Taxes for businesses in Switzerland
If you run a business in Switzerland, find out which Swiss taxes you are liable for and how to file a Swiss tax return.
Companies registered or administered in Switzerland must pay Swiss taxes, while limited tax liability applies to companies with a permanent presence in Switzerland.
Corporate income tax and tax on equity in Switzerland
Legal entities with either a registered office or an actual administration in Switzerland are subject to unlimited tax liability. Limited tax liability applies to foreign corporations with a permanent establishment or with real estate in Switzerland. The international comparison shows that Switzerland is a very attractive location for corporate tax payers.
Switzerland has a 'classical' corporate tax system in which a corporation and its owners or shareholders are taxed individually, causing economic double taxation. In order to reduce this effect, the taxation of the shareholder benefitting from the dividends is lowered by 40% at the federal tax level. Some cantons have incorporated the federal system while others apply different systems to reduce qualified dividends.
Determination of taxable profit
Resident companies are subject to corporate income tax on their worldwide income with the exception of income attributable to foreign establishments or foreign real estate (immovable property). Such income is excluded from the Swiss tax base and is only taken into account for rate progression purposes in cantons that still apply progressive tax rates.
Non-resident companies are subject to tax only on Swiss source income, ie income and capital gains derived from Swiss business, permanent establishments or real estate property.
As a matter of principle, the statutory accounts of a Swiss company and – in case of a foreign company – the branch accounts form the basis for determining taxable income. Apart from participation exemption for dividend and capital gains income, various adjustments required by tax law and the use of existing loss carryforwards (the loss carryforward period is seven years), there are very few differences between statutory profit and taxable profit.
The most common deductions allowed are depreciation, tax expense, interest expense, and management and service fees/royalties. The last two are deductible to the extent that they are in accordance with the arm’s-length principle. The arm's length principle is the condition or the fact that the price for a certain transaction should be the same as if the two companies involved were indeed two independents, not part of the same corporate structure. The arm’s length principle is found in Article 9 of the OECD Model Tax Convention and is the framework for bilateral treaties between OECD countries, and many non-OECD governments, too.
Special tax regimes
At the cantonal level only, a 'holding privilege' applies to pure holding companies. They are exempt from the cantonal corporate profit tax. Moreover, cantonal law confers a 'domicile privilege' on companies who are only administered in Switzerland, but whose business is conducted abroad; including shell corporations. The cantons tax only about 10 percent of the worldwide profits of such companies.
The special tax regimes face increasing international pressure, in particular from the European Union. The federal and cantonal governments have reacted and are currently reshaping the Swiss tax legislation. The Federal Council initiated the consultation phase in September 2014 with the publication of a legislative draft for Corporate Tax Reform III. In compensation for abolishing the special tax regimes, the legislative draft includes inter alia the following measures: introduction of a license box at the cantonal level, notional interest deduction and a general lowering of cantonal corporate income tax rates.
The consultation procedure for the legislative draft will last until early 2015, after which the Federal Council will prepare the final proposal for discussion within the Parliamentary chambers and commissions. If no referendum is held, it can be assumed that the new legislation will come into force by January 2019.
Determination of taxable equity
The basis for the calculation of capital tax is in principle the company’s net equity (ie share capital paid-in surplus, legal reserves, other reserves, retained earnings). The taxable base of companies also includes any provisions disallowed as deduction for tax purposes, any other undisclosed reserves, as well as debt that economically has the character of equity under the Swiss thin capitalisation rules.
Corporations are subject to corporate income tax as well as tax levied on equity at the cantonal and municipal level.
The federal corporate income tax rate is a flat 8.5 percent. The cantonal tax rates vary considerably. In general, they are progressive (depending on different factors). The rates laid down in the cantonal tax laws are usually subject to cantonal and municipal multipliers.
In Switzerland, all taxes for corporate taxpayers are deductible. As this is different in most other countries, Swiss tax rates should not be compared 1:1 with foreign tax rates. If the aggregate of all rates in Switzerland amounts to 30 percent for example (of which 8.5 percent is federal tax), the effective rate would only be about 23 percent (of which 7.8 percent is federal tax) compared to a country where taxes are not deductible. The effective maximum income tax rate of an ordinarily taxed company with an EBT of CHF 1,000,000 is roughly 24 percent, the lowest about 13 percent.
The rates of tax on equity are mostly proportional or sometimes defined by a progressive scale with a minimum and a maximum rate. For a total equity of CHF 10,000,000 the tax rate varies between 0.01 percent and 0.51 percent. Since 2009, however, cantons are allowed to credit annual equity tax against corporate income tax to the effect that profitable corporations do not owe annual equity taxes.
The table below shows the income tax burden of an ordinary taxed company with an EBT of CHF 1,000,000 and a taxable equity of CHF 10,000,000.
Who pays Swiss taxes?
Depending on the legal form of the business, taxes on the company’s profit are either due by the business owner directly (in the case of sole proprietorships or partnerships) or by the legal entity (corporations and limited liability companies).
In the latter case, the business owner does either receive remuneration as an employee or dividends from the company. Remunerations are a deductible expense for the company but taxable income for the individual, which is also subject to social security and pension contributions. Dividends are paid by the company from its profit after tax and are not subject to social security and pension contributions. To eliminate economic double taxation, the dividend amount taxable for the shareholder is reduced by 40 percent at the federal tax level and even more in most of the cantons. Often a reasonable combination of both, salary and dividends has proven beneficial.
VAT or value-added tax
The value added tax (VAT; Mehrwertsteuer / Taxe sur la valeur ajoutée / Tassa sul valore aggiunto) is one of the Confederation's principal sources of funding. It is a general consumption tax levied at a rate of 8 percent on most commercial exchanges of goods and services. Certain exchanges, including those of foodstuff, drugs, books and newspapers, are subject to a reduced VAT of 2.5 percent.Yet other exchanges, including those of medical, educational and cultural services, are tax-exempt, as are goods delivered and services provided abroad. A special rate of 3.8 percent applies to the hotel and lodging industry.
Although Switzerland is not an EU member state, its value added tax system was structured in accordance with the sixth EU VAT directive as a non-cumulative, multi-stage tax that provides for deduction of input tax. It is designed as a tax owed by the supplier of goods or services and the tax is usually passed on to the customer as part of the price.
Any entity that generates revenues through business or professional activity in Switzerland is liable for tax, including foreign businesses supplying goods or certain services to Switzerland. There is a registration obligation if the taxable revenue exceeds CHF 100,000 per year. If the revenues are less, then the entity is exempt from tax liability. However, any such entity may waive exemption from tax liability.
Beat Meyer / Expatica
Beat Meyer is a Swiss Certified Public Accountant and qualified tax consultant. He is owner and CEO of Bonfina Treuhand GmbH / Expat Tax Switzerland (www.expattax.ch).
Need advice? Contact Beat via Expatica's Ask the Expert free service (in the Tax category).
Please note: The information contained within this article is for general guidance only and professional advice will be needed regarding your direct circumstances. / Updated 2015.
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