Swiss lump-sum taxation

01 May 2013 Pietro Sansonetti, Dr Jean-Frédéric Maraia and Danielle Hostettler

Swiss lump-sum taxation

Pietro Sansonetti, Dr Jean-Frederic Maraia and Danielle Hostettler discuss the advantageous tax regime for foreign nationals in Switzerland.

Approximately 5,5001 foreign nationals living in Switzerland are taxed under a special tax regime, known as the lump-sum tax regime or régime du forfait. To benefit from this regime, taxpayers must meet certain conditions, such as not being engaged in any gainful activity in Switzerland. Recent domestic and international initiatives have tightened the requirements of the regime and some have sought to abolish it altogether. The Swiss cantons of Zurich, Schaffhausen and Appenzell Innerrhoden recently abolished the lump-sum tax regime, while the cantons of Glaris, St Gallen, Thurgau, Lucerne and Bern have tightened the rules of the regime. Last year the Swiss federal government proposed to abolish the regime, while the French government announced that Swiss residents who are taxed under the lump-sum regime will no longer benefit from the provisions of the Swiss-French double-tax treaty.

In response to these challenges, the Swiss Parliament, on 28 September 2012, adopted the draft of the new federal tax law on lump-sum tax. The new law will come into force on 1 January 2016 at federal level, and on 1 January 2014 at cantonal level, subject to a positive vote by Swiss citizens.

Current system

Requirements

Article 14 of the Federal Tax Act (FTA) and article 6 of the Federal Act on the Harmonisation of Cantonal Taxes (FAHC) set out the requirements that taxpayers must meet to be eligible for lump-sum tax. According to the legislation, individuals who take up residence in Switzerland for the first time or return to Switzerland after an absence of at least ten years, and who are not engaged in any gainful activity in Switzerland, shall be deemed eligible to be taxed under the lump-sum regime. Under this regime income and wealth taxes are levied based on the taxpayer’s expenditure and standard of living in Switzerland and abroad, rather than on their worldwide income and assets. Qualifying foreign nationals can opt for lump-sum tax under federal and relevant cantonal systems, in the year of their arrival in or return to Switzerland.

Tax base

The tax base for the lump-sum tax is calculated based on the taxpayer’s living expenses in Switzerland and abroad, the living expenses of the taxpayer’s family and other living expenses for persons the taxpayer supports. The following living expenses are treated as taxable income: housing costs, costs for clothing and food, schooling for children, expenses for hobbies and sports activities, travel expenses in Switzerland or abroad, taxes, and interest paid (especially mortgage interest). For federal tax purposes the taxpayer’s living expenses are assessed as five times the annual rental cost or the deemed rental value of the taxpayer’s dwelling in Switzerland. The assessment of a minimum taxable income is required by most cantons and is calculated based on the taxpayer’s incurred living expenses; e.g. Geneva and Zug require a minimum tax base of CHF300,000 and CHF420,000 respectively.

In general, tax deductions are not permitted when determining the tax base. However, Swiss tax law allows a comparative calculation in the course of assessing the lump-sum tax treatment of a given taxpayer. Accordingly, where the taxpayer is seeking relief from foreign withholding taxes, in accordance with a double-tax treaty concluded by Switzerland, the taxpayer must report all income and wealth from any source, whether Swiss or foreign, on their yearly tax return. If it appears, based on these disclosures, that the taxes that would be owed by the taxpayer under the ordinary tax regime would be greater than the taxes that would be owed under the lump-sum tax regime, taxes will be assessed based on the ordinary regime. In this context, the taxpayer may claim deductions for asset-management fees as well as for costs for real estate maintenance.

Further restrictions

Some of Switzerland’s double-tax treaties provide further restrictions when determining the taxpayer’s tax base. For example, until 31 December 2012, a taxpayer had to raise their tax base by approximately 30 per cent to be eligible to benefit from provisions under the double-tax treaty between Switzerland and France. However, following the unilateral decision of the French tax authority in December 2012, from 1 January 2013, taxpayers who have been granted an increased lump-sum tax decision are no longer considered Swiss residents. If this new practice is enforced by the French authorities, these taxpayers may no longer benefit from the Swiss-French double-tax treaty. The situation of taxpayers who have been granted a Swiss lump-sum tax decision and who are still engaged in a gainful activity or receive dividends in France, or maintain any other significant economic ties with France, has to be closely monitored in the future as these taxpayers may become liable to French income taxes.

Finally, under Swiss law the right to pay taxes under the lump-sum tax regime expires once the conditions are no longer met, e.g. if Swiss citizenship is granted or if the taxpayer engages in a gainful activity in Switzerland.

The new federal tax law

Requirements

Under the new legislation, Swiss residents will no longer be eligible for lump-sum tax in the year of their arrival in or return to Switzerland. In addition, cohabiting spouses are eligible for lump-sum tax only if both spouses meet the regime’s requirements. In other words, both spouses must be foreign nationals to be eligible for lump-sum tax, and mixed lump-sum tax is no longer permitted.

Tax base

Under the new law, at federal level the minimum taxable basis (deemed income) will be CHF400,000. Furthermore, living expenses will be assessed as at least seven times the annual rental cost or rental value of the taxpayer’s dwelling in Switzerland, or at least three times the costs for a hotel. The new law also stipulates that worldwide living expenses, i.e. Swiss and foreign, must be taken into account to determine the tax base.

Therefore, under the new law the taxable income will correspond to the higher of the following amounts: worldwide living expenses, the minimum income of CHF400,000, seven times the housing costs or the total of the gross income (and, for cantonal tax purposes, the wealth) from Swiss sources according to the comparative calculation.

The cantons must also set a minimum taxable income amount, but they are free to determine this amount; e.g. in Geneva the tax burden shall increase by approximately CHF45,000 on a tax base of CHF400,000. The new law requires the cantons to introduce rules to determine the tax base for income and wealth tax purposes. The cantons could, for instance, determine the taxable wealth based on the taxable income, as this is already the practice in many German-speaking cantons. A further possibility would be to adopt the solution applicable in Basel-City, where living expenses are capitalised to determine the tax base and the fair market values of the real estate located in the canton are also taken into account.

Transitional period

The transitional provisions provide that taxpayers who are taxed under the lump-sum tax regime when the new law enters force will continue to be taxed under the old rules for five years after the entry into force of the new law. After five years taxpayers shall be subject to the new rules.

According to the new FAHC, the cantons have two years to harmonise their tax laws with federal law. Most cantons will wait until 1 January 2016 to align the entry into force of their own legislation with federal law, but some may adopt new tax legislation before then, with or without a transitional period. Consequently, legislative changes at cantonal level should be monitored closely.

Outlook

The changes proposed by the new law tighten the eligibility requirements of the lump-sum tax regime. The amendments provide welcome improvement to the current tax regime, although further reform is likely in the near future considering international and domestic political trends in this area. The extent of this evolution, however, remains uncertain.

  • 1Statistics issued by the Conference of the Financial Directors of the Cantons. According to this, 5,445 individuals were taxed under the lump-sum tax regime at the end of 2010.

Authors

Pietro Sansonetti, Dr Jean-Frédéric Maraia and Danielle Hostettler

CPD Reflective Learning