Switzerland remains a popular destination, and its tax regime is undoubtedly one of the attractions for internationally mobile individuals.
Foreign citizens residing in Switzerland (and Swiss citizens who return to take up residence after a ten-year period of absence), who do not pursue gainful employment or self-employment in the country, have the option of being taxed according to their living expenses – known as lump sum taxation or ‘forfait’ taxation. Employment in a foreign country does not preclude this option, as long as the individual’s habitual residence, for tax purposes, is in Switzerland.
Lump sum taxation replaces the ordinary basis of Swiss tax, which applies to total worldwide income and assets. Instead, the taxpayer’s cost of living is used as the basis for the tax calculation. The amount of living expenses assessed in practice varies from canton to canton and is normally negotiated with the relevant tax authorities. In all cases, rental costs plus a lump sum allowance for general living expenses form the basis of the calculation.
The following income must be reported to Swiss tax authorities on an annual basis:
The Swiss tax authorities then prepare a comparative ‘control calculation’ by reference to these sources of income. The tax calculation based on the cost of living may not be lower than the calculation based on the aforementioned income.
Taxpayers subject to lump sum taxation also have the right of recourse to any double tax treaties that Switzerland has negotiated with other countries. However, a number of such treaties (including with Germa ny, Italy and the USA, among others) stipulate that all income from sources in these countries must be properly declared on the Swiss tax declaration and subject to tax, in order to qualify for treaty benefits. Insofar as the taxpayer decides to declare fo reign source income, for example, in order to reclaim foreign withholding tax under the terms of the applicable double taxation treaty, this income will be included in the above mentioned control calculation.
Various cantons in Switzerland have already abolished the lump sum tax or raised the minimum amount of tax payable in recent years. For example, lump sum taxation is no longer possible in the cantons of Zurich, Schaffhausen, Appenzell Ausserrhoden, Basel-Stadt and Basel-Land.
Swiss voters went to the polls to decide on the fate of the lump sum tax at the end of 2014. At the time, approximately 60% of voters decided in favour of maintaining the system.
Revisions to lump sum taxation entered into law with effect from 1 January 2016. They stipulate that a minimum of seven times the rental costs or imputed rental value must now be applied as the tax base for the calculation (at both the cantonal and federal levels), with a minimum value of CHF 400,000. The cantons are also obliged to determine a minimum value at their own discretion.
Despite the recent changes, Switzerland’s forfait regime looks set to stay and will continue to enhance the fiscal attractions of Swiss residency.
For more information, contact:
ABT Treuhandgesellschaft AG, Switzerland
T: +41 (0)44 711 90 90
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