TAX I NFO. Lump-sum taxation. Taxation based on costs

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1 TAX Lump-sum taxation Taxation based on costs

2 Introduction In this world, nothing is more certain than death and taxes (Benjamin Franklin) If Benjamin Franklin was right, the question arises as to how one can make the best of the situation. Switzerland is a country which is very attractive for foreigners, not only for its scenic beauty but also for its interesting economic environment, the stable political situation and, not least of all, the low tax rates. Foreigners who live in Switzerland without pursuing a gainful occupation can, in certain circumstances, enjoy lower taxation than other people who are resident here. Swiss tax law allows the choice of being taxed on the basis of subsistence costs (so-called lump-sum taxation ) instead of paying the ordinary Swiss income tax. This form of taxation can lead to a substantial reduction of personal income and capital tax. The tax benefits which can be obtained are an important argument for the planning of a change in residence (e.g. a retirement home) in Switzerland. Apart from taxation on the basis of costs, there are inheritance tax factors which speak in favour of a move of residence to Switzerland. Rudolf Schumacher National Director of direct and indirect tax and Head of the Swiss VAT practice Berne, June E RNST & YOUNG

all, the low tax rates. Foreigners who live in Switzerland without pursuing a gainful occupation can, in certain circumstances, enjoy lower taxation than other people who are resident here.

3 Residence permits The basic pre-condition for the possibility of being taxed in Switzerland is a residence or stay in Switzerland which is recognised under tax-law. The establishment of a residence or stay for foreigners who are not gainfully employed is only possible if a residence permit (type B) is issued by the immigration authorities. Within the framework of the legal stipulations, this is basically at the discretion of the responsible cantonal authorities. There is no automatic claim to a permit, but the authorities can issue one if certain minimum conditions are fulfilled. These depend on the category of the foreign person who is not gainfully employed (e.g. schoolchildren, students, pensioners, etc.). For the purposes of lump-sum taxation, a so-called pensioner s permit is one point of focus. The pre-conditions are that the applicant is older than 55 years, has close ties to Switzerland, is gainfully employed neither in Switzerland nor abroad, transfers the centre of his or her interests to Switzerland and has the necessary financial resources. Basically, the residence permit is issued for one year and, at the discretion of the authorities, may be renewed at the end of the year. After five years and under certain conditions, it may be possible to apply for a permanent residence permit (type C). E RNST & YOUNG 3

Within the framework of the legal stipulations, this is basically at the discretion of the responsible cantonal authorities.

4 Pre-conditions Lump-sum taxation People who receive a residence permit in Switzerland have the right to be taxed on the basis of their living expenses if further pre-conditions are fulfilled: The taking up of residence in Switzerland must be for the first time or after a period abroad of at least ten years The foreigner must be tax-liable without limitation in Switzerland The foreigner may not pursue any gainful occupation. For the taxation of foreigners based on costs, there are basically two cases which are differentiated, namely that of ordinary or modified lump-sum taxation. The criterium for the differentiation is the different calculation of the assessment basis. Ordinary lump-sum taxation (federal) According to the principles applied for ordinary lump-sum taxation, there are two minimum assessment bases which are either: the costs of living of the tax-payer and his family or the gross income of the summarised revenues shown in the so-called control calculation if this is higher than the costs. The taxable costs represent the total of the annual costs of living which the person liable to tax has to pay for him- or herself and any dependants. The costs must amount to at least five times the annual rent paid for accommodation (or the rental value if the person owns his or her own house or flat) for taxable persons who run their own household. For others, the costs must amount to at least double the expenditure for hotel or similar accommodation and subsistence. 4 E RNST & YOUNG

not pursue any gainful occupation. For the taxation of foreigners based on costs, there are basically two cases which are differentiated, namely that of ordinary or modified lump-sum taxation.

5 For the calculation of the gross income all forms of income from Swiss sources are first calculated: income from immovable assets located in Switzerland income from movable capital invested in Switzerland (with Swiss debtors) income from copyrights, patents, licences and similar rights in Switzerland pensions and other retirement benefits received from Swiss sources. Foreigners in Switzerland therefore have the possibility of structuring their movable assets in Switzerland in such a way that they are optimised in terms of taxation and economics whereby the income earned from them and added to the other forms of income taken into account does not negatively influence the minimum calculation basis. Foreign income is only included in the control calculation to the extent that the taxpayer is claiming partial or full relief from foreign source tax on the basis of a doubletaxation treaty concluded by Switzerland. Lump-sum tax credit on such income earned and subjected to source tax abroad is not available to a taxable person paying lumpsum tax. On the other hand, the Swiss withholding tax is refunded. Modified lump-sum taxation For certain countries a modified lump-sum taxation applies. A foreigner who pays lump-sum tax in Switzerland cannot normally claim relief under the double taxation treaties between Switzerland and Belgium, Germany, Italy, Norway or Austria, as well as the USA and Canada. If, however, he or she wishes to benefit from these treaties, he or she must declare in Switzerland all income and not only income which was taxed at source from sources within one of these states for the purposes of taxation in Switzerland. E RNST & YOUNG 5

Foreigners in Switzerland therefore have the possibility of structuring their movable assets in Switzerland in such a way that they are optimised in terms of taxation and economics whereby the income

6 In this process, the foreign income is added to the income from Swiss sources as mentioned above and taxed at the full rate as per the relevant double-tax treaty under reserve of a progression. The maximum federal income tax rate is currently 11.5 %. If the foreigner does not elect to be taxed according to modified lump-sum taxation, he or she cannot claim relief under the double-tax treaty with the foreign nation in question for a refund of source tax. Taxation in the cantons As with the Confederation, the majority of cantons provide in their tax legislation for lump-sum taxation of foreigners. Those cantons include Appenzell-Innerrhoden, Berne, Fribourg, Geneva, Glarus, Graubünden, Jura, Lucerne, Nidwalden, Obwalden, Schaffhausen, Solothurn, St. Gallen, Tessin, Thurgau, Uri, Waadt, Wallis, Zug and Zurich. In Schwyz some tax relief may be obtained under certain restricted conditions and without legal claim. From 1 January 2001, all cantons will have harmonised regulations with regard to lump-sum taxation. The way in which lump-sum tax is levied by the cantons can vary from the principles set forth by the Confederation. There are also significant variations in the conditions from one canton to another. The calculation of the tax basis and the resulting tax payable may be influenced by sophisticated pre-immigration planning of assets and sources of income (i.e. transfer of assets to trusts or foundations) and negotiation with the relevant tax authorities. The maximum income tax rates levied by the cantons (including the municipalities) show enormous variances and amount to between 10 and 35 %. 6 E RNST & YOUNG

If the foreigner does not elect to be taxed according to modified lump-sum taxation, he or she cannot claim relief under the double-tax treaty with the foreign nation in question for a refund of

7 Social security Special points From the point of view of social security law, the status of a person subject to lumpsum taxation is of importance insofar as the foreigner does not pursue a gainful activity and is thus only subject to social security contributions which apply to unemployed persons (until reaching the statutory retirement age). At the moment, the maximum annual contribution for unemployed persons in Switzerland is CHF 10,100 per person. Inheritance tax The estate of a foreign citizen who had his or her last place of residence in Switzerland is subject to cantonal inheritance tax under reserve of the regulations of any existing double tax treaty. Here too, it is possible to benefit from the favourable conditions as inheritance tax in Switzerland is generally lower than in other countries. There is no inheritance tax at federal level. The cantons have varying regulations. The canton of Schwyz, for example, does not levy inheritance tax at all, whereas others exempt descendants and/or spouses. Other cantons reduce the tax on the inheritance or allow special deductions for foreigners. This should be taken into consideration when selecting a canton of residence. Purchase of real estate A foreigner with a residence permit in Switzerland has the right to purchase real estate in Switzerland for residential purposes under the pre-condition that the property serves as that person's main home. E RNST & YOUNG 7

At the moment, the maximum annual contribution for unemployed persons in Switzerland is CHF 10,100 per person.

8 For further information please contact the tax specialists of Ernst & Young at our offices: Bahnhofstrasse Aarau Tel Fax T AX Rte de Chantemerle Fribourg Tel Fax Tribschenstrasse Lucerne Tel Fax Bleicherweg Zurich Tel Fax Aeschengraben Basel Tel Fax , route de Chancy 1213 Petit-Lancy 1 Tel Fax Rue des Moulins Neuchâtel Tel Fax Belpstrasse Berne Tel Fax Hauptstrasse Kreuzlingen Tel Fax Teufener Strasse St. Gallen Tel Fax Nidaugasse Biel Tel Fax Place Chauderon Lausanne 9 Tel Fax Place du Midi Sion Tel Fax Gäuggelistrasse Chur Tel Fax Via Pretorio Lugano Tel Fax Bundesstrasse Zug Tel Fax E RNST & YOUNG , Ernst & Young 06/00

041-367 77 11 Fax 041-367 77 05 Bleicherweg 21 8022 Zurich Tel. 01-286 31 11 Fax 01-286 31 47 Aeschengraben 9 4002 Basel Tel.

DOMICILIATION OF FOREIGNERS IN SW IT ZE RL A ND

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