Switzerland’s tax system is as unique as its alpine landscapes. Dive into our comprehensive guide and uncover the origins of this distinctive taxation model, its influence on investment activities, and the particular advantages it provides to private investors.
We’ll also contrast it with other European systems, offering valuable insights for both residents and those contemplating a move to this famously tax-friendly nation.
Tracing the Roots of the Swiss Investment Tax System
If we go back in time —to 1848 to be more precise—we will discover the origin of Swiss federalism in the form of a Confederation. The Confederation is a bottom-up form of government in which 26 different cantons retain their sovereignty but are subject to constitutional directives.
This model of cantonal independence is also reflected in taxation, a controversial topic that has been discussed multiple times over the years, especially at European and international levels.
The key advantage for a private investor resident in Switzerland is the ability to benefit from tax exemption on profits from certain financial investments.
Because of this system, it is not unusual to come across different cantonal tax systems just a few kilometers away. In some cases, these differences make it more favorable for the taxpayer while remaining in the same country.
The different not only exists on a cantonal level. Even at a municipal level, there may be differences in taxation rates that make one municipality more attractive than another.
Understanding Taxation in Switzerland
In Switzerland, we have three different levels of taxes: federal (the same for the entire population), cantonal and municipal.
This diversity and autonomy have made Switzerland an attractive country over the years for companies and individuals when considering different tax planning solutions.
Taking Switzerland as a whole, the average cantonal tax on income is 33% for the highest earners, with peaks ranging from 44.75% in Geneva to lows of 22.38% in Zug.
Although there have been a number of initiatives over the years to harmonize the Swiss tax system, there are still some advantages that survive in some cantons despite the pressure.
The table below shows how the tax system in Switzerland varies depending on the canton of residence, as far as the maximum income tax is concerned:
Income tax rates in the cantons in 2021
There are severalonline tax calculatorsto get an indication of the tax rate according to income where it is also possible to compare with other cantons and internationally.
Leaving aside the corporate sector, which still has its tax advantages with a wide choice between the different cantons, let’s focus on the taxation of capital gains from investment activities in the financial markets for a private individual.
Taxation of Capital Gains
The key advantage for a private investor resident in Switzerland is the ability to benefit from tax exemption on profits from certain financial investments.
The capital gain for non-professional investors is not taxed in the whole of Switzerland. However, it does contribute to increasing taxpayers’ wealth, which in Switzerland is taxed progressively according to a cantonal scale.
An investor is considered by the Swiss tax authority as a private investor by default. Subject to some conditions*, such as the volume of the investment revenues and the holding period of his securities, they might be considered as a professional investor.
In December 2001, Swiss citizens were called upon to vote on a tax reform aimed at implementing a 20% tax on all capital income above 5,000 CHF.
Two-thirds of the population rejected this proposal, arguing that it was unnecessary as there is already a wealth tax in the country. If capital gains are to be taxed, it should also be possible to deduct capital losses.
Opinions have not changed 20 years later as a new referendum —called “the 99% initiative”— was submitted to the Swiss population, who remained consistent in their position.The aim of this proposal, introduced by the left wing, was to implement a tax on gains from dividends, shares, and rental income.
Taxpayers usually feel squeezed by the tax system which is perceived as a sword of Damocles hanging over their heads as soon as they manage to secure a small profit. But when they make a loss, no one cares.
However, the Swiss tax system does not entail such a burden since private capital gains on movable assets earned by private investors resident in Switzerland are normally tax-exempt as long as the individual does not qualify as being a professional securities dealer.
To sum up, Switzerland has several tax advantages for private investors thanks to its federal model and pragmatic approach towards financial investments.
If we look at our neighbors in Europe, things are significantly different: Capital gains on movable assets are taxed at 30% in France (+4% for high-income earners), 26% in Italy, or 26.38% in Germany (plus a 5.5% solidarity surcharge). We then realize what an advantageous tax system we have in Switzerland.
If the capital gain for non-professional investors is not taxed in the whole of Switzerland, it does, however, contribute to increasing taxpayers’ wealth, which in Switzerland is taxed progressively according to a cantonal scale.
Taxation of Wealth
Wealth tax differs significantly from canton to canton (federal approach), while in some it does not even exist.
Another important point to mention is that, even if the gain is not realized, it still contributes to the total wealth at the end of the year.
“Wealth” refers to the market value of all movable and immovable assets, as well as assets of which the taxpayer is the usufructuary (i.e. assets from which he/she receives income).
The Confederation does not levy wealth tax.
For instance, an investor having an unrealized profit of 100.000CHF at 31.12.2021, will need to include this amount in his total fortune in the tax declaration. Therefore, according to the canton where one resides, one is taxed on one’s total wealth.
Taxation of Dividends and Interests
So far, we have dealt with taxation on the capital income generated by investments in financial markets. The situation is quite different when talking about dividends and interest taxation, which are subject to a Swiss withholding tax of 35%.
Introduced in 1965, withholding tax is applied at source on certain capital gains on movable assets (interest and dividends). The applicable rate changes according to the type of income and is subject to certain conditions. The amount withheld is refunded to Swiss taxpayers by means of the yearly tax declaration.
The only fixed federal tax levied on financial instruments is stamp duty, which usually ranges between 0.075% and 0.15% on the transaction, depending on the underlying product (whether you trade on a Swiss Stock exchange or a foreign stock exchange).
The purpose of this brief analysis is to highlight the advantages that a Swiss tax resident investing like a private investor can enjoy in Switzerland by accessing tailored investment solutions offered by a Swiss financial institution.
To sum up, Switzerland has several tax advantages for private investors thanks to its federal model and pragmatic approach towards financial investments.
There are really few occasions when a taxpayer does not have to give up some of his financial gains. This is one of them and it is definitively a great incentive to start investing.
Criteria to avoid being categorized as a professional investor
Guidelines published by the Federal Tax Administration list 5 criteria to be used by municipal and cantonal tax offices in determining the tax status of investors. You can only be sure that you will not be categorized as a professional investor if you meet all of these criteria:
- You hold securities for at least 6 months before you sell them.
- The transaction volume of all of your securities trades combined (total spent on purchases and totally earned on sales) is not higher than 5 times the total value of your securities at the start of a tax year.
- Capital gains generated through securities trading do not account for a significant portion of your basic income. The rule of thumb: Capital gains should account for less than 50% of your net income.
- You use your own assets to finance the purchase of securities. Or: Taxable returns like interest and dividends are higher than the interest owed on loans.
- If you invest using derivatives – and options in particular – these can only be used to hedge your own securities.
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The content of any publication on this website is for informational purposes only.
Switzerland's tax system is known for its unique characteristics and has attracted many investors over the years. The origins of the Swiss tax system can be traced back to the country's federalism, which was established in 1848. The Swiss Confederation is a bottom-up form of government where 26 different cantons retain their sovereignty but are subject to constitutional directives. This model of cantonal independence is also reflected in taxation, with each canton having its own tax system [[1]].
One of the key advantages for private investors residing in Switzerland is the ability to benefit from tax exemption on profits from certain financial investments. This means that capital gains for non-professional investors are not taxed in Switzerland as a whole. However, these gains do contribute to increasing taxpayers' wealth, which is taxed progressively according to a cantonal scale [[1]].
It is important to note that there are differences in tax rates and systems between cantons and even municipalities within Switzerland. This means that a taxpayer may find more favorable tax conditions in one canton or municipality compared to another, even if they are just a few kilometers apart. The average cantonal tax on income for the highest earners in Switzerland is 33%, with variations ranging from 44.75% in Geneva to 22.38% in Zug [[1]].
In terms of wealth tax, it differs significantly from canton to canton. Some cantons do not even have a wealth tax, while others have varying rates. Wealth tax refers to the market value of all movable and immovable assets, as well as assets from which the taxpayer receives income. The Confederation itself does not levy wealth tax [[1]].
When it comes to the taxation of dividends and interests, Switzerland applies a withholding tax of 35% on certain capital gains on movable assets, such as interest and dividends. The applicable rate may vary depending on the type of income and is subject to certain conditions. The amount withheld is refunded to Swiss taxpayers through the yearly tax declaration. Additionally, there is a stamp duty on financial instruments, which ranges between 0.075% and 0.15% on transactions, depending on the underlying product [[1]].
Compared to other European countries, Switzerland's tax system offers several advantages for private investors. For example, capital gains on movable assets are taxed at 30% in France, 26% in Italy, and 26.38% in Germany (plus a 5.5% solidarity surcharge). These differences highlight the advantageous tax system in Switzerland [[1]].
To avoid being categorized as a professional investor, there are criteria set by the Federal Tax Administration that need to be met. These criteria include holding securities for at least 6 months before selling them, ensuring that the transaction volume of all securities trades combined is not higher than 5 times the total value of securities at the start of a tax year, ensuring that capital gains from securities trading do not account for a significant portion of net income, and using personal assets to finance the purchase of securities [[1]].
In conclusion, Switzerland's tax system is characterized by its federal model and pragmatic approach towards financial investments. The ability to benefit from tax exemption on profits from certain financial investments, along with variations in tax rates between cantons and municipalities, make Switzerland an attractive destination for private investors. The taxation of dividends and interests is subject to withholding tax, and wealth tax differs significantly between cantons. Overall, Switzerland's tax advantages for private investors set it apart from other European countries [[1]].
