This fact sheet provides an overview of the Swiss tax system and planning opportunities in connection with expatriates taking up employment in Switzerland. They will be subject to Switzerland’s comprehensive rules and employment visa requirements. Grant Thornton’s expatriate tax team can advise expatriates and their employers in dealing with the Swiss tax and employment visa requirements.
In particular Grant Thornton can assist expatriates and their employers in identifying Swiss tax planning opportunities and provide compliance services regarding the Swiss tax filing requirements.
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The employer is required to apply for a residence and work permit prior to the employee taking up employment in Switzerland. It is therefore important that the expatriate’s employment contract and benefits package is structured in a tax-efficient manner before filing the application.
Employment of non EU/EFTA citizens
Switzerland imposes strict regulations on foreign employees. Each year, the federal authorities review the numbers of work permits that may be issued. In particular, the applicant employer must demonstrate that in spite of all its efforts it was unable to find a suitable person on the Swiss or EU/EFTA labor market.
However, these rules are applied less rigorously for executives or qualified specialists of internationally operating firms within the scope of an intercompany transfer and for executives or highly qualified specialists who are indispensable for important research projects or essential for the fulfillment of extraordinary assignments.
Employment of EU/EFTA citizens
One of the numerous agreements signed between Switzerland and the EU is the agreement on the free movement of persons (including recognition of professional diplomas), entered into force on 1 June 2002. Similar rules are applicable to Iceland, Norway, Liechtenstein (EFTA countries).
The Swiss tax year runs from 1 January to 31 December.
Swiss taxpayers as well as foreign holders of a permanent residence permit (C permit granted after five or ten years of residence depending upon the nationality) are required to file an annual tax return. For foreign holders of a B permit (one year for non-EU/EFTA citizens, five years for EU/EFTA citizens) or an L permit (duration of less than one year), then the tax on salary is collected at source and paid by the employer. If a foreign holder of a B or L permit has an employment income of gross CHF 120’000 or higher per year (relevant bracket for most cantons) and if the person is an unlimited Swiss tax resident, a tax return must be filed as well.
The employee’s personal tax return should normally be filed as of 31 March following the end of the tax year concerned. However, the employee’s canton of residence may allow for an extension of the filing deadline beyond 31 March.
Swiss tax residents are subject to federal, cantonal and communal taxes. If registering with a religious affiliation for the catholic or protestant church, Swiss residents are required to pay church taxes as well. The taxable income is subject to a progressive scale and the tax rate is determined on the basis of the Swiss resident’s worldwide income and net wealth.
For a single person with no children, the global rate calculated on a gross income of CHF 150,000 could vary between 12% and 24%, depending on the place of residence.
For a married person with no children, the global rate calculated on a gross income of CHF 150,000 could vary between 8% and 16%, depending on the place of residence.
Single person without children, no denomination resident in the city of Zurich (in CHF/2019 tax rate and tax multiplier)
|Benefits providing housing||24,000|
|Less social security contributions (assumed employee contrib.)||12,620|
|Less pension scheme (assumed employee contrib.)||14,000|
|Less employment related expenses (estimate)||9,000|
|Less insurance premiums paid (ZH lump sum deduction)||2,600|
|Less interest expenses paid (estimate)||1,000|
|Less charitable contribution (estimate)||300|
|Federal incl. ZH cantonal/municipal income tax||36,100|
Individuals are subject to unlimited Swiss taxation (worldwide income and wealth except foreign business and immovable property) when they are a resident in Switzerland. Individuals are considered a tax resident based on Swiss domestic law:
- either because they are ‘domiciled’ in this country (intention of remaining on a long term basis);
- or because they are ‘resident’, ie they remain in Switzerland without any significant interruption for at least 30 days with a gainful activity (at least 90 days without a gainful activity).
Assessable employment income includes all wages, salaries, overtime pay, bonuses, gratuities, perquisites, benefits, tax gross-ups, etc.
The expatriate’s employer is required to deduct and retain the tax at source from the assessable employment income.
The taxation at source applies to most expatriates moving to Switzerland. The basic principle is that expatriates are subject to wage source tax if they do not have a C permit. However, they must also file an ordinary tax return if their annual gross salary exceeds a certain amount (usually CHF 120,000) or if they have other sources of taxable income.
As mentioned above, where duties are performed in Switzerland, any remuneration received in respect of these duties is subject to Swiss income tax regardless of the expatriate’s tax residence status (subject to the relevant Double Taxation Agreement (DTA)).
In general, where a benefit is enjoyed in Switzerland, a Swiss income tax charge will arise. Therefore, housing, meal allowances, provision of a car, and relocation allowances will be considered for income tax purposes in addition to the individual’s salary.
Where no DTA applies, double taxation on foreign source income is in principle alleviated by means of the deduction method (foreign tax deducted from the taxable income).
Where a DTA exists, double taxation is in principle eliminated in accordance with the exemption method.
However, the credit method is utilized for dividends, interest and, sometimes, royalties derived by Swiss residents from another contracting country: Under the credit method, the foreign tax at source is credited against Swiss taxes, however, the credit may not be higher than the amount of Swiss taxes on such income. A so-called lump tax credit mechanism has been enacted for this purpose.
Certain expenses can be provided by an employer free of income tax where they qualify as wholly, exclusively, and necessarily incurred in the performance of the employment duties.
Personal tax deductions apply to Swiss tax residents and are based on their personal tax circumstances.
Individuals qualifying as expatriates for Swiss tax purposes are entitled to special deductible expenses (directly related moving expenses, reasonable housing costs in Switzerland if a permanent residence is kept in the country of origin and kept permanently available for personal use (not rented out), schooling expenses in the native language (unless the Swiss public school system already provides class in the native language)).
These deductions are only admitted provided they are not reimbursed by the employer. In order to qualify as an expatriate an employee must either be a senior executive or a specialist with special professional qualifications who is assigned to Switzerland by his foreign employer for a limited period of up to five years. The Swiss authorities are strict in regard to acceptance of expatriate deductions and usually require a lot of additional documentation to assess if an individual is considered an expatriate for Swiss tax purposes.
Capital gains on movable private (not business) assets are generally exempted from income tax. Capital gains on immovable property are generally subject to a separate real estate capital gains tax.
These taxes are levied (only at cantonal and communal levels) if the deceased/donor is Swiss resident (also on immovable properties situated in Switzerland). The rates are progressive and depend on the degree of relationship between the deceased/donor and the heir/donee. However, no tax is levied between spouses and, in many cantons, between parents and descendants. Moreover, the respective DTAs must be considered in an international inheritance context.
Investment income such as interest, dividends, etc. is subject to Swiss income tax.
Depending on the municipality of residence, real estate taxes are levied on a cantonal and/or municipal level.
The Swiss social security system is based on the so-called ‘three pillars’.
- The 1st pillar: Old age and survivor insurance (AVS/AHV) and disability insurance (AI/IV), with the objective to meet the basic needs of retirees, survivors and disabled individuals. Individuals with gainful employment in Switzerland are required to contribute. The total contribution is currently 10.6% of total employee remuneration. Half of it is paid by the employer and the other half (5.3%) is paid by the employee.
- The 2nd pillar: Company pension plan, with the objective to maintain the individual’s standard of living after retirement. Individuals with gainful employment in Switzerland are required to contribute. Total contribution varies according to the age of the person and the scheme chosen by the company. The cost for a minimal pension plan amounts to about 20% of the total employee remuneration. At least half of it is paid by the employer and the remaining portion by the employee
- The 3rd pillar: Private pension funds, with the objective to build up private capital. This is encouraged by tax exemptions but is not required.
Individuals with gainful employment in Switzerland are also required to contribute to unemployment insurance.
The total contribution is 2.2% of the employee remuneration, capped at CHF 148,200, per year. Half of it is paid by the employer and the other half (1.1%) by the employee.
For the part of salary exceeding CHF 148,200 the applicable rate is 1% and this is payable half by the employer and half by the employee.
However, if certain conditions are met, expatriates generally remain affiliated to the social security system of their own country (for EU/EFTA citizens Form A1 and for many other countries Certificate of Coverage).
Monetary benefits deriving from employee shares are generally taxable as employment income at the time the shares are granted/vested.
For restricted shares, the market value is reduced according to the number of years the shares are blocked. The discount amounts to approx. 6% per blocked year on the market value of the share and is applicable to a maximum of ten years.
Monetary benefits deriving from employee options that are traded at the stock exchange are taxed at the time of granting.
Options that are not traded at the stock exchange or restricted are taxable at the time they are exercised. The taxable benefit corresponds to the difference between the market value of the share at exercise date and the exercise price.
Wealth tax on the cantonal and communal level is assessed on net assets. The rates, subject to a progressive scale, are typically in the range of 0.1%-1%.
Church tax is levied on a cantonal/municipal level as a percentage/multiplier of the taxable income and net wealth.
Where foreign employment continues to exist and part of the expatriate’s duties are performed outside of Switzerland, any employment income received in respect of the foreign duties will be treated in accordance with the DTA.
A significant part of tax planning involves the effective structuring of employment arrangements. Grant Thornton’s tax team can advise expatriates on these and related opportunities.