Switzerland’s allure for the wealthy is largely attributed to a policy known as lump-sum taxation. This distinctive approach assesses income and wealth to determine the tax liability in a unique manner. It is available to foreign nationals who establish their tax residence in Switzerland and meet specific criteria.
What does lump-sum taxation entail and how is it implemented?
In Switzerland, individual residents are generally taxed on their worldwide income and wealth. Reflecting the country’s federal organization, taxes are imposed at three levels: federal, cantonal, and communal. Consequently, the progressive tax rates vary based on one’s Swiss residence. It is noteworthy that, at the federal level, only income tax is levied, with no wealth tax imposed.
Switzerland offers a special tax regime known as lump-sum taxation for a specific group of individuals, who fulfill certain criteria (see below). Under this regime, the taxable income and wealth are not based on actual amounts but on a predetermined lump-sum derived from the global living costs of the individual and their family. This makes lump-sum taxation highly attractive for wealthy families.
However, it is important to note that lump-sum taxation is not available in all Swiss cantons. Specifically, it has been abolished in Appenzell Ausserrhoden, Basel-Landschaft, Basel-Stadt, Schaffhausen and Zurich.
Are you eligible for lump-sum taxation?
To qualify for lump-sum taxation in Switzerland, you must meet the following three criteria:
- You are not a Swiss citizen;
- you establish Swiss tax residency for the first time, or after an absence of at least 10 years; and
- you refrain from exercising gainful employment in Switzerland.
For married couples, both spouses must individually meet these criteria; otherwise, none of them can benefit from lump-sum taxation.
What exactly constitutes “gainful employment”?
One of the aforementioned requirements is the prohibition against engaging in any gainful employment in Switzerland. However, managing one’s private wealth is generally allowed. Additionally, board membership activities may be permitted to a certain extent, depending on the canton of residence. Therefore, it is highly recommended to disclose any board memberships to the tax authorities when relocating to Switzerland to ensure they do not adversely affect your eligibility for lump-sum taxation.
How do Swiss tax authorities determine the amount owed?
Under the lump-sum tax regime, the taxable income and wealth are typically calculated using the family’s global annual living expenses (expenditure-based). These expenses encompass various facets, including but not limited to:
- housing,
- food,
- personal staff,
- educational costs,
- travel expenses,
- healthcare and
- foreign taxes.
Social security contributions, currently capped at CHF 25,700 per person, may also be included at times. These living expenses must meet or exceed a specified minimum threshold, currently set at CHF 429,100 at federal level and potentially differing at the cantonal level. Additionally, they must amount to at least seven times the annual rent or three times the annual board and lodging costs. Determination of these figures involves individual negotiations with the relevant tax authority and is formalized through a binding tax ruling. As long as the taxpayer’s personal situation remains stable, their taxable income and wealth generally remain unchanged.
To accurately assess living costs in relation to income and assets, it is essential to provide comprehensive disclosure of your financial circumstances to the tax authority. This disclosure requirement specifically extends to trust and company structures. Any financial information shared with the tax authority, however, remains confidential.
Full disclosure of all financial circumstances from the outset offers the advantage of ensuring that the tax treatment of asset structures such as trusts, including their treatment in the event of death, can also be determined in a binding tax ruling.
And what about the control calculation?
In addition to the previously mentioned requirements, an annual control calculation must be conducted. Individuals taxed on a lump-sum basis, like all taxpayers, are required to submit an annual (simplified) tax return. The central component of this return is the control calculation, which serves to annually review and validate the tax factors initially determined on a lump-sum basis.
In this control calculation, you are required to declare all Swiss-sourced income. This includes income derived from Swiss real estate, movable assets located in Switzerland (e.g., Swiss bank accounts or shares), intellectual property rights exploited in Switzerland (e.g. licensing income), and pension benefits originating from Swiss sources.
Foreign-sourced income does generally not need to be included in the control calculation. However, if one intends to claim for treaty benefits on such foreign-sourced income (e.g. reclaiming foreign withholding tax under a double taxation treaty), such foreign-sourced income needs to be included in the control calculation.
If the taxes calculated from the taxable income specified in the tax ruling are lower than those derived from the control calculation, the higher tax amount must be paid to ensure compliance with standard tax obligations.
What are the recommended steps to follow?
We typically recommend the following procedure when applying for a lump-sum taxation:
- Select a residence in a canton that allows lump-sum taxation (see above “What is lump-sum taxation and how does it work?”). We recommend visiting potential locations in person beforehand. The cantons generally have local business promotion offices that offer guided tours, support in the search for accommodation, assist with the necessary visits to the authorities etc.
- Compile all personal information. Gather all relevant documents related to your financial circumstances. For more complex financial situations, such as trusts, include all trust documents, which should be analyzed and, if necessary, amended before relocating to Switzerland. We also recommend conducting appropriate estate planning.
- Submit the tax ruling to the competent tax authority in your future canton of residence. Typically, it takes the authorities 2-4 weeks to review the ruling.
- Contact the cantonal migration office to obtain a residence permit once the tax ruling has been approved.
- Submit an annual tax return, including the control calculation.
Be mindful of double taxation treaties!
Switzerland has concluded over 100 double taxation treaties with various countries. Individuals subject to lump-sum taxation can generally claim treaty benefits. However, special rules apply in relation to Austria, Belgium, Canada, France, Germany, Italy, Norway, and the United States (referred to as “modified lump-sum taxation”).
Contact us if you have any further questions about Swiss lump-sum taxation. We at Schellenberg Wittmer are also available and happy to assist you with the preparation of a tax ruling and scheduling appointments with local authorities.
