10 facts about taxation in Switzerland that every Swiss resident absolutely must know

The end of the fiscal year is setting almost everyone in turmoil. Tax returns follow one another at a breakneck pace. Whether you are an employee, employer, retiree or even self-employed, any strategy is oriented towards optimizing your tax situation.        

However, Swiss tax laws are complicated and tax optimization is free help from a tax advisor is an arduous mission. It is even more difficult for foreigners who have just arrived in the country. For those of you considering living in Switzerland, knowing the rules of the tax system will allow you to develop a thoughtful financial strategy.

Many factors come into play when determining income tax in Switzerland such as income, assets, your marital status, etc...The tax advisors at Impact Financial Engineering in Geneva are here to enlighten you on the Swiss tax system by answering a few key questions.    

 1. Who pays taxes in Switzerland?    

All residents of Switzerland are subject to Swiss income tax. For those who do not live in Switzerland but work there, Swiss tax law only taxes income from Switzerland (with a few exceptions such as certain cross-border workers.) Those who live in Switzerland must declare their overall income and are therefore liable for tax on all income from abroad (subject to some particularities and exceptions, particularly in the real estate sector).

 2. How are taxes collected?  

Switzerland being a federal state, taxation is done at three levels: federal, cantonal and municipal. Tax regulations differ from one canton to another. That said, in practice, a single tax declaration is sufficient (most often cantonal). Taxation at source remains reserved for residents with a B permit and for cross-border workers in particular.

 3. Is taxation uniform throughout Switzerland?  

Significant tax disparities exist at the cantonal and municipal level and depend on your income and your situation (border or resident). The disparities come from the fact that the 26 cantons have their own tax legislation. Although each canton has a different tax rate, the income tax rate in Switzerland can reach more than 40%.  

 4. Who decides how much taxes to pay?   

Citizens decide for themselves the amount of taxes to be levied (laws passed). The State only decides on obligations – including taxes provided for by the Constitution and regulations. Furthermore, any constitutional modification (federal or cantonal) is subject to popular vote. The recent reform of the AVS is a good example. To find out more, read our latest article. In most cases, the people must also decide when determining tax rates, scales and coefficients.  

 5. How does the Swiss tax system work?  

There are three main types of direct debits:    

• Direct which represent income and wealth tax, ownership and expenditure in the case of domestic animals as well as corporate tax;  
• Indirect or Value Added Tax (VAT) which means consumption tax; And  
• Social security contributions which consist of health/accident coverage, maternity/family allowances, welfare and unemployment insurance.  

6. What does the term “taxable income” mean? 

Taxable income is the amount from which your tax will be calculated. To obtain your taxable income in Switzerland, you must subtract deductions from your gross income. Gross income represents all income received by a tax household, i.e. salaries, pensions, real estate income, lottery winnings, etc.

 7. What are the deductible expenses?   

Swiss law offers many ways to save your taxes. Here is a small list.    

• Pension contributions: Tax deductions for payments into the 2nd and 3rd pillars –essential elements of adequate retirement savings– are one of the most effective ways. Redemptions in the pension fund (2^e pillar) employees are deductible from taxable income. Investments in a 3A of the 3rd pillar can reduce your tax burden, as the payments are fully deductible from taxable income. The amounts differ for people affiliated to a pension fund and for those who are not, such as the self-employed.

If you want to know how to choose your right one pillar 3A, read our recent article, or contact our financial advisors.  

• Old age and survivors insurance (AVS) : Contributions are also deducted from taxes if paid within five years. A possible shortcoming can be redeemed on the mancos of the last five years.
• Sickness costs: Deductions for hospitalization or medication costs when they are not covered by health insurance.  
•  Costs related to your professional activity (transport/meals)  
•  Donations  
•  Alimony paid  
•  Childcare costs for employees at home  

In addition, the ordinary scale allows more deductions, this list being not exhaustive.  

 8. What is the tax regime for foreigners?   

Foreigners in Switzerland are subject to different tax systems. All foreigners pay tax at source but may be subject to different income tax scales. All cantons set a salary limit which determines the type of scale to which you will be subject, the limit being 120,000 CHF per year. Below this limit, you are taxed at source. Beyond that, you are subject to the ordinary scale. Once they have a settlement permit (C permit), any foreigner domiciled in Switzerland becomes an ordinary taxpayer.

9. How does taxation work for couples?

For married couples, the tax scale is applied to the spouses' cumulative income from January 1 (except in the canton of Zurich).  

In Switzerland, income tax is progressive. Married couples are taxed jointly and unmarried people are taxed individually. The tax burden is determined on the amount obtained by adding the income of both spouses, while for unmarried people, it is the individual income which is decisive.  

Good to know: Swiss taxation recognizes registered same-sex partners and mixed couples are treated the same as married couples.

10. What is the corporate tax rate in Switzerland?

In Switzerland, the average corporate tax rate is 14.87%, which places it among the countries with the lowest international tax rates. Switzerland also has other advantages for businesses and individuals, including good cooperation between authorities and businesses and a series of double taxation agreements. VAT in Switzerland is relatively low (7.7%).

For more information on the world of Swiss tax laws, consult our tax advisors at Impact Financial Engineering in Geneva. They will explain to you in a very detailed and educational manner how taxes work in Switzerland and the way that best suits you to contain the progressiveness of your taxes.