Principles of taxation
Within the context of the taxation system according to expense, currently in force, and commonly called “lump sum taxation», the law provides for a flat rate taxation negotiated with the tax authorities.
Therefore, on a sum established accordingly, the tax charge is calculated by applying to it the income tax rate applicable. The tax due according to the lump sum taxation negotiated with tax authorities is a substitute for a higher tax amount which would have been due on the income and the wealth of the taxpayer. (Subject to exceptions mentioned below. It is called “pure fixed rate”).
Example: The taxpayer negotiates Valais with Tax Administration of the canton of Valais a tax base of CHF 250 ‘000 including income tax as well as wealth taxation. To this sum is applied the income tax rate in force for this income range (33 %). The annual taxation of the taxpayer is of CHF 82’ 575.
Subject to the amount of the rent or annual rental value
The sum negotiated with the tax authorities which cannot be less than the equivalent sum for five times the annual amount paid for the rent or the rental value, is decisive for the taxation.
This is valid but subject to an overtaking of this sum by control calculation.
The tax calculated on the sum negotiated with the tax authorities cannot be inferior to the following elements:
- Income from real estate assets in Switzerland;
- Income from movable objects located in Switzerland;
- Income from investments placed in Switzerland, including receivables guaranteed by pledged assets;
- Income from royalties, from patents and from other similar rights exploited in Switzerland;
pensions, private incomes and pensions of Swiss source, income for which the taxpayer requests a partial or complete tax relief of foreign taxes in accordance with a convention concluded by Switzerland in view of avoiding double taxation.
The elements which are more often taken into account as part of the control calculation is income coming from movable objects and real estate assets and from investments placed in Switzerland, as well as the income for which a tax relief in accordance with a convention of double taxation is requested.
Example: The base sum negotiated in the canton of Valais is of CHF 250 ‘000 (that is CHF 82’ 575). The taxpayer holds a portfolio of Swiss shares. The venal value of the portfolio is of CHF 15 ‘000 ‘ 000. The annual return of this portfolio of Swiss shares is of CHF 500 ‘000. The withholding tax of 35 % on the return of Swiss shares is of CHF 175’ 000. The fiscally deductible expenses of administration and of management of the portfolio are CHF 20 ‘000. The control calculation breaks down as follows:
- ordinary taxation of wealth 0.63% (wealth tax rate) of CHF 15’00’ 000 = CHF 94’500
- Ordinary net income taxation: CHF 480’000 * 38.50% (income tax rate for this instalment) = CHF 170’552.
- Total ordinary taxation according to the control calculation method CHF 265’052
In summary, the amount of tax calculated in accordance with the negotiated lump sum basis is compared with the amount obtained (i) the income tax due on the annual rent amount respectively of the rental value or (ii) the amount calculated as per control calculation. The taxpayer shall pay the highest amount of the three.
The Swiss Parliament adopted on September 28, 2012 the Federal law on taxation according to the expenditure. This law notably increases minimum tax thresholds for lump sum taxation:
The taxable basis for the direct federal tax (“DFI”), is fixed to a minimum of 7 times the annual rent or the rental value, but in all cases to a minimum taxable basis of CHF 400’000. For the DFI, the tax rate on a taxable basis of CHF 400’000 is 10%. This represents an amount of CHF 40’000.
for cantonal and communal taxation (“ICC”), the principle of the tax package and its guidelines are governed by the Federal law on the harmonization of direct taxes of the cantons and the communes (“LHID”). In the context of the principles laid down by the LHID in its revised version, the cantons remain free to determine the taxable minimum lump sum basis to which they apply their cantonal and communal taxation rates. However, the taxable lump sum basis must be at least 7 times the annual amount of the rent or the annual rental value. A minimum taxable basis will also be determined by each canton. Finally, the cantons must determine how the tax according to the expenditure covers the wealth tax.
The minimum tax base for the ICC has not yet been defined by the cantons, nor the terms of the taxation of the wealth as part of the lump sum taxation.
These new tax arrangements will come into force on January 1st , 2016. However, the transitional provisions provide that for people who are taxed according to the expenditure at the time of the entry into force of the reform, the same taxation regime continues to apply for a period of five years from the entry into force of the Act. This means that the lump sum taxation obtained before will remain valid until January 1st, 2021.
It should be noted that in the vote of November 30, 2014, the Swiss people were in favour of maintaining the lump sum taxations at a federal and cantonal level. The cantons are free to provide a system of taxation based on the expenditure for their cantonal and communal taxes. The tax according to the expenditure is planned in the majorities of the Swiss cantons. The cantons of Zurich, Basel (city and country), and Schaffhausen have repealed the flat-rate taxation of their tax legislation cantonal.
17 July 2015