Introduction

Unlike in most countries, where taxes were typically imposed from the top by a king or a dictator, in Switzerland, tax-raising was introduced democratically in the cantons. The federal government got the right to impose indirect taxes, such as value-added taxes, excise taxes, stamp duties, and customs duties, with the Constitution of 1848. It was only under the pressure of war expenditures that in 1940 the federal government was authorized to levy direct taxes. Initially, this income tax was intended to be an extraordinary financing source for World War II, but politicians quickly got used to additional expenditures which have grown since then. After the war, it was renamed the Direct Federal Tax. With the postwar demand for more social security expenditures—for old age, illness, and unemployment—tax categories increased to 12 by 2022, and the federal government got more tasks which led to rapidly rising Federal tax incomes.

The cantons and municipalities continued to raise taxesFootnote 1 and, because of the overlap among federal, cantonal, and municipal taxes ,Footnote 2 the Swiss Federal Constitution empowered federal authorities to harmonize the basis of these taxes. In 1993, the Federal Tax Law Footnote 3 was passed to achieve horizontal harmonization , and on January 1, 1995, further legislation at the federal level was implemented to achieve vertical harmonization .Footnote 4

These harmonization efforts allowed for better statistical comparisons. Unlike the stories of a tax paradise, these comparisonsFootnote 5 show that the total tax burden in Switzerland is only slightly below the OECD’s European average and is only achieved because defense expenditures had been cut dramatically.

However, these cuts were more than offset by Social Security expenditures, with the federal government’s share growing to one-third of the tax pie, and the cantons and municipalities accounting for the remaining one-third each.Footnote 6 By international standards, Switzerland cannot be called a tax haven .Footnote 7 Furthermore, Switzerland raised most of its revenue through individual and social insurance taxes. These revenue sources contrast with OECD countries, where consumption taxes are most important.Footnote 8

Figure 12.1 shows Swiss corporate tax rates from 1981 to 2019. During the 24 years between 1981 and 2005, they trended downward from about 33% to approximately 21%, where they remained fairly constant until 2019. With the introduction of a patent box, the Swiss government reduced the corporate tax rate marginally in 2020 (not shown in Figure 12.1) to incentivize R&D expenditures.

Fig. 12.1
A line graph of tax rate percent, from 1981 to 2017. It plots a line with a downward trend between 33% to 21%. Values are estimated.

(Source: Tax Foundation, Taxes in Switzerland, https://taxfoundation.org/country/switzerland/#corporate [Accessed on September 13, 2022])

Switzerland's Top Corporate Tax Rates: 1981 to 2019

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Switzerland raises most of its revenue through individual and social insurance taxes. Figure 12.2 shows how these revenue sources contrast with OECD countries, where consumption taxes are most important:

Fig. 12.2
2 stacked bars of Switzerland and O E C D average, in percent. Switzerland has the most individual, corporate, property, and other taxes. O E C D average has the most social insurance and consumption taxes.

(Source Tax Foundation, Sources of Revenue in Switzerland, https://taxfoundation.org/country/switzerland/#sources [Accessed on September 13, 2022])

How Does the Swiss Government Raise Revenues Relative to OECD Nations: 2020

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Just as there are tax laws at the federal level, parallel ones exist for each of the 26 cantons. Because of Switzerland’s federalist structure, federal, cantonal, and municipal governments receive tax income in roughly equal proportions. However, these one-third averages do not reflect equal tax charges in the 26 cantons and 2,148 municipalities. Significant differences depend on where a person lives or a company is registered. As a result, the after-tax return an investor or company earns relies on the choice of cantonal and municipal residence.

Table 12.1 provides an overview of the Swiss tax system. It shows how taxes are imposed on three levels: federal, cantonal, and municipal. Individuals pay taxes, such as personal income and wealth taxes, while corporations pay corporate income tax, capital tax, VAT, and capital gains tax.

The tax imposed depends on the nature of the transaction or the type of assets considered. A good example is the difference between withholding taxes, which are imposed on earned income, and stamp duties, which are raised on the issuance or transfer of securities. Whereas Table 12.1 gives an overview of all Swiss taxes, this chapter focuses on those taxes that are most relevant to Switzerland’s financial markets and are typically paid by investors.

Table 12.1 Overview of swiss taxes
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Federal Withholding Tax

The federal government imposes a 35% withholding tax on certain Swiss capital income, such as dividends of domestic companies, qualifying interest payments of domestic borrowers, bonus shares, interest on Swiss bank accounts,Footnote 9 domestic collective investment schemes, and even lottery prizes.Footnote 10 There is no withholding tax on revenues from foreign sources, such as foreign bonds and notes. In 2022, the 35% federal withholding tax on Swiss-earned, capital market income was the only Swiss duty applied at the source level.Footnote 11 Its primary purpose is to ensure that individuals, who should pay taxes, actually pay them, hence, the avoidance of tax evasion .

For Swiss taxpaying residents (both individuals and corporations), Swiss withholding tax payments are not lost because they are either reimbursed by the government or paid for personal tax liabilities. In fact, a complete 100% refund (or offset) can be claimed when income taxes are declared. Relief from withholding taxes must be applied for and is given by means of refunds, or in specific cases, by means of withholding tax relief at the source.Footnote 12

By contrast, non-Swiss residents cannot reclaim any part of this tax unless their country of residence has a Double Taxation Agreement (DTA) with Switzerland or a bilateral agreement, such as the one between the European Union (EU) and Switzerland governing the automatic exchange of information. In most nations, this unrecoverable portion of the withholding tax can be deducted from gross income for tax purposes.

In 2022, Switzerland had DTAs with over 100 countries and was seeking to extend its agreement network further. Switzerland also has agreements for the avoidance of double taxation with respect to inheritance and estate taxes.Footnote 13

Regardless of their existence, the real value for investors of these DTAs depends critically upon how rapidly and reliably the authorities refund taxes. Experience has taught many investors that it is preferable to avoid, or at least carefully structure, investments where withholding taxes are involved.

The Federal Council published a dispatch on reforming the withholding tax for the attention of the Swiss Parliament on April 14, 2021. Under the proposal, the withholding tax would continue to apply (unchanged) to the interest paid on bank accounts held by private individuals in Switzerland, but it would no longer apply to interest (coupons) paid on bonds or to individuals outside Switzerland. In respect of the latter, the international system of automatic exchange of information in tax matters has established itself as a safeguard, removing one of the main purposes of a withholding tax.Footnote 14 The Federal Council published a report by BAK Economics in June 2019 that looked at the economic impact of abolishing the stamp duty and comprehensively reforming the withholding tax .Footnote 15 The report concludes that these reforms would boost gross domestic product by 1.4% within ten years, which equates to around 22,000 new jobs on a full-time equivalent basis.

Federal and Cantonal Stamp Duties

There is hardly any transaction with securities that is not taxed on the federal level, starting with the issuance of securities, the transfer of securities ownership, and insurance premiums. These Swiss stamp duties are imposed at the federal level, and they have been the most counterproductive taxes of Switzerland’s financial market, because they have prevented the development of a competitive money market by increasing Switzerland’s transaction costs above average international levels, forcing financial transactions abroad. They are generally being cited among the most important reasons for the nation’s anemic money market development.

Critics often mention these duties as responsible for Switzerland’s significant loss of mutual fund business to Luxembourg and the loss of major portions of the equity and Eurobond businesses to London from the 1970s to the 1990s. For these reasons, the Swiss electorate voted, in a September 1992 referendum, to abolish the stamp duty on money market transactionsFootnote 16 and replace it with a tax that varies with the maturity of domestic notes and bonds. To reduce or reverse outflows of capital and to mitigate the loss of businesses to countries with lower taxes, Switzerland repealed, among other things, its securities transfer stamp tax on:

  • Transfers related to the issuance of bonds by foreign borrowers in currencies other than Swiss francs and Swiss-franc bonds of foreign borrowersFootnote 17;

  • Transfers (i.e., secondary market) of Eurobonds and Swiss-franc bonds of foreign investors to the extent that a foreign seller or purchaser is a party to the transaction;

  • The issuance and transfer of money market papers (i.e., collective fundraising debt instruments with maximum fixed terms of 12 months);

  • Transfers related to the issuance of Swiss mutual fund certificates; and

  • Corporate relocations to Switzerland.

As a consequence of these tax-reduction measures, liquidity in the Swiss capital markets increased immediately. Within a few weeks of the referendum, Swiss share trading volume doubled on the Swiss markets. At the same time, trades of Swiss shares in London fell by half.Footnote 18 Increased transactions involving bank Nostro dealings were especially noticeable.

There are many exceptions to the securities issuance stamp tax. One such exemption applies to mergers and changes in corporate structure. There are also exceptions for individuals who are counterparties to foreign banks, brokers, and exchanges, but, with exchanges, these exceptions only apply if they acquire or deliver securities as counterparties to transactions involving standardized derivative instruments. Further exceptions may apply for certain institutional investors, such as mutual funds and foreign-regulated life insurance companies.Footnote 19

In December 2011, the Swiss Federal Council abolished stamp duties on the issuance of debt instruments (bonds and money market papers) and shares issued upon exercise of contingent convertible bonds (coco bonds). This change was implemented,Footnote 20 and immediately thereafter, the Swiss Federal Tax Administration prepared to reform Switzerland’s corporate tax laws, with the ultimate goal of abolishing all stamp duties on the issuance of equity . As of 2022, it was clear that these changes would not take effect because, in the public vote of February 2022, the Swiss population rejected the abolishment of stamp duties on the issuance of equity . As mentioned above, on April 14, 2021, the Federal Council published a dispatch on reforming withholding tax for the attention of the Swiss Parliament , in which it also proposed abolishing the transfer stamp tax on Swiss bonds.

  1. 1.

    Stamp duty on the issuance of new securities.

A one percent issuance stamp tax is imposed on corporations wishing to tap the Swiss capital market by either issuing new shares or increasing the nominal capital.

  1. 2.

    Stamp duty on secondary market trading of securities.

The stamp duty on security trading accounts for more than half of the annual federal stamp tax revenues, which were about CHF 2.6 billion in 2021.Footnote 21 This stamp duty must be paid for any transaction that involves a change in security ownership against remuneration between any party to the transaction and a Swiss security dealer acting as either a counterparty or intermediary. For the purchase or sale of foreign securities , a rate of 0.3% is imposed on the Swiss franc value of the security, and a rate of 0.15% is imposed on the transfer of domestic securities . Under the law, the securities dealer owes the tax for both parties, which means the dealer pays each half owed by the buyer and seller, assuming neither party is exempt from the tax. Both equity and debt securities , such as bonds, cash bonds, and mortgage bonds , are subject to this tax. As an anomaly to the system, stamp duty on securities trading also applies to issuances of foreign collective investment schemes (i.e., to a primary market transaction ) to the extent that a Swiss securities dealer, acting as either a counterparty or intermediary, is involved in the transaction .

  1. 3.

    Stamp duty on insurance premiums.

In general, a 5% duty is levied on insurance premiums, mainly for liability, fire (unless the item covered by the insurance is located outside Switzerland), damage, and household insurance. In each case, the insurer is held responsible for paying the tax. Special regulations, for life insurance policies, include a 2.5% stamp duty on life insurance policies that have cash-surrender value and were purchased paying a single premium. Similarly, life insurance policies with periodic premium payments are exempt from the duty, as are reinsurance, health, accident, disability, and unemployment insurance policies.

Cantons and municipalities can levy stamp duties as well, but are limited to areas where the federal stamp taxes are not applicable, such as the Ticino cantonal stamp duty on specific contracts and banking documents issued/signed in the canton.

Personal Income Taxes

Personal income is taxable on the federal, cantonal, and municipal levels. Apart from the special case of labor income, which will not be discussed further in this chapter, taxation depends on the type of investments and, therefore, the source of income. In particular, saving by Swiss residents for old-age retirement generally is tax-deductible, so long as the funds are invested in certified, restricted-access accounts. In 2022, the maximum deductible savings amount per year was CHF 6,883 for individuals with an employee benefit scheme and CHF 34,416 for self-employed savers.Footnote 22 Moreover, these funds are not subject to wealth taxes and, until they are paid out, their returns are free from Swiss income taxes . These funds must remain invested until at least five years before applicants reach the qualifying age for state, old-age pension benefits, but can be withdrawn in case of emigration to an approved country, for self-use-housing, or leave for self-employment.

Deductions from taxable income are limited and depend on whether an individual already belongs to an occupational pension plan. For saving in unrestricted accounts, both cantons and the federal government provide some relief in the form of deductions. By contrast, the income from free-access savings is taxable at ordinary income tax rates, unless it is part of a retirement plan, in which case, a lower special tax rate is applied at the time of payout.

Personal Capital Gains Tax

Neither the Swiss Confederation nor any of the 26 cantonsFootnote 23 imposes a capital gains tax on security trades by private individuals (i.e., the capital gains associated with moveable property), and, in 2001, Swiss voters rejected an initiative to re-launch the tax. By contrast, capital gains are taxed as regular income if earned from a business activity. This difference is important because private investors who trade securities on a regular basis and earn profits on such trades might be classified as professional traders by the tax authorities and hence become subject to this tax. Similarly, these earnings are heavily taxed if they involve short-term gains associated with real estate .

Capital Gains Taxes on Real Estate

In contrast to securities transactions, Switzerland imposes a capital gains tax on real estate equity at the cantonal and municipal levels, and individuals and corporations must pay this tax. Depending on the cantonal law, either a special real estate capital gains tax applies, or these gains are taxed according to regular corporate income tax regulations. The canton of Basel-Stadt, for example, generally takes 60% of the profits if real estate is sold within three years of its purchase. This rate is reduced by 0.5% for each additional month thereafter and reaches a floor at 30% starting in the ninth year after a property’s purchase.Footnote 24

In addition to the capital gains tax, cantons impose other taxes on the transfer of real estate, depending on the purchase price. The rate is usually in the range of 1 to 3%. They also impose a wealth tax on real estate, which varies between 0.03 and 3%. Therefore, even if no official capital gains tax exists, there are many areas and situations in which an effective capital gains tax is actually imposed.

Corporate Income Tax

For all Swiss-domiciled corporations, profits are taxed at the federal, cantonal, and municipal levels. The tax rates for Swiss-domiciled companies are based on worldwide income, except for earnings from non-domestic real estate and permanent foreign establishments. Because rates in each canton and municipality vary, a corporation’s tax burden depends heavily on the company’s domicile. To avoid conflicts, specific rules apply to the allocation of taxing powers if a corporation maintains a presence in more than one canton, such as a company with its domicile in Zurich and a permanent establishment in Geneva. In general, the maximum statutory rates on before-tax income vary between 11.9 and 21.04%,Footnote 25 including a federal income tax , which is imposed at a flat rate of 8.5%Footnote 26 and assorted cantonal and municipal rates.

Switzerland’s corporate income tax rates were significantly lowered during the past fourteen years. In 2008, the average tax rate was 19.44% which was lowered to 14.68% in 2022.Footnote 27 The lowest effective corporate income tax (including the federal income tax ) is on corporations located in the cantons of Zug , Nidwalden, Lucerne, and Glarus. In each of these cantons, the tax rate is about 12%. The highest tax rate among all Swiss cantons (approximately 21%) is in Bern.Footnote 28

Certain stakes that one company has in another may qualify for participation relief. In such cases, capital gains are exempt from taxation, in proportions corresponding to the ratio between the net earningsFootnote 29 on such participations and total net profit. Since January 2011, capital gains have qualified for such an exemption in cases of participations of at least 10%Footnote 30 (20% before 2011), given that the selling corporation or cooperative has owned the share for a minimum period of one year and the capital gain exceeds the historical acquisition costs of the participation. In general, the cantons and municipalities are free to decide whether or not to introduce legislation that provides for participation relief on capital gains.

On January 1, 2020, Swiss tax reform entered into force and the previously available special tax statuses at cantonal level (e.g., holding status, mixed company status, or principal company status) for Swiss corporate entities fulfilling certain requirements were abolished. For companies previously benefiting from such special tax statuses, specific transitional rules were introduced to mitigate the impact of tax reform. The abolishment of the special tax statuses was also cushioned by a general reduction of the cantonal and municipal income tax rates and by the introduction of new tax measures aimed at increasing the tax competitiveness and attractiveness of Switzerland while introducing measures widely accepted abroad. The newly introduced measures provide for a patent box, a R&D super-deduction, and for a notional interest deduction and are capped with a maximum relief percentage. The cantons are free within some boundaries provided by the Swiss tax reform to implement the mentioned measures and relief capping..Footnote 31 With these measures, Switzerland retained its international attractiveness and was able to safeguard the inter-cantonal tax competition.

Taxes may also be rescinded if a company agrees to operate in one of Switzerland’s eligible regional areas. To qualify for this tax benefit, cantons usually have additional conditions, which are often connected to innovation, investments, and job creation. The Appendix to this chapter, entitled Statutory Top Corporate Rates around the World, 2021, provides a comparison for 2021 of global corporate tax burdens, showing that Swiss corporate tax rates were still below the international average.

Cantons are free to define their own individual tax rates. As a result, some cantons have flat-rate taxes on profits while others tax them on a proportional basis. Municipal taxes are typically a fixed multiple of the cantonal tax.

Each corporation in Switzerland is taxed as a separate legal entity, which means the parent and affiliates are taxed separately, and there is no group consolidation for tax purposes. A parent company is taxed only on its own income and the dividends it receives from affiliates.Footnote 32 As long as the transactions between a Swiss branch and foreign head office are at arm’s length, Switzerland imposes no withholding taxes on profit transfers abroad.

At the federal, cantonal, and communal levels in Switzerland, corporate losses may be carried forward for as many as seven business years and deducted from future net profits.Footnote 33 For many start-ups , this period is overly restrictive.Footnote 34 Loss carryback provisions are not permitted by Swiss tax authorities, except for the canton of Thurgau, which allows a one-year carryback on the cantonal and municipal levels.

Corporate Capital Tax

In Switzerland, only the cantonal/municipal tax authorities impose capital taxes on a company’s net equity, which is defined as the sum of nominal capital, paid in surplus, retained earnings, other equity reserves, and, according to Swiss thin capitalization rules, potentially existing deemed or hidden equity. Tax rates vary depending on the place of business but are typically below 0.5%. As a result of Switzerland’s relatively recent corporate tax reforms,Footnote 35 which became effective in 2009, cantons are allowed to deduct the cantonal corporate capital taxes from the cantonal corporate income taxes . In practice, this means that only the higher of the two rates has to be paid. In addition, Swiss corporate tax reform allows the cantons as of January 1, 2020, to introduce an adaptation of the capital tax base for participations, patents, and loans to group companies, which typically lowers the impact of capital tax provided that qualifying assets are held.

Value-Added Tax (Vat)

The Swiss value-added tax (VAT) has been in force since 1995, when it replaced the nation’s turnover tax. Unless an activity is expressly exempted from the tax, such as medical services and cultural offerings, this tax is imposed on all transactions in Switzerland involving the exchange of goods and services. Business owners whose revenues exceed CHF 100,000 are liable for the VAT. Since January 1, 2018, the standard tax rate was 7.7%, but the tax on basic goods, such as water, food, books, and newspapers, was 2.5%. Moreover, a special rate of 3.7% was applied to hotels.

VAT is a tax on domestic consumption. As a result, it is also imposed on all imports but not on exports. Therefore, domestic products are able to compete in the international markets without the added tax burden, and foreign producers must bear the same VAT burden as domestic Swiss companies.

Corporate Capital Gains Tax

Capital gains earned by corporations are classified as direct income and subject to taxation at the standard rates described above. As mentioned above, the tax on real estate capital gains is often treated differently from canton to canton and within a canton. The rate can also vary depending on how long the asset has been held.

Special Aspects of Corporate Taxation

Taxation of income, capital, and capital gains may differ depending on the particular situation and structure of a company. Of particular interest here are the tax treatments of dividends, and foreign income.

  1. 1.

    Taxation of dividends and stock dividends.

Since 2011, corporations and cooperatives owning at least 10% (20% before 2011) of a dividend-paying corporation’s share capital or owning participations with a current market value of at least CHF 1 million (CHF 2 million before 2011) receive a profit-tax abatement. The abatement is without regard to any minimum holding period and in proportions that correspond to the ratio between the net earnings on such participations and total net profit. Tax relief on such significant shareholdings in other firms is mandatory at all levels. Relief is mandatory at all levels of taxation (federal, cantonal, and municipal) to avoid triple taxation of the same profits. Without such relief, each Swiss franc profit would be taxed at the corporate, holding company, and individual levels. Stock dividends are subject to taxation at the federal level in the same manner as cash dividends. Cantons also tax stock dividends, but they are not homogeneous with respect to the timing. Some cantons levy the tax directly when a stock dividend is issued, while others wait until the stake is sold.

  1. 2.

    Taxation of foreign income.

Income from domestic and foreign sources generated by a Swiss resident corporation is subject to income taxation in Switzerland, except for income from foreign real estate or income allocated to a foreign permanent establishment. Such foreign income would be unilaterally allocated abroad and not be taxed with corporate income tax. Cantons with progressive corporate income tax rates may, however, consider such income for the assessment of the applicable corporate income tax rate (i.e., consider for tax rate progression). Unrecoverable foreign withholding taxes in countries with which Switzerland has double tax treaties typically can be indirectly credited against the taxes due considering a tax credit capping mechanism. If no Swiss income taxes are due by the Swiss resident company (e.g., due to a loss or offsetting of income with tax losses carried forward), no tax credit is granted and the foreign suffered tax is lost. The withholding taxes of non-treaty countries cannot be offset against corporate income taxes, but there is an allowance for income tax purposes, i.e., a net taxation of the income.

Conclusion

Switzerland is neither a tax haven nor a tax dungeon. Tax rates are about equal to the international average, but if Switzerland’s special tax measures are considered, they often fall somewhat below this level. Because taxes are a crucial element of business (and business decisions) and because Switzerland has many exceptions and three levels of taxation (i.e., federal, cantonal, and local), professional tax advice is a must.

Generally speaking, Switzerland’s tax structure has not been particularly kind to capital market transactions. In fact, it has driven some businesses to offshore markets and to nations with more benevolent rates and treatment. Switzerland’s tax system strongly favors debt over equity, and for young capital-intensive companies that are at the frontier of technological development and facing long development horizons, it has been (and is) a clear obstacle.