The various cantonal and municipal taxes are also levied at progressive rates, with a maximum combined cantonal and municipal rate of approximately 35%. In addition, cantonal and municipal net wealth taxes are levied.
The federal Supreme Court and tax administration have developed rules for allocating tax liability among the cantons to avoid double taxation.
Federal taxable income. Individuals establishing tax residence in Switzerland are assessed for federal income tax purposes on a current-year basis.
Special rules apply for the first year a taxpayer is subject to Swiss tax. In addition, the basis of assessment may be altered if certain extraordinary events substantially change an individual’s financial situation (for example, change of business or profession, or divorce or legal separation).
In general, taxable income for federal tax purposes consists of all types of income earned by a resident individual, including the following:
- Remuneration from an employer (base salary, bonus, stock options, home leave, and payment of rent, taxes, school fees and utilities)
- Self-employment or business income
- Pension payments and compensation for loss of work or health
- Income from private investments (including interest and dividends)
- Income from real estate
Although income derived from either a fixed place of business or a permanent establishment located abroad, as well as income de rived from real estate located abroad, are exempt from taxation, this income must be properly recorded on a Swiss tax return for the determination of the tax rate (exemption with progression).
Cantonal and community taxable income. At the cantonal level, tax is also assessed on a current-year basis. Taxable income for cantonal and community tax purposes is calculated in basically the same way as taxable income for federal taxes.
An individual who is resident or domiciled in Switzerland is subject to federal, cantonal and municipal taxes on worldwide income, except income derived from real estate located abroad and income from either a fixed place of business or a permanent establishment located abroad. Individuals are subject to Swiss income tax and net wealth tax (see Section B) from their first day of residency until they officially leave the country.
Nonresidents are subject to tax on income from the following Swiss sources:
- Interest in Swiss real estate
- Interest in a Swiss partnership or sole proprietorship
- Trade or business attributable to a Swiss permanent establishment or fixed place of business
- Professional practice in Switzerland
- Trade and agency of real estate located in Switzerland
- Services performed in Switzerland (with exceptions)
- Interest income derived from a mortgage secured by Swiss real estate
- Services rendered as a director or officer of a Swiss corporation (with exceptions)
- Payments by Swiss pension funds
Individuals are considered resident in Switzerland if they take up legal residence in Switzerland or if they intend to stay there for a certain period (usually longer than one month), as well as if they work in Switzerland for a period exceeding 30 days.
Income subject to tax. The taxation of various types of income is described below.
Employment income. In general, all compensation provided by an employer is considered employment income and is included in the employee’s overall taxable income. However, if properly documented, certain reimbursements for necessary business-related expenses are not subject to tax.
Both residents and nonresidents who remain in Switzerland for employment purposes are subject to tax on employment income. In general, residents are not subject to withholding tax on employment income. Residents with certain types of work permits, however, and most nonresidents are subject to withholding tax on employment income.
Self-employment and business income. Self-employment and business income is included in overall taxable income. A partnership is not taxed as a separate entity; rather, the respective shares of partnership profit are included in the taxable income of each partner. All necessary expenses incurred in operating a business or profession are tax-deductible. Self-employed individuals may carry forward business losses if these losses cannot be offset against other taxable income. No carrybacks are allowed for self-employed individuals.
Directors’ fees. For residents, directors’ fees received from a Swiss company are included in the taxpayer’s overall taxable income. Directors’ fees remitted from a foreign country are generally included in a resident’s overall taxable income, unless an applicable double tax treaty provides otherwise. For nonresidents, directors’ fees received from a Swiss company are subject to withholding tax (at a rate of 25% in the Canton of Zurich and 20% in the Canton of Geneva) and social security contributions (unless the terms of an applicable totalization agreement specify otherwise).
Investment income. A withholding tax of 35% is levied on dividends; on interest from publicly offered bonds, from debentures and from other instruments of indebtedness issued by Swiss residents; and on bank interest, but not on normal loans. For Swiss residents, withholding tax is fully recoverable. For nonresidents, withholding tax is a final tax, unless the terms of an applicable double tax treaty specify otherwise.
Dividends received are taxed as ordinary income. However, if the recipient of a dividend owns at least 10% of the share capital of the payer company, only 60% of the dividend is taxable for the purpose of the federal income tax. Some cantons have adopted similar rules.
Rental income and royalties, as well as licensing, management and technical assistance fees, are not subject to withholding tax. With certain exceptions, they are included in taxable income and are taxed by the federal government, cantons and municipalities.
Taxation of employer-provided stock options. In Switzerland, employer-provided stock options are, in principle, taxed at grant. Independent professionals must determine the fair market value for employers issuing the stock options. If the options granted are subject to restrictions (for example, the option may not be exercised or sold during a certain period), the fair market value of the option is discounted for tax purposes according to a special formula (the share price is discounted in the option pricing mode). The income derived from the grant of the options is taxed together with other income at the ordinary tax rates. If the value of the option cannot be evaluated at the time of grant, the option is taxed at the time of exercise on the difference between the fair market value of the shares and the strike price. This value is also relevant for net wealth tax. In addition, social taxes are imposed on income derived from the exercise of stock options.
Under a directive issued in 2003, in most cases taxation is deferred until the optionee exercises the option. However, not all of the cantonal authorities apply this practice. The cantons of western Switzerland maintain the principle of taxation at grant, but allow a deferral of taxation until departure or exercise, subject to certain conditions.
For options that are taxed at exercise, the taxable amount is the fair market value of the share less the exercise price.
A federal law that might come into force (probably in January 2012) will affect the cantonal practice. It will be binding for all Swiss cantons.
In all cases, the subsequent sale of the shares triggers no further tax consequences because private capital gains are exempt from tax in Switzerland.
Capital gains and losses. Private capital gains derived from sales of movable assets are not taxed at the federal level or at the cantonal level. Capital gains derived from sales of immovable assets are subject to a separate tax in all cantons. For federal tax purposes, a gain or loss from a sale or exchange of business assets is treated as ordinary income or an expense item.
For cantonal tax purposes, the treatment is the same, except that some cantons levy a separate tax on gains from sales or exchanges of immovable assets.
Deductions
Deductible expenses. Necessary expenses incurred in connection with employment income, maintenance and operating costs of real estate, any kind of debt interest, contributions to qualified pension plans, Swiss or foreign compulsory social security premiums, and other specific items are deductible from taxable income. For some expenses, tax-deductible amounts are standardized (insurance premiums, education costs and lunch expenses). These rules apply for federal as well as cantonal and municipal taxes. However, other items may be treated differently among the cantons.
For expatriates, an annual deduction of CHF 18,000 is allowed, which is intended to cover an expatriate’s housing fees and other expenses related to being an expatriate. Expenses in excess of CHF 18,000 may be deductible if they can be proven. Other typical expenses of an expatriate, including moving expenses and tuition, are also deductible.
Personal deductions and allowances. No specific personal deductions and allowances are granted to individual taxpayers, except some minor standardized deductions granted in most cantons (for example, deductions for children).
Business deductions. Nonresidents may deduct necessary expenses incurred in operating a business or profession and in the maintenance and operation of rental property.
Lump-sum taxation
Federal income tax. Resident aliens and Swiss citizens who were resident or domiciled abroad for the past 10 years may qualify for a special tax concession called lump-sum taxation if they do not engage in any employment or carry on a business in Switzerland. Activities outside Switzerland are not taken into consideration. The lump-sum tax is imposed on income imputed from the living expenses of taxpayers and their families (for example, by a multiple of rental value). The amount of lump-sum tax may not be less than the tax that would be payable on the sum of the following items:
- Income from Swiss real property
- Income from Swiss investments
- Income from any other property located in Switzerland
- Income from Swiss-source patents, copyrights and similar property rights
- Pensions or annuities paid from Swiss sources
- Foreign income, if treaty exemption is claimed
Cantonal income taxes. Several cantons allow a nonworking resident to elect lump-sum taxation instead of regular income tax.
In certain cantons, lump-sum taxation is granted for only a limited number of years. In many cantons, eligibility for lump-sum taxation and the method of calculating the tax payable are negotiated individually with the tax authorities rather than statutorily determined.
Rates. The maximum overall federal tax rate is 11.5%. Maximum cantonal and municipal tax rates range from approximately 14% to 35%.
Cantonal tax rates vary considerably from one canton to another, although all rates are progressive. The tax rate consists of a base rate multiplied by a coefficient, which may change from year to year. The municipal tax rate is usually a percentage of the cantonal rate. Therefore, the overall rate varies within a canton, depending on the municipality where a taxpayer resides. In most cantons, a church tax is also levied as a percentage of the cantonal rate for taxpayers who are members of an official Swiss church community.
B. Other taxes
Net wealth tax. No net wealth tax is imposed at the federal level. All cantons and municipalities levy net wealth tax on worldwide assets, with the exception of real estate, a fixed place of business, or a permanent establishment located abroad. Tax rates are reasonably low and vary widely, depending on the canton and municipality where the taxpayer resides.
Inheritance and gift taxes
Cantonal taxes. No inheritance or gift taxes are imposed at the federal level. Almost all cantons levy separate inheritance and gift taxes. Rates vary widely depending on the canton where the deceased or donor is domiciled.
In most cantons, resident foreigners are subject to inheritance tax and gift tax on worldwide assets, except for real estate located abroad. Nonresidents are subject to inheritance tax and to gift tax on real estate located in Switzerland only.
Treaties. To prevent double taxation, Switzerland has entered into inheritance tax treaties with the following countries.
Austria
Germany
Sweden
Denmark
Netherlands
United Kingdom
Finland
Norway
United States
France
C. Social security
Swiss retirement benefits are derived from the following sources:
- The mandatory social security system (old-age and survivors’ insurance). Pensions are based on premiums paid and on the number of years worked. Benefits generally satisfy minimum living requirements.
- Company pension plans. Pension plans must be segregated from the company. These benefit plans complement the benefits of the Swiss social security program and are compulsory for employees subject to the old-age and survivors’ insurance.
- Individual savings.
Employees. The Swiss social security contribution rate is 10.3% of total salary, with no ceiling; the employer and employee each pay 5.15%. The employee’s share is withheld monthly by the employer. In addition, contributions at a rate of 2.2% on annual salary up to CHF 126,000, and 1% on annual salary from CHF 126,001 up to CHF 315,000 must be made to the unemployment insurance fund. This cost is also divided equally between the employer and employee.
In general, employees who pay into the Swiss social security system must contribute to a pension plan. The employer must make contributions of at least 50% of the total contribution.
Contributions to both schemes are fully tax-deductible. Furthermore, contributions to special types of individual savings schemes are tax-deductible, up to a certain amount.
Self-employed individuals. Self-employed individuals must make social security contributions at a maximum rate of 9.7% of their income from their business or profession. The 9.7% rate also applies to partnership profits. Self-employed persons are not required to be members of a pension plan.
Nonresidents. Nonresidents who carry on a business activity within Switzerland (including serving on the board of a Swiss company) are subject to Swiss social security contributions on income derived from that activity, unless a social security treaty provides otherwise.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, Switzerland has entered into totalization agreements, which usually apply for a period of two years but may extend to five years, with the following jurisdictions.
Australia
Hungary
Poland
Austria
Iceland
Portugal
Belgium
India
Quebec
Bulgaria
Ireland
Romania
Canada
Israel
San Marino
Chile
Italy
Slovak Republic
Croatia
Latvia
Slovenia
Cyprus
Liechtenstein
Spain
Czech Republic
Lithuania
Sweden
Denmark
Luxembourg
Turkey
Estonia
Macedonia
United Kingdom
Finland
Malta
United States
France
Netherlands
Yugoslavia
Germany
Norway (former)*
Greece
Philippines
* This treaty applies to Bosnia-Herzegovina, Montenegro and Serbia.
Under these agreements, if certain conditions are met, exemption from the Swiss social security system is available for a certain period if employees continue to contribute to their home country social security systems.
Under an agreement between Switzerland and the European Union (EU), Switzerland applies European Regulation 1408/71, which overrules the bilateral totalization agreements listed above with respect to Swiss and EU nationals.
New Regulation (EC) No. 883/2004 of the European Parliament and the Council of 29 April 2004 on the coordination of social security schemes is expected to be applied, most probably, from 1 January 2012. This may have a significant impact on the social security situation of mobile employees.
Double tax relief and tax treaties
Income is allocated in accordance with rules developed by the federal Supreme court on intercantonal tax allocation, unless an applicable double tax treaty provides otherwise. In addition, certain cantonal rules may influence international income allocation. However, treaty law always overrules Swiss domestic law.
According to Swiss domestic law and treaty regulations, foreign-source income is excluded from taxable income if it is derived from a permanent establishment located in a foreign country (as defined by treaty law or, in the absence of an applicable double tax treaty, by Swiss domestic law). Also excluded is income derived from real estate located abroad. In addition, certain types of income, including directors’ fees, special pensions and partnership profits, may be exempt in Switzerland under an applicable treaty.
In general, all other foreign-source income is taxable in Switzerland. In the absence of a treaty, foreign-source income is taxed net of any foreign income taxes or withholding taxes imposed on such income by the source country.
Most of Switzerland’s income tax treaties follow the draft model of the Organization for Economic Cooperation and Development (OECD). Switzerland generally applies the exemption-with-progression method rather than the tax-credit method for qualified foreign-source income. A limited tax credit is granted, however, for remaining net foreign withholding taxes imposed on dividends, interest and royalties from the following treaty countries. The credit may not exceed Swiss tax due on the relevant income.
Switzerland has entered into double tax treaties with the following countries.
Albania
Iceland
Pakistan
Algeria
India
Philippines
Argentina
Indonesia
Poland
Armenia
Iran
Portugal
Australia
Ireland
Qatar
Austria
Israel
Romania
Azerbaijan
Italy
Russian Federation
Bangladesh
Jamaica
Barbados
Japan
Serbia
Belarus
Kazakhstan
Singapore
Belgium
Korea (South)
Slovak Republic
Bulgaria
Kuwait
Slovenia
Canada
Kyrgyzstan
South Africa
Chile
Latvia
Spain
China
Liechtenstein
Sri Lanka
Côte d’Ivoire
Lithuania
Sweden
Croatia
Luxembourg
Thailand
Czech Republic
Macedonia
Trinidad
Denmark
Malawi
Tobago
Ecuador
Malaysia
Tunisia
Egypt
Mexico
Ukraine
Estonia
Moldova
United Kingdom
Finland
Mongolia
United States
France
Montenegro
Uzbekistan
Germany
Morocco
Venezuela
Ghana
Netherlands
Vietnam
Greece
New Zealand
Zambia
Hungary
Norway
Zimbabwe
To learn more about the history, culture, economy and other information about Switzerland
We have been preparing US income tax returns for US Citizens and permanent residents living in Switzerland for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Switzerland and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Switzerland.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email