The Swiss tax system is characterized by various levels of direct taxation: direct federal tax, cantonal taxes and municipal taxes. The tax legislation in the individual Swiss cantons is often very different from one canton to another. The cantons were required to adapt their tax legislation according to the federal tax – harmonization law. However, this law did not aim to make every canton accept the same tax legislation.
Important decisions regarding tax rates continue to remain under the authority of the cantons.
Cantonal and federal taxes in Switzerland
In principle, individuals and legal entities are liable for tax in any Swiss canton, if their residential or business domicile is located there, or if they operate a branch there. An obligation to pay tax on assets and income can also exist if the domicile of the legal entity is outside Switzerland. Foreign persons can be taxed at source for income, which they earn professionally in a Swiss canton, such as remunerations for attending company meeting or director’s fee.
To find out if this is the case, it is advisable to consult the double taxation treaties that Switzerland has with various countries. Switzerland has such treaties with most industrialized countries, regardless if they’re part of the European Union or not.
Income and capital tax
Direct federal tax, cantonal taxes and municipal taxes are levied on the income of a corporation, while the capital is subject only to cantonal and municipal taxes. Depending on the activity of a corporation, the tax rates may vary. Different tax rates apply to operating companies, holdings, domicile companies and mixed companies. Some cantons offer tax privileges to holding, mixed and domicile companies.
Operating companies are legal entities that carry out trading, manufacturing or service activities. These companies are subject to ordinary taxation. Tax is payable on the taxable net profit and the paid up share or foundation capital as well as on disclosed and tax hidden reserves.
Opposite to federal tax, which provides limited privileges for holding companies, the tax legislation in some Swiss cantons provides privileged taxation for certain corporations, depending on their activity.
Holding companies are exempt from cantonal income tax and pay a reduced rate of capital tax. At federal level, based on the income from significant investments in other companies, it is possible to claim a tax reduction, known as participation deduction.
Investment companies are granted a tax reduction at cantonal level for significant investments in other companies, similar to the participation deduction.
Management companies are fully taxed for revenues from Swiss sources, however the income from foreign sources is proportionally taxed, depending on the extent of the activity. Income from investments in other companies is tax – exempt.
Mixed companies are taxed according to various regulations. The taxable net profit of a mixed company is assessed in accordance with divisional calculation. A certain sum consisting of management costs and taxes may be allocated as a deduction. Income derived from outside Switzerland is taxed on a scale calculated in accordance with the number of fulltime employees in Switzerland.
Principal companies can claim a deduction at the level of direct federal tax for business conducted outside Switzerland, such as trading transactions with foreign subsidiaries and sister companies or allocation of manufacturing orders to such foreign companies.
The distribution of a corporation’s profits is a subject to the Swiss Confederation withholding tax. This tax is levied at source and is currently at the rate of 35%. A refund is possible, depending on the tax treaty between Switzerland and the country of residence.
In the case of a Swiss company and a Swiss subsidiary, the company that is paying out a cash dividend may choose between delivering up the withholding tax or applying the notification procedure.
Value – added tax
The supplies of goods and services within the territory of Switzerland give rise to the value - added tax, levied on gross sales. Export and services rendered abroad are exempt from VAT. Liable for this tax is any legal entity, which carries on a business. Exempt from tax liability is anyone who generates turn – over from taxable supplies of less than 100,000 CHF within a year. The normal VAT rate is 8%, a low rate in comparison to other UE countries. For certain goods and services the rate is even lower, just 2.5%.