In today's globalized world, migration is no longer just driven by economic and existential needs. People increasingly choose to be expatriates and lead international lifestyles. As such, relocation planning has never been as important. In this brochure, we set out the most important legal and tax considerations to bear in mind if you are planning a move to Switzerland. Following a brief general overview of the Swiss legal system, the brochure summarises the most important tax laws, the rules on foreigners acquiring Swiss real estate and the most relevant aspects of Swiss family, divorce and succession law.
This brochure aims at providing individuals who think about relocating to Switzerland as well as their advisers with an overview of the most relevant legal and tax issues to consider before taking the final decision to relocate. It can and should not replace personal advice which is very important not only with regard to a relocation to Switzerland in general but also in light of the broad autonomy of the cantons and the range of different (tax)regimes and rules existing among all 26 of them. For a variety of reasons, we strongly recommend obtaining legal and tax advice before taking up residence in Switzerland.
SWITZERLAND AT A GLANCE
Switzerland has a population of almost 8.5 million, of which roughly one quarter are foreign nationals. The country has four official languages (German, French, Italian and Romansh) and English is also widely spoken.
Politically and economically, Switzerland is one of the most stable countries in the world. It is a federal republic made up of 26 cantons, each of which has considerable autonomy in the areas of taxation, healthcare, social welfare, law enforcement and education; this creates a number of differences in local governance.
Ranked amongst the wealthiest countries in the world, Switzerland is also renowned for its high quality of living. Its largest city, Zurich, was recently ranked second in the Mercer Quality of Living Survey, followed closely by other Swiss cities, Geneva, Basel and the capital, Bern. Few other countries can boast as many cities in the top 20.
Switzerland has a stable economy thanks to its highly developed professional services sector (including banks and insurance companies) and thriving manufacturing and pharmaceutical industries. Competitive taxation levels both for individuals and corporations help to stimulate business and migration.
Switzerland's outstanding healthcare system, which is a combination of public, private and semiprivate healthcare institutions, offers a large network of highly qualified doctors and hospitals, which are equipped with the most cutting edge medical facilities.
As is the case with most European countries, Switzerland is a civil law jurisdiction. One of the most important pieces of Swiss legislation is the codification of private law in the Civil Code, which came into force in 1907 and was influenced by both the German and French civil codes. The Civil Code is published in three of the official Swiss languages – German, French and Italian – and is revered for its concise and plain language.
The judiciary comprises of federal and cantonal courts. Each canton has its own courts of first instance and a second instance of appeal. The highest judicial authority is the Federal Supreme Court located in Lausanne, which is the final instance of appeal against decisions of: the cantonal courts of appeal; the Federal Criminal Court, located in Ticino; the Federal Administrative Court and the Federal Patent Court, both located in St. Gall.
MIGRATING TO SWITZERLAND
Switzerland operates a dual immigration system with different rules applying to EU/EFTA and non-EU/EFTA nationals.
EU/EFTA nationals are entitled to live and work in Switzerland if they have an employment contract with a Swiss employer. Non-working EU/EFTA nationals can only obtain a residence permit if they have sufficient means to pay their living and (compulsory) health insurance costs. As a general rule, close family members of EU/EFTA nationals who have a Swiss residence permit are entitled to join them and reside in Switzerland.
Non-EU/EFTA nationals are only eligible for a work permit if they or their employer can show that they are specifically qualified for the position and there is no suitable person from Switzerland or the EU/EFTA to fill the job vacancy. Non-working EU/EFTA nationals are only eligible for a residence permit if they are over 55 years of age, have sufficient financial means and close ties to Switzerland, or if they are of particular economic interest to the canton in question, for example, because of the tax revenue they would bring or their business activities.
Family members of non-EU/EFTA nationals with a Swiss residence permit are also eligible for residence; however, the authorities exercise discretion when granting such permits.
In order to obtain Swiss citizenship, foreigners must first obtain a naturalisation licence by successfully completing a citizenship test. The requirements for eligibility for the test are ten years of residency on a permanent residence permit and successful integration in Switzerland. To satisfy the integration requirement, applicants must be able to communicate in at least one of the national languages spoken in their municipal community of residence and must respect the fundamental principles of the Swiss constitution.
The naturalisation process is governed by federal, cantonal and, at times, municipal law. As a result, the practicalities of the process can vary considerably across the country.
The process is expedited for persons who are married to a Swiss citizen. Foreigners are eligible for citizenship if they have been married to a Swiss citizen for at least three years and have lived in Switzerland for a total of five, including the year immediately preceding the application. Foreigners who are married to a Swiss citizen and live abroad are eligible for citizenship after six years of marriage and if they can demonstrate strong ties to the country.
TAXATION AND SOCIAL SECURITY
Unlimited Tax Liability in Switzerland
Tax Residence in Switzerland
Under Swiss law, a person is resident in Switzerland for tax purposes if he or she has had an uninterrupted stay of at least 30 days in the country with professional activity or a stay of at least 90 days without professional activity. Unless a double taxation treaty specifically allocates the person's tax residence to another state, he or she will then become subject to unlimited tax liability in Switzerland. This means that his or her worldwide income and wealth become subject to income tax at the federal, cantonal and municipal levels, and to wealth tax on the cantonal and municipal levels.
In addition to unlimited tax liability in Switzerland, Swiss tax residency typically also brings with it compliance requirements such as the obligation to file an annual tax return and ancillary consequences such as becoming subject to the automatic international exchange of information and the American CRS and FATCA regimes.
Taxation of Income and Wealth
For Swiss tax residents, income tax is generally levied on all forms of income, for example, from employment, investment, pension or real estate. Exceptions apply to certain types of income, most importantly, income derived from:
- Foreign real estate or business;
- Capital gains on privately held assets (e.g. shares); and
- Income constituting a repayment of nominal capital or qualifying capital contribution reserves in companies.
Losses on privately held movable assets are not deductible from income tax. It follows that the distinction between privately and commercially held assets is crucial for tax planning purposes.
In addition to the income tax exemptions under domestic legislation, double taxation treaties may provide for other types of income to be exempt from Swiss taxation (but nonetheless relevant to determine the applicable tax rate; so-called "exemption with progression"). These may include the compensation for board memberships in foreign companies or income from employment activities abroad. The gross amount of taxable income in Switzerland may be further reduced by various deductions, such as for debt interest, charitable donations, contributions into qualifying pension plans or deductions for professional expenses or wealth management.
The applicable tax rate depends on a number of factors. Income tax rates are progressive and vary depending on the canton and, within a canton, on the specific municipality of residence. On a federal level, income from qualifying participations can benefit from a 40% reduction of the tax basis. Some cantons have introduced a similar dividend relief system, while others provide relief through a reduced tax rate. Following a referendum held on 19 May 2019, Switzerland adopted the Federal Act on Tax Reform and AHV Financing, which introduced reforms including increased dividend taxation, according to which dividend inclusion for individuals will rise to 70% at federal level and to at least 50% at cantonal level (with the cantons free to increase the inclusion ratio even further). The new provisions are expected to come into force on 1 January 2020.
In 2019, the ordinary effective income tax rate for unmarried persons without children or church affiliation at maximum progression ranges between 22.7% to 45%.
Further to the taxation of income and moveable and immoveable assets, Swiss tax residents are also subject to wealth taxation at the cantonal and municipal (but not federal) level. For these purposes, wealth includes cash, bank accounts, real estate, art, precious metals, boats, private jets, shares, options and other forms of investments, irrespective of where they are located. Real estate and businesses abroad are reportable but generally exempt from Swiss wealth taxation (although they are relevant for determining the tax rate; "progression"). While not all of Switzerland's double taxation treaties cover wealth tax, some of the treaties allocate taxation rights for assets situated abroad to the country in which the asset is located. For taxation purposes, gross wealth may also be reduced by various deductions, such as for debt (e.g. mortgages) or, depending on the canton, certain tax-free amounts (e.g. social deductions).
In 2019, wealth tax rates in the various cantons and municipalities range from 0.13% to 1.01% of the taxable value.
Whether and to what extent wealth planning structures such as trusts and foundations are taken into account for the purposes of Swiss taxation depends on the specific circumstances and must be assessed on a case-by-case basis by obtaining tax rulings.
Lump Sum Taxation
As an alternative to the ordinary regime of income and wealth taxation, most cantons provide taxpayers the option of being taxed on their worldwide living expenses by way of lump sum taxation (also known as "forfait"). Although cantons Zurich, Basel-City, Basel-Country, Schaffhausen and Appenzell Ausserrhoden have abolished lump sum taxation on the cantonal level, it continues to be a possibility federally and in most other cantons. Note, however, that the lump sum taxation regime does not apply to inheritance or gift taxation. As a result, wealth and succession planning structures, such as trusts and foundations, still require individual assessment for tax purposes. For such structures, it would typically be appropriate to obtain a tax ruling from the competent cantonal tax authorities.
Lump sum taxation is only available to persons who are not Swiss nationals, who do not exercise a professional activity in Switzerland and who have recently relocated to Switzerland or have not lived here during the past ten years. For married couples to qualify for the regime, both spouses must meet the requirements. Cantonal practices in relation to the requirements vary and it is recommended that applicants seek specific advice at their location of choice.
In a lump sum regime, the income tax basis is determined by a tax ruling that must be obtained from the cantonal tax authorities, and is derived from the highest amount of the following figures:
- The aggregate amount of the taxpayer's and his or her spouse's worldwide living expenses;
- The sevenfold of Swiss housing costs; or
- The so-called control calculation and the applicable cantonal and federal minimum amount.
The control calculation takes into account any income from Swiss sources (e.g. real estate investments, pensions, shareholdings, etc.). The basis for wealth taxation is typically determined by the cantonal legislation applicable to taxable income. Both income and wealth taxes are levied at ordinary rates under the lump sum taxation regime.
Domestically, persons taxed under the lump sum taxation regime are considered to be Swiss tax residents, and are recognized as such in most other jurisdictions. In order for the taxpayer to be recognized as a Swiss tax resident in the US and Germany, any US- or German-sourced income would need to be fully taxed under a so-called modified lump sum taxation regime.
Inheritance and Gift Taxation
Gift and inheritance taxes are levied at the cantonal and municipal level but not federally. Most cantons and some municipalities impose inheritance and gift taxes if one of the following applies:
- The deceased or the donor had their (last) Swiss residence in that canton;
- The asset in issue is real estate located in the canton; or
- The asset in issue is a commercial asset that was transferred abroad from the canton.
Cantons Schwyz and Obwalden do not impose either inheritance or gift tax and canton Lucerne does not impose gift tax.
While the cantonal and municipal legislation applicable to inheritance and gift taxes varies significantly, a key characteristic common to inheritance and gift tax in most cantons is that the liability to pay the tax falls on the recipient (i.e. the donee, heir or legatee). The applicable tax rates and tax-exempt amounts vary between the cantons and depend on the relationship between the deceased / donor and the heir / donee, which should be considered at the planning stage. The progressive nature of the tax rates must also be kept in mind. While transfers to a spouse are exempt from inheritance and gift tax in all cantons, transfers to direct descendants are taxable in some cantons (e.g. canton Vaud).
There is a real risk that taxpayers are taxed more than once for in- heritance and gifts because Switzerland has only concluded a handful of double taxation treaties on inheritance tax (e.g. with the UK, Germany and the US). To the extent that it has done so, the treaties are in any event not comprehensive and do not cover gift taxes.
International Exchange of Information: FATCA and AEI/CRS
With the implementation of the Foreign Account Tax Compliance Act ("FATCA"), the US seeks to ensure that it receives information on all accounts held abroad by persons who have a certain US tax nexus. FATCA is a unilateral US piece of legislation, which applies to all countries worldwide. It requires foreign financial institutions to disclose information about US accounts to the US tax authorities or to levy a high withholding tax on undisclosed accounts. Swiss financial institutions report the account information directly to the US tax authorities with the consent of the US customers concerned.
Similar to the FATCA concept, Switzerland has introduced legislation implementing the automatic exchange of information ("AEI") effective as of 1 January 2017. As of 1 January 2019, Switzerland has agreed to the automatic exchange of information with more than 89 partner countries, including the European Union, Liechtenstein, Russia, Monaco, Cayman Islands, Australia and China, but not the US.
The AEI subjects Swiss financial institutions to reporting requirements pursuant to which they must collect account information relating to persons who are tax residents in the partner countries. As most Swiss AEI treaties are reciprocal, Swiss tax residents who hold accounts or other assets outside Switzerland are also subject to the international automatic exchange of information to the Swiss authorities.
Customs and Import VAT
The import of goods is generally subject to import duties (also known as customs duties) and import VAT. In 2019, VAT rates in Switzerland are at 7.7% of the assessment basis, with a reduced rate of 2.5% being applicable to certain goods, such as food products, non-alcoholic beverages, books, magazines and pharmaceuticals. Customs duties are determined based on a tariff system. Compliance with the formal requirements of Swiss customs and VAT legislation is complex and the import of goods, for example, during the relocation process, is typically handled by specialized service providers (usually logistics firms).
Swiss customs and VAT legislation provides for a limited number of exceptions from import duties, particularly for the import of household goods and cars. In order to be eligible for such exemption during any relocation to Switzerland, the imported items must have been in personal use for at least six months prior to relocation and must continue to be in the relocator's personal use after importation. To benefit fully from these provisions, compliance with the necessary formalities is crucial.
No Tax Residence in Switzerland: Limited Tax Liability in Switzerland
Persons not resident in Switzerland for tax purposes may nonetheless be subject to limited tax liability here if they have a specific economic nexus to the country. The most relevant factors to trigger such a liability include: permanent establishments in Switzerland; brokering in or ownership of Swiss real estate; exercising professional activities in Switzerland; membership of a board of directors or management of a Swiss legal entity; and the receipt of pension benefits from Swiss sources. Swiss double taxation treaties contain provisions on how such income should be treated and on how double taxation can be avoided or mitigated.
If limited tax liability applies, only a certain portion of income will be taxable in Switzerland. At a minimum, this will include the revenue earned from Swiss sources. However, as a general rule, a person's global revenue will be used to calculate the applicable tax rate.
Taxation of Real Estate Transactions
The sale of Swiss real estate triggers real estate capital gains taxation ("RECGT") pursuant to the applicable cantonal legislation. RECGT is imposed on the sellers of Swiss real estate and is levied on the differ- ence between the proceeds of sale of Swiss real estate and the costs of acquisition (including the purchase price or, in some cases, a deemed value going back a certain number of years and any value enhancing investments in the property). The applicable tax rates and formalities vary between the cantons. Typically, RECGT tax rates decrease over the course of ownership; i.e. the longer the duration of ownership, the lower the RECGT tax rate. Cantonal legislation provides for possibilities to defer RECGT, such as in the event of inheritance, donation or the replacement of real estate property used as a primary home by another Swiss property serving the same purpose.
In addition to RECGT, certain cantons and municipalities apply real estate transfer taxes and notary and land registry fees may also be payable during real estate transactions.
Special rules apply to real estate transactions involving corporate owners or real estate serving commercial purposes.
The Swiss Social Security System
Contributions into the Social Security System
The Swiss social security system consists of three pillars: a public social security element (known as "pillar 1", the public social security institution); a (private) pension element (known as "pillar 2" and provided by certain private providers); and individual savings (referred to as "pillar 3", which is offered by banks and insurance companies). Contributions into pillar 1, pillar 2 and partially also pillar 3 are generally tax-deductible. The retirement age in Switzerland is normally at 64 for women and 65 for men.
Persons working or living in Switzerland are subject to the Swiss social security system. In cross-border situations, a person's participation in the system is decided pursuant to Swiss domestic legislation, bilateral treaties (if applicable) and the coordination rules with the EU/EFTA.
The Swiss social security system depends on social security contributions made by employees, self-employed individuals and also non-working individuals, mainly into pillar 1. A crucial aspect of relocation planning is correctly to determine the social security status of a Swiss tax resident or an individual working in Switzerland in order to ascertain the applicable basis and rates for contributions. Swiss social security contributions into pillar 1 range from approx. 10% (for self-employed individuals) to approx. 13% (for employees; with contributions being shared equally by employer and employee) of a person's gross income. Contributions into pillar 2 (the pension) vary depending on the pension provider.
Benefits from the Swiss Social Security System
Current or former Swiss resident individuals who have contributed into the Swiss social security system (into pillar 1) and the social security system of EU/EFTA member states may apply to receive benefits from the Swiss social security system (from pillar 1) upon reaching retirement age.
In addition to the benefits from pillar 1, they may be eligible for further benefits from Swiss or foreign pension schemes and individual savings plans. As a general rule, Swiss and foreign pensions are granted independently and may be accumulated.
Swiss resident individuals are obliged to arrange a basic health insurance with a Swiss provider. In addition to the basic health insurance, in most cases, additional coverage can be purchased. Swiss legislation provides for certain exceptions to compulsory health insurance, such as for individuals with sufficient coverage abroad which cannot be matched in Switzerland. Health insurance is provided by independent Swiss insurance companies, and it is, in particular, not linked to an individual's employment. If a person is not employed, accident insurance must also be included in the health insurance package.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.