DOMICILIATION OF FOREIGNERS IN SW IT ZE RL A ND

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1 DOMICILIATION OF FOREIGNERS IN SW IT ZE RL A ND March 2012 This note provides a brief overview of Swiss taxation as it applies to foreigners taking up residence in Switzerland, and looks at the conditions for obtaining a residence permit. A separate section is devoted to the possibility of purchasing real estate in Switzerland. This is just general information and not a legal advice to be acted upon. All cases are different and should be discussed with one of our experts. TA X AT IO NS GENERAL POINTS In terms of direct taxation, the Swiss tax system has three layers: all Swiss residents pay a federal tax, a cantonal tax and a municipal tax all three being collected by the canton of residence, sometimes also by the municipality of residence. Estate and gift taxes are levied exclusively by the cantons, and in some cases also by the municipalities. LUMP SUM (au forfait) TAX ASSESSMENT 1. Principles Individuals taking up domicile or residence in Switzerland for the first time, or after an absence of at least ten years, and who are not engaged in any remunerated activity in Switzerland, are entitled 1 to pay a tax computed on their standard of living, as an alternative to paying cantonal and municipal taxes and federal direct income tax 2 and cantonal and municipal wealth tax. When the persons concerned are Swiss nationals, this right is limited to their first tax period. The lump sum taxation is not a fiscal concession or privilege, but simply a legally permitted taxation procedure. Instead of a worldwide basis, taxable income (and wealth) are calculated on the basis of the level of expenses consistent with the taxpayer s standard of living. Income must be at least five times the rental value of the person s dwelling or, for persons living in a hotel or lodging, twice the cost of their accommodation. For the sake of simplicity, the estimate of the cost of maintaining the standard of living is usually based on these factors 3. The number of family members and above all the applicants age are key variables in the computation of the lump sum. In general, the younger the applicants are, the higher the lump sum. Each year, the tax calculated on the lump sum basis is compared to the total tax which would be payable on income from Swiss sources and Swiss wealth, and on income from foreign sources for which the taxpayer has availed himself of the double taxation agreements entered into by Switzerland (this is referred to as the control calculation). The tax payable is the higher of these two amounts. 1 For foreigners without the Swiss citizenship, this right is not limited in time, except in the cantons of Zurich and Schaffhausen. 2 There is no tax on capital gains on private movable property in Switzerland. 3 A draft law, currently debated by the Swiss Parliament, might raise the minimum expense to seven times the rent or the rental value or to three times the cost of accommodation.

2 Income from Swiss sources is defined as dividends on Swiss shares, interest on the bonds of Swiss issuers, interest on current accounts in Switzerland, rental income (or the rental value) of real estate in Switzerland, etc. Swiss wealth comprises, in particular, real estate located in Switzerland and Swiss securities (wherever they may be held). Income from foreign sources for which the taxpayer does not ask to benefit from double taxation agreements is excluded from the comparative calculation and does not have to be declared. In this case, any foreign withholding tax will be nonrecoverable. As previously noted, a taxpayer benefiting from a lump sum taxation may avail himself of double taxation agreements signed by Switzerland 4. Naturally, the income concerned is then subject to Swiss taxes, within the control calculation. For example: for an annual rent of CHF 60,000, the taxable income will be set at a minimum of CHF 300,000. Where the taxpayer owns his dwelling, the rental value thereof (an amount theoretically equivalent to the rent that would have to be paid) is used in the calculation. In practice, for ordinary properties, this rental value is between 3% and 5% of the purchase price. For exceptional properties, negotiation with the tax authorities is advisable. 2. Canton of Geneva In Geneva, the lump sum on which tax is levied may not be less than CHF 400,000 in principle. Taking into account the federal direct tax, the top marginal tax rate in Geneva is approximately 45% for a couple. The total tax in the City of Geneva would thus be: LUMP SUM INCOME TOTAL TAX EFFECTIVE RATE CHF 400,000 CHF 136,000 34% CHF 500,000 CHF 180,000 36% CHF 600,000 CHF 224, % Depending on the municipality of residence, the effective tax rate may vary from 1% above this figure to 3% below it. 3. Canton of Vaud In the Canton of Vaud, the lump sum may not be less than CHF 400,000 in principle. Thus for an annual rent of less than CHF 80,000, taxable income will nonetheless be set at CHF 400,000. Taking into account the federal direct tax, the top effective tax rate is 41.5%. For a couple, total tax in Lausanne would be: LUMP SUM INCOME TOTAL TAX EFFECTIVE RATE CHF 400,000 CHF 144,000 36% CHF 500,000 CHF 192, % CHF 600,000 CHF 242, % Depending on the municipality of residence, the tax rate may vary from 1% above this figure to 5% below it. As a general rule, lakeside municipalities are more advantageous. 2 4 Some of these agreements impose conditions, such as an increase of 30% of the lump sum for France. Other countries, namely Germany, Austria, Belgium, Canada, the United States, Italy and Norway, require that all income sourced within their territory be taxed ordinarily in Switzerland

3 4. Canton of Valais In the Canton of Valais, the lump sum may not be less than CHF 220,000 in principle. Municipalities in the Canton of Valais apply the same tax rate to all foreigners with a lump sum arrangement. There is consequently no variation between municipalities. Taking into account the federal direct tax, for a couple, the total tax would be. LUMP SUM INCOME TOTAL TAX EFFECTIVE RATE CHF 220,000 CHF 64,000 29% CHF 300,000 CHF 97, % CHF 400,000 CHF 137, % CHF 500,000 CHF 177, % GIFT AND ESTATE TAXES 1. Principles Only the cantons are allowed to levy gift and estate taxes. There are major variations from one canton to another. The tax rate is usually determined by the amount transferred and the degree of kinship between the donor/deceased and the beneficiary. The tax rates for gift tax are generally identical to those for estate tax. The key factor in determining liability for the tax is the domicile of the donor or deceased, but the tax is payable by the recipient or heir. The donor is jointly and severally liable for payment of the tax. 2. Canton of Geneva Between spouses 6 % above CHF 500,000 Between parents and children 6 % above CHF 500,000 Between brothers and sisters 25.2 % above CHF 300,000 Between uncles and nephews and great-uncles and great-nephews 29.4 % above CHF 300,000 Between non-relatives 54.6 % above CHF 100,000 Gift and estate taxes for the two first categories were abolished with effect from June 1 st, 2004 for donors and deceased not having benefited from a lump sum arrangement in their last three taxations. 3. Canton of Vaud Between spouses 0 % Direct descendants 3.5 % above CHF 1,302,000 Descendants of a previous marriage of the surviving spouse, father and mother, grand-parents, great-grand-parents 7.5 % above CHF 1,061,000 Between brothers and sisters 12.5 % above CHF 489,000 Between uncles and nephews 16.5 % above CHF 314,000 Between great-uncles and great-nephews 20 % above CHF 123,000 Between non-relatives 25 % above CHF 110,000 There is also a municipal tax which applies cumulatively and varies from 0% to 100% of the cantonal tax rate. Estate tax for foreigners benefiting from a lump sum arrangement in the canton is reduced by half. The same reduction applies to donations made by these taxpayers. Thus, for the direct descendant of a lump sum taxpayer, the maximum rate varies between 1.75% and 3.5%, including the municipal tax. For internal use only 3

4 4. Canton of Valais There are no specific tax rates for the municipalities. The cantonal tax rates are as follows: Between spouses and direct descendants 0 % Between brothers and sisters 10 % Between cousins 15 % Between second cousins 20 % Between non-relatives 25 % 5. Global trends Most cantons, particularly in German-speaking Switzerland, do not impose estate tax on direct descendants. The Canton of Schwyz does not levy any gift or estate tax, irrespective of the degree of kinship. The Canton of Lucerne does not tax gifts (provided the donor lives for five more years after the gift). Recent years have seen a number of cantons reduce the burden of gift and estate taxes. Spouses are nowadays exempt in all cantons. Nonetheless, an initiative, currently collecting signatures, was launched in order to finance the Swiss social security by replacing the cantonal gift and estate taxes by a federal tax of 20% on amounts higher than CHF 2,000,000, without regard to the degree of kinship (spouses would remain exempt). The future will tell what fate is in store for this initiative. STAY/ RESIDENCE PERMIT CONSEQUENCES OF BILATERAL AGREEMENTS BETWEEN SWITZERLAND AND THE EU Since June 1 st, 2002, when the Agreement between Switzerland and the European Union on the Free Movement of Persons (ALCP) came into force, the process of taking up residence in Switzerland has become much simpler for European Union nationals. The only conditions to be met to qualify for a residence permit ( B permit) are to have adequate annual income or funds to support one s standard of living and to be covered by a health insurance policy recognised in Switzerland. Supporting documents required when submitting an application vary from one canton to another, but normally comprise: a confirmation of personal wealth or a copy of the lump sum agreement; a copy of an identification document; 3 passport photographs; a real estate purchase deed or a land registrar extract if the applicant already owns real estate in Switzerland. 4 For internal use only

5 FOREIGNERS WHO ARE NON-EU NATIONALS To be allowed to remain in Switzerland, a foreigner who is not a European Union national must apply to the competent cantonal authorities for a B residence permit. The procedure for issuing a permit normally takes two to three months. There are five conditions to be met for a permit without activity to be granted: to be over 55 years of age; to have close ties with Switzerland; to abstain from any gainful activity in Switzerland (and abroad); to make Switzerland the centre of one s interests; to have adequate financial resources for all family members. Even if all these conditions are met, the granting of a permit is still discretionary and subject to a quota. The authorities will examine the overall economic effect of granting the permit, with financial considerations being of overriding importance. Sometimes a higher lump sum agreement may be enough of an argument. PROPERTY PURCHASE PRIMARY RESIDENCE Since October 1 st, 1997, a foreigner who holds a residence permit or is about to be granted one, may purchase his or her primary residence without authorisation (previously, foreigners were only allowed to purchase a secondary residence in a tourist area). The foreigner must establish his or her primary tax domicile at the place of purchase. It should be noted that when a villa is purchased by a non European Union national, the size of the land must not exceed 3,500 m 2. If it is larger, a request for authorisation must be submitted (with little chance of success). CONSEQUENCES OF BILATERAL AGREEMENTS BETWEEN SWITZERLAND AND THE EU Here again, the bilateral agreements between Switzerland and the European Union have made the Swiss approach considerably more flexible. Since June 1 st, 2002, a European Union national resident in Switzerland may make unlimited property purchases, both for his or her primary or secondary residence or for investment purposes. For internal use only 5

6 MISCELLANEOUS SOCIAL SECURITY Persons resident in Switzerland (whether working there or not) and aged less than 65 for men and less than 64 for women must join the Swiss social security system. This insurance scheme covers pensions, disability and death benefits. Contributions are proportionate to earnings from professional activity, with no ceiling; for those not working, they are based on the insured person s pension or wealth, up to the maximum contribution of CHF 23,750 per person per annum. The maximum contribution will be payable with total wealth of approximately CHF 8,300,000 per person or a lump sum of CHF 415,000, or a lump sum for a couple of CHF 830,000. Benefits are in proportion to the length of the contribution period. Thus, being a member for only a few years will not produce a substantial pension (a few hundred francs per month). However, the contributions are still compulsory and may constitute a significant expense. HEALTH INSURANCE It is also mandatory in Switzerland to hold basic health insurance. This will cover ambulatory treatment as well as all care and treatment in a public hospital ward. The monthly premium is around CHF 300 per person (with large discrepancies between the cantons). It is also possible to take out supplementary insurance to cover, for example, treatment in a private clinic. Premiums are of course higher, and the insurance company may decline anyone who fails to meet its health criteria. In general, anyone aged over 60 will not be accepted. There is also the possibility of coverage by foreign insurers providing additional benefits for expatriates who decide to live in Switzerland. Our specialists are available if any further information is required. Jan Langlo, LL.M. (NYU) Dr. Jean-Philippe Krafft, LL.M. (Cantab.) Lawyer, certified tax expert Lawyer, certified tax expert Tel.: Tel.: Nicolas Uster, LL.M. (Lausanne) Soizic Mendes de Leon Certified tax expert Lawyer, certified tax expert Tel.: Tel.: For internal use only