Switzerland Lump-Sum Taxation Dr. Ruth Bloch-Riemer Zurich, 29 November 2018
Swiss Lump-Sum Taxation Table of Content Switzerland Overview & Introduction 3 General Requirements & Eligible Classes of Taxpayers (Questions 1 + 2) 10 Limitations of Rulings (Question 3) 13 Scope of Benefits (Question 4) 15 Impact of Double Taxation Treaties (Question 5) 18 Cost and Timing of Application (Question 6) 20 www.baerkarrer.ch 2
Overview & Introduction www.baerkarrer.ch 3
Introduction: Switzerland at a Glance Facts & Figures Key Facts Switzerland Area 41'285 km 2 Population 8'419'600 Population Density 520 per km 2 (habitated surface) Capital City Berne Largest City Zürich Foundation Date 1291 National Day August 1st Government Direct Democracy Federal Parliamentary Republic 7 Federal Councils Parliament 2-Chamber-System Official Languages German (63%) French (23%) Italian (8%) Romansh (1%) Others (5%) Currency Swiss Franc (CHF) 1 CHF = 100 Rappen Time Zone Nov - Mar: CET = UTC +1 Apr - Oct: CEST = UCT +2 Vehicle Code CH Internet TLD.ch Calling Code +41 GDP CHF 658.98 bn GDP per Capita CHF 78'700 Unemployment Rate 3.2% (average 2017) Inflation 0.30% Trade Blance CHF 32.27 bn Direct Investments Switzerland > Abroad CHF 32 bn (2013) Abroad < Switzerland CHF 0.6 bn (2013) Budget plus, CHF 1.3 bn (2013) Export CHF 298.408 bn Import CHF 266.137 bn Status as of end 2016 (unless otherwise noted) Genève FL International Airport www.baerkarrer.ch 4
Switzerland at a Glance Key Features Strategic location in the center of Europe combined with good flight connections to the rest of the world; Strong labour market with well-educated, multi-lingual and flexible labour force ensuring high productivity; One of the highest worldwide quality of life standards; Competitive and stable economy with a strong currency as well as a stable political system; Sound legal system, good environment for setting up a business Good and reliable collaboration with authorities; Fully integrated and efficient capital market. Multilingual culture: German, French and Italian speaking parts of Switzerland, English spoken everywhere, considerable Spanish and Portuguese speaking population; High education standard and world-renowned universities, technical institutes, R&D institutions and technology clusters with significant research capabilities; Outstanding health care infrastructure, world renowned clinics; Strict data protection legislation; Highly developed transport and communication infrastructure; Close ties with the EU including comprehensive Free Trade Agreement and series of Bilateral Treaties; Moderate taxation and various tax planning possibilities. www.baerkarrer.ch 5
Residence in Switzerland Application for Residency Most commonly used grounds to apply for residency in Switzerland Family reunion Gainful employment "Financially independent persons" Pensioners and retirees Education and training EU/EFTA-Citizen: Due to the Agreement on the Free Movement of Persons relatively easy to apply for residency in Switzerland Non-EU/EFTA-Citizen: Depending on whether a gainful activity will be carried out www.baerkarrer.ch 6
Residence in Switzerland Residence Permits with a gainful Activity Working in Switzerland EU/EFTA Nationals Due to the Agreement on the Free Movement of Persons relatively easy to apply for residency in CH Short-term employment up to 3 months: - No authorization needed (but registration of employment required). Employment longer than 3 months: - Residence permit required (i.e. employment contract needed). - For certain industry sectors: no qualifying applicants on the Swiss market available. Self-employed: - Accounting records have to be presented. Non EU/EFTA Nationals Employment: - Limits on the number of foreign nationals permits - Job offer needed - No person with equivalent qualifications can be found in CH or in EU/EFTA countries - Prospective employer must submit an application to the cantonal immigration or labour market authorities Self-employed: Authorization needed - Limits on the number of foreign nationals permits - May be granted if justified on economic grounds and if certain personal requirements are met - Different if married to a Swiss citizen or to a person permanently resident in CH www.baerkarrer.ch 7
Residence in Switzerland Residence Permits without gainful Activity Mere residence permits (without gainful activity) are granted to: EU/EFTA Nationals Non EU/EFTA Nationals EU Nationals, if they can prove that they: Non-EU Nationals, if they ("Pensioner-Rule"): a. have adequate financial means for themselves and their families; b. have comprehensive health insurance coverage. a. are at least 55 years old; b. can show a special relationship to Switzerland; and c. have adequate financial means. No problem for EU/EFTA-citizen including non- EU/EFTA-spouse, potentially subject to change. Or: Individuals of specific "economical interest" to the Canton in question Lump-sum tax www.baerkarrer.ch 8
Residence in Switzerland "Pensioner-Rule" "Pensioner-Rule" Mere residence permits (without gainful employment) are granted to: Non-EU Nationals, if they: a. are at least 55 years old; b. can show a special relationship to Switzerland; and c. have adequate financial means. General requirements To ensure that they have effectively retired from active professional life, the pensioners must submit a corresponding confirmation. They have to agree to not pursue any gainful employment neither in Switzerland nor abroad. The pensioners need to have their center of life in Switzerland. The extension of the permit will be denied if the authorities find out that the foreigners have their center of life abroad. Special relationship with Switzerland The applicant has to prove the special personal relationship with Switzerland, such as e.g. longer previous stays in Switzerland (with a residence permit), intensive business and personal relationships or the presence of close relatives (i.e. parents or children). The intensive business and personal relationship has to be proven by regular stays as a tourist, visit or business trips (i.e. flight tickets, hotel bookings). Tax interests as well as extraordinary cultural or economic merits may also be considered. Enough funds Pensioners are deemed to have the necessary financial resources if these are sufficient to be lived on until death (pensions, assets) so that the risk of welfare dependency is assessed to be negligibly small. www.baerkarrer.ch 9
Taxation in Switzerland Overview: Taxation of Individuals Unlimited Taxation Residence in Switzerland. Stay of at least 30 days in Switzerland and employment. Stay of at least 90 days in Switzerland without employment. Limited Taxation Foreign residence and employment in Switzerland. Foreign residence and earnings from compensations as member of board of directors, management or CEO of a Swiss legal entity. * Tax rates 2017. Assumptions: not married, no church affiliation, no children Tax Object Tax Rate Income Tax (federal, cantonal, communal) Wealth Tax (cantonal, communal) Inheritance and Gift Tax (cantonal) Employment income Investment income Pension income Etc. Exemption: i.a., private capital gains Worldwide wealth, except real estate and business abroad. Object: Gifts and successions of CH residents (except SZ) and real estate in CH Recipient is tax liable in canton of decendent's / donor's (last) domicile / situs canton of real estate Withholding Tax Distribution of dividends or interests. Exemption: Repayment of nominal capital and capital contribution reserves. Full refund for Swiss residents, to check: availability of full or partial refund for non- Swiss-residents. Progressive tax rates with significant differences between Cantons and between communes within same Cantons* Zug: 22.9% Zürich: 40.0% Geneva: 45.0% Progressive tax rate with moderate differences between communes in same Cantons* Zug: 0.28% Zürich: 0.66% Geneva: 1.00% Depending on Canton Tax rate: 35% Value Added Tax In principle all supplies of goods and services. Ordinary tax rate: 7.7% (reduced tax rates for certain kind of goods and services) Customs Import of goods Personal effects are exempt Depending on goods (weight, measure, tare) www.baerkarrer.ch 10
General Requirements & Eligible Classes of Taxpayers www.baerkarrer.ch 11
Swiss Lump-Sum Taxation General Requirements & Eligible Taxpayers Lump-Sum Taxation abolished in the following cantons: Zurich (2009) Schaffhausen (2011) Basel-City (2012) Basel-Country (2012) Appenzell-Ausserrhoden (2012) General Principles Attractive alternative to ordinary income and net wealth taxation based on worldwide net income and wealth Lump-sum taxation is based on the world-wide expense of the tax payer and his family Eligible Persons Individuals without Swiss citizenship Unlimited liability to Swiss taxation for the first time or interruption of 10 years No gainful employment in Switzerland The managing of own assets is usually not considered as a gainful employment up to a certain extent The activity as a board director is generally not allowed in Switzerland; whether the activity is allowed outside of Switzerland depends on cantonal practice In case of married couples, both partners must fulfill the requirements Taxation Lump-sum as basis for taxation, application of ordinary tax rates Cantons and communes have to raise income and wealth tax In some cantons lump-sum taxation affects inheritance and gift tax www.baerkarrer.ch 12
Swiss Lump-Sum Taxation Individuals of "economical interest" Individuals of specific "economical interest" to the Canton in question "Economic interest" includes fiscal interests (typically in connection with lump-sum taxation) Examples for Cantonal practices (subject to negotiations / tax ruling in specific case) Zug: CHF 1'000'000 taxable income and CHF 20'000'000 taxable wealth (total tax burden of approx. CHF 300'000) Schwyz: CHF 2'500'000 taxable income and CHF 40'000'000-50'000'000 taxable wealth (total tax burden of approx. CHF 500'000) Ticino: CHF 750'000 taxable income (old practice, based on CHF 100'000 as minimum for applicability of lump-sum taxation) Grisons: Tax burden depending on region: Oberengadin (includes St. Moritz): CHF 1'000'000 minimum Tourist Destinations: CHF 500-700 000 minimum Chur Area: CHF 400-500 000 Obwalden: Tax burden (i.a. depending on region): EU Nationals: CHF 110'000 Non-EU Nationals: CHF 225'000 www.baerkarrer.ch 13
Limitations of Rulings www.baerkarrer.ch 14
Swiss Lump-Sum Taxation Limitations of Rulings General requirements for reliability of a tax ruling: 1. Ruling was given without reservations; 2. the public authority issued it regarding a concrete situation regarding specific persons; 3. the public authority has acted in within the confines of its competency; 4. (if the ruling is contrary to the law) the taxpayer was not able to recognize immediately the mistake; 5. the taxpayer has taken dispositions that are not reversible without prejudice; 6. the rules have not changed since the ruling was issued; and 7. the interest of applying the law correctly is not greater than that to protect the taxpayer's confidence in the public authority. (BGer 2C_603/2012 of 10.12.2012, c. 4) www.baerkarrer.ch General Principles No formal legal basis for rulings Only case law, practice and general administrative law Some cantons generally only issue rulings limited in time (e.g. SG: 5 years). If a ruling is explicitly limited in time, the taxpayer cannot rely on it in good faith beyond its time limit, even if the public authority does not object (BGer 2C_888/2014 of 7.6.2015, c. 7.3) rulings have to be renewed explicitly Possible Reasons for Withdrawal of a Ruling Taxpayer no longer fulfills all requirements (e.g. they take up gainful employment in Switzerland, acquire Swiss citizenship). If taxpayer has ceased to be taxed under the lump-sum taxation regime, that taxpayer cannot return to lump-sum taxation. Rulings are revisited due to a change of law. Intertemporal Law Law was changed by 1.1.2016. Art. 205d determines old rules apply until 31.12.2020 to existing rulings Scholarship agrees that withdrawal of a ruling is generally not immediate, if dispositions have been made. 15
Scope of Benefits www.baerkarrer.ch 16
Swiss Lump-Sum Taxation Scope of Benefits Highest of following four categories serving as tax basis: Highest of following four categories for tax basis: Living Expenses Rent / Rental Value Control Calculation Minimum tax basis Living Expenses: worldwide 7x Rent / Rental Value Control Calculation: Swiss income Minimum Tax Basis: CHF 400'000 Number of individuals taxed on an expenditure basis: 2010: a total of 5445 2012: a total of 5634 Highest numbers in cantons: VD (1396); VS (1300); TI (877) Rent apartment Switzerland or costs of privately owned estate Furnish, decoration etc. Travel and holidays Housekeepers Food, beverage & others Health & personal care Insurances Donations, contributions CHF 500'000 7 times annual rent (in case property is rented) or rental value (if property is owned) CHF 600'000 Income from Swiss sources, e.g. Swiss real estate, bank accounts Treaty protected income For wealth tax: Value of Swiss assets CHF 200'000 Depending on Canton: fiscal interest for residence permit minimum tax basis or tax burden (For income and wealth tax) CHF 700'000 Taxable income based on the above assumption: CHF 700'000. Wealth tax: Cantons have to levy wealth tax separately, but are free to determine how this wealth tax (in addition to the income tax) shall be covered by the Lump-sum Taxation. www.baerkarrer.ch 17
Swiss Lump-Sum Taxation Cantonal Comparison Location Lucerne Zug Vaud Geneva Thurgau Berne Capital Airports Lucerne Zurich (60 min) Zug Zurich (45 min) Lausanne Geneva (50 min) Geneva Geneva (15 min) Frauenfeld Zurich (35 min) Bern Belp (25 min) Marginal Income Tax approx. 31 % approx. 23 % approx. 41.5 % approx. 45% approx. 33 % approx. 41.5 % Marginal Wealth Tax 0.26 % 0.28% 0.8 % 1% 0.3 % 0.58 % Minimum cantonal assessment basis: Income Minimum cantonal assessment basis: Wealth i) 7 times ii) 3 times iii) CHF 600'000 20x assessment basis for income, i.e.12 Mio. i) 7 times ii) 3 times iii) CHF 500'000 20x assessment basis for income, i.e. 10 Mio. i) 7 times ii) 3 times iii) CHF 415'000 Assessment basis for income also covers wealth tax i) 7 times ii) 3 times iii) CHF 400'000 Assessment basis for income which is increased by 10%, i.e. CHF 440'000. i) 10 times ii) 4 times iii) CHF 150'000 (minimum tax) i) 7 times ii) 3 times iii) CHF 400'000 - Value of real estate situated in the Canton of Berne. Interested in having new relocates; Discussions with Cantonal Tax Authorities show that individuals economic capacity (i.e. worldwide wealth) is important guideline in negotiations. Declaration of approx. world-wide wealth is mandatory. Remarks - Position on recognition of de facto family very flexible. No employment outside of Switzerland. Tending to a have a rather high taxation. - - i) Annual housing costs (annual rental costs or rental value) ii) Pension fee for accommodation and catering iii) Minimum amount www.baerkarrer.ch 18
Impact of Double Taxation Treaties www.baerkarrer.ch 19
Swiss Lump-Sum Taxation Impact of double taxation treaties Switzerland has double taxation treaties with over 80 countries. The Modified Lump-Sum Taxation applies with the following countries: General Principle Resident taxpayers are able to benefit from all DTTs for foreign income. DTT benefitted income has to be declared in the tax return (control calculation). Taxpayer is taxed based on all income benefitting from a DTT, even if formal request is not necessary. Swiss tax credit benefits are not applicable. 1. Belgium 2. Germany 3. Italy 4. Norway 5. Canada 6. Aus tria 7. United States of America Modified Lump-Sum Taxation Application of certain DTTs requires modification of the lump-sum tax basis. All income from respective countries are treated as if taxed ordinarily, provided there is Swiss legal basis for taxation and no DTT provision prohibits it. The resulting tax base is taxed at the rate applicable to global income. With regard to income, tax deductions, e.g debt interest, and Swiss tax credit benefits apply. (Special rules apply for DTT France) www.baerkarrer.ch Art. 4(6)(b) DTT France excludes taxpayers under the lump-sum regime from the benefit of the DTT. Switzerland grants the benefit of the DTT with France nonetheless, if taxpayer has a certain minimal taxation (forfait majoré). 20
Cost and Timing of Application www.baerkarrer.ch 21
Lump-Sum Taxation Cost and Timing of Application Timing Planning step Costs / Considerations Preimmigration Lump-Sum taxation regime application Pre-immigration tax ruling recommended Wealth / estate planning structures Review of estate planning Pre-immigration tax ruling recommended, especially considering inheritance and gift tax Residence Permit EU/EFTA vs. other nationals Housing Purchase: Lex Koller restrictions Impact on lump-sum taxation Relocation of assets Customs / VAT Social security and other insurances Cf. following slide www.baerkarrer.ch 22
Swiss Lump-Sum Taxation Social Security and Insurances Social security contributions: max. CHF 24'000 per year and spouse Mandatory health and accident insurance Social security status: to be reviewed on case-by-case basis (self-employment, activities abroad, partnerships, etc.) Social Security Payment of social security mandatory due to no exercise of gainful activity Basis: (deemed) net wealth Until age of retirement Men: age of 65 years Women: age of 64 years Limitation: CHF 24'000 p.a. and per spouse (i.e. max. CHF 48'000 for married couple) Other Insurances Mandatory health insurance Mandatory accident insurance www.baerkarrer.ch 23
Practical notes Further topics to be kept in mind Wealth planning structures Swiss tax treatment Tax ruling necessary? Applicable laws, jurisdiction for estate planning and matrimonial law Estate planning Day-today aspects Housing Schooling Health care providers Etc. www.baerkarrer.ch 24
Contact Dr. Ruth Bloch-Riemer Attorney-at-Law, Certified Tax Expert Zurich Phone: +41 58 261 56 51 ruth.blochriemer@baerkarrer.ch Zurich Brandschenkestrasse 90 CH-8027 Zurich P: +41 58 261 50 00 F: +41 58 261 50 01 zurich@baerkarrer.ch Genf 12, quai de la Poste CH-1211 Genf 11 P: +41 58 261 57 00 F: +41 58 261 57 01 geneve@baerkarrer.ch Zug Baarerstrasse 8 CH-6301 Zug P: +41 58 261 59 00 F: +41 58 261 59 01 zug@baerkarrer.ch Lugano Via Vegezzi 6 CH-6901 Lugano P: +41 58 261 58 00 F: +41 58 261 58 01 lugano@baerkarrer.ch www.baerkarrer.ch 25