The tax system in Switzerland is extremely complex. In addition to the federal tax, taxes are levied in the cantons and municipalities. Each of the 26 cantons has its own tax laws, which means regionally different taxation of assets, income and profits. But at the same time, Switzerland is known as an investor-friendly country. If, for example, you realize a profit with price gains on shares, this remains tax-free for private investors. Thus, investing in shares in Switzerland is also interesting from a tax point of view. The general tax burden in Switzerland is also low in international comparison.
However, only through clever planning can you operate an efficient pension plan and reduce your personal tax burden at the same time. Personal pension planning is therefore one of the most effective ways to save taxes. Read this article to find out what you should bear in mind.
Contents
- Capital income are subject to income tax – capital gains are tax-free.
- Declare assets correctly and recover withholding tax.
- Withholding tax abroad can reduce returns.
- Private investors must observe the threshold for professional trading.
- Pillar 3a offers additional opportunities to save taxes.
Taxes on investments: which taxes may apply
Switzerland’s low tax rate by international standards gives investors hope. The fiscal quota is the most common way to measure the overall tax burden. It corresponds to fiscal revenues, including social security contributions, as a percentage of gross domestic product (GDP). According to figures from the Swiss Federal Statistical Office, Switzerland’s fiscal-to-GDP ratio is 28.5 percent in 2021. By comparison, in OECD countries with a comparable level of development, the ratios average a good 34 percent and range from about 17 to 46 percent.
The cantons in Switzerland have a high degree of tax autonomy. The federal government, on the other hand, may only levy taxes that are permitted by the federal constitution. The cantons, on the other hand, also decide on the levying of property taxes, gift taxes or inheritance taxes.
This makes the tax system complex and to save taxes in Switzerland, knowing some details is essential.
Capital Income and Capital Gains
Basically, the tax law distinguishes between capital income and capital gains.
- Capital income: Capital income includes income generated by capital. This includes interest as well as dividends from shares or funds. This income counts as taxable income.
- Capital gain: This arises from price gains generated by securities. These are tax-free for private investors as long as they are not generated commercially.
Withholding tax
In addition to income tax, Swiss investors also pay the so-called withholding tax of 35 percent. The withholding tax on investment income is a tax levied by the federal government. It is intended to ensure that income and capital gains are disclosed.
Investors can reclaim the withholding tax if they correctly declare their assets in their tax return. The taxpayer can declare the withholding tax on the official forms of the tax authorities, which will reimburse it.
Withholding tax of foreign securities
In the case of income from foreign securities, the withholding tax of the respective country of origin applies.
Below is a selection of countries and their withholding taxes:
- USA: 30 percent
- Germany: 26.375 percent
- Austria: 27.5 percent
- Great Britain: no withholding tax
- Australia: no withholding tax
The Swiss Federal Tax Administration provides information on withholding tax for all countries on its website. Income from foreign securities is generally subject to income tax regardless of the foreign withholding tax.
Double taxation treaty partially prevents double taxation
However, investors can partially avoid double taxation through double taxation agreements that Switzerland has concluded with numerous countries. In these cases, some withholding taxes can be credited against income tax in Switzerland when foreign dividends are paid out. In most cases, this involves about 15 percent. In some cases, the remaining amount can be reclaimed in the country of origin. However, due to the administrative effort involved, this is often only worthwhile for larger amounts.
Wealth tax
Wealth tax is an annual tax levied on the taxpayer’s total assets. Tax is levied on the basis of net assets, i.e. after deduction of liabilities and cantonal social deductions. Therefore, it is often advantageous to take out loans for the investment and thus save taxes. The tax rates in the cantons or municipalities of residence are between 1.3 and 11.5 per mille. There is a progressive taxation, whereby assets above one million francs are particularly affected.
Most cantons and municipalities grant different tax allowances. Marital status and children also have an effect. The differences are considerable. The tax-free minimum, depending on the canton, is between CHF 10,000 and CHF 200,000.
As a private investor, always keep an eye on: Threshold to professionalism
As a private investor in Switzerland, you should always keep an eye on the threshold for commercial activity. As soon as a private investor becomes a professional, different rules apply and he or she is subject to profit tax law. The exact rules for the threshold for professionalism are very complex in Switzerland and are interpreted differently from case to case. However, there are some general guidelines that private investors should be aware of.
According to a circular issued by the Swiss Federal Tax Administration, taxpayers who are found to meet the following criteria will be looked at more closely:
- Credit financing of investments ensures that taxable property income (for example, interest and dividends) is lower than the pro rata interest on loans.
- The value of purchases and sales made in the course of a calendar year exceeds the value of securities and cash balances held at the beginning of the tax period by a factor of five.
- Within a tax period, capital gains have been realized that account for more than 50 percent of all taxable income.
- Investments are closely related to a specific professional activity and are not available to all investors.
- Securities sold were held for less than six months. Day traders must therefore be prepared for a heightened scrutiny.
- The taxpayer trades in derivatives (especially options) that do not serve the sole purpose of hedging his securities positions.
Different investments – different taxes
The need for private pension provision was recognized early on in Switzerland. This is shown by the exception in the tax laws to exempt gains from investments for private investors from income tax.
In detail, there are some differences in the investment forms:
The federal government initially levies withholding tax on interest and dividends from shares. This means that the bank transfers 65 percent of the income to the account holder and 35 percent to the Federal Tax Administration.
With the withholding tax, the federal government avoids tax evasion. If you declare your bank account and securities income correctly in your tax return, you will receive the withholding tax back. To do this, you declare your investment income in the securities list of the tax return. The withholding tax is then refunded by your canton, which is usually done by offsetting it against your cantonal taxes. For personal taxation, the income is then added to the taxable income (dividends or interest before deduction of withholding tax).
With regard to wealth tax, securities are taxable at market value. In the case of credit balances, the nominal value corresponds to the market value. Life and annuity insurance policies are subject to wealth tax at the surrender value during the savings phase.
Accumulating funds
In the case of funds with no ongoing distribution to the investor, the income is generally reinvested in new units. The taxation is basically no different from that for distributing funds. For this purpose, the fund companies report the reinvested income to the tax administration as of the reporting date.
Cryptocurrencies
Cryptocurrencies are digital means of payment that depend on a protocol and the technology behind it. Owning cryptocurrency units such as Bitcoin is economically comparable to owning cash.
Provided cryptocurrencies are part of private assets, capital gains are tax-free, as from other investments. In the case of cryptocurrencies, the tax regulations on commercial trading must also be observed in this context. The prospecting (mining) of cryptocurrencies against remuneration based on the provision of computing power is considered as self-employment and leads to taxable income.
Credit balances in cryptocurrencies must be reported as “other credit balances” in the securities and credit balances register and are subject to wealth tax. The year-end exchange rate is decisive for the valuation.
Real estate assets
In addition to property tax amounting to approximately one to two per mille of the value of the property, those who live in their own home in Switzerland must pay tax in particular on the so-called imputed rental value. This value corresponds to about 60 to 70 percent of the usual rent. In return, however, all maintenance expenses and loan obligations are tax-deductible.
If you sell your house, apartment or land and make a profit, you must pay tax on this in all cantons. This profit can be high if you bought your home many years ago when prices were much lower.
How much of the profit you have to pay tax on depends in most cantons on how long you have owned the house: The longer, the lower the property gains tax. On the other hand, cantons levy a higher tax on real estate gains realized during a short period of ownership; this is done to curb speculation.
You can determine the amount of real estate gains tax online at many cantonal tax administrations.
Example:
You have sold your property in the municipality of Aarberg in the canton of Bern at a price of CHF 500,000. In addition to the purchase price of CHF 300,000, you had deductible maintenance costs of CHF 150,000. This results in a profit of 50,000 CHF. Assuming an ownership period of 5 years, this results in a property gains tax of 10’723.55 CHF. The profit tax would be reduced to CHF 6,169.95 with an assumed ownership period of 20 years.
Saving Taxes in Switzerland: These Options Every Private Investor Should Consider
Private pension provision is a major lever for saving taxes in Switzerland. Therefore, pay particular attention to the following points when making your investments:
- In the case of shares, aim for tax-free price gains: Investors looking for high-yield investment opportunities should consider what they focus on. Bonds regularly yield interest, but this interest is taxable and thus reduces the return. Stocks seem to be a worthwhile investment thanks to dividend payments, but dividends are also subject to income tax. Securities that forgo dividends may be a better option for investors. After all, stocks can lead to significant increases in value over the long term, and when they are sold, the entire gain remains tax-free.
- Avoid classification as a professional trader: Achieve this by investing for the long term with infrequent rebalancing. Also, avoid leverage when trading and use options exclusively for hedging. Also, make sure that your profits from stock trading do not account for more than half of your pure income.
- Take advantage of the opportunities for self-provision: This includes pillar 3a. Assets are tax-free until the time of the capital benefits. Only thereafter are they subject to annual tax. In the 2022 tax year, as an employee, you can deduct up to CHF 6,883 (a maximum of 20 percent of net income) from taxable income as payments into the tied pension plan of pillar 3a. As a self-employed person (without a pension fund), the amount is CHF 34,416. Read more about the 3a maximum amount here.
- Purchases into a pension fund are deductible: The possibilities depend on the personal coverage gap. You can find out the maximum payments in your annual pension fund statement. In order to make optimal use of the progression, it is advisable to spread the expenses over several years.
- Structured products with tax-free coupons: Structured products consist of a combination of different investments. Some providers offer constructions in which only a small interest income is generated. The greater part of the distribution is generated by the sale of options and thus remains tax-free.
- Withholding tax on investments abroad: As already explained in the paragraph “Withholding tax on foreign securities”, different withholding taxes apply in the individual countries worldwide. These can only be offset if there is a double taxation agreement with Switzerland. In all other cases, they reduce the return. You should bear this in mind when choosing a product, such as ETFs or funds.
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Save taxes even as a retiree and with real estate
Personal situations that may also be relevant from a tax point of view are, for example:
Retirement: The tax-saving potential depends crucially on whether you want to draw your pension as a lump sum or as an annuity. Because this is more favorable from a tax point of view, you should prefer a lump-sum withdrawal – especially if the money is invested at the same time. The reason: The pension fund annuity must be taxed in full. However, the payment of the capital is only taxed once, separately from the other income, and at a lower tax rate.
Home ownership: Current costs of your property can be deducted from your taxable income. These include interest on a loan and work to maintain the property. You can choose between a flat rate (between 10 and 20 percent of the imputed rental value, depending on the canton) and the actual costs. This also applies to vacation homes, where you can also deduct a flat rate for wear and tear of around 20 percent for the furnishings if you rent out the property.
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