What do I have to consider as U.S. citizen?
Are you a U.S. citizen who has decided to move to Switzerland? In this case, you should carefully consider the differences between the tax systems of the United States of America and Switzerland. The following two-part article gives you a first overview of the taxation including social security obligations in Switzerland and potential friction points between the two tax systems.
Taxation of Swiss tax residents – most important taxes
Swiss Income Tax
All tax-resident individuals are taxed on their worldwide income and wealth (unlimited tax liability). Non-tax-resident individuals are only taxed on Swiss sourced income and wealth (limited tax liability).
Income tax is levied at three different levels: at the federal level (which is the same all over Switzerland), at the cantonal level (which is the same within each canton and is based on the canton's own tax law and tax rates), and at the municipal level (municipalities follow the cantonal tax law but are entitled to set their own communal tax rate within certain parameters). Income tax rates are progressive at the federal level and in most of the cantons. Some cantons have recently introduced flat rate taxation.
Tax at source
If you do not have a permanent residence permit (so called C-permit), your income as an employee of a Swiss resident employer is subject to tax at source. In this case, the employer deducts the income tax directly from your income before it is paid out. If your annual income exceeds 120'000 Swiss Francs, you have income that is not subject to tax at source or if you have wealth that exceeds the cantonal tax-free amount, you are also subject to a subsequent ordinary taxation. In this case, you have to file a tax return and the cantonal tax authorities assess the income and wealth tax due based on this tax return (see below: ordinary taxation). The paid tax at source is credited against the higher or lower tax calculated according to the ordinary taxation. Examples for income that is not subject to tax at source, and which must be declared in the yearly tax return are income from self-employment, income from foreign employers not resident in Switzerland, pension income or social security income and investment income from movable or immovable properties.
Ordinary Taxation
If have a permanent Swiss resident permit or if you are subject to subsequent ordinary taxation (see above) you are required to submit an annual tax return, which the tax authorities use to calculate your taxable income and wealth. In general, your worldwide income is taxable in Switzerland unless this income stems from permanent establishments or properties abroad. The taxable income includes income from employment, income from self-employment, investment income (interests, dividends), rental income as well as the notional income from owner-occupied properties (inputed rental value). As an exemption to this rule, private capital gains, e.g., capital gains from the sale of securities or (crypto) currencies, are generally not taxable in Switzerland.1 All taxable income is added together (i.e., all income sources are added together) and it is from this sum that all applicable deductions are subtracted. Based on this amount, the applicable tax rate is established and levied on all taxable income.
The following deductions from taxable income can be made on the tax return:
- Employment expenses (commuting costs, additional costs for meals at workplace etc.);
- In connection with owned property: Repair and maintenance costs, third-party management costs, investment costs related to energy saving measures or measures to protect the environment (effective costs or lump sum deduction);
- In connection with investment income: Third-party management costs;
- Interest expense;
- Personal deductions (alimony, charitable contributions to a qualifying Swiss based charity organization, mortgage deductions, real estate costs etc.);
- Personal allowances (usually in the form of small lump sum deduction).
If not all of your income is taxable in Switzerland, the income and the deductions are subject to an international allocation. This means that, for example, the rental income from a foreign property or foreign permanent business establishment is not taxable in Switzerland. Switzerland and the United States of America have concluded a treaty to avoid double taxation (Swiss-U.S. double taxation treaty) this treaty ensures, among] other things, that rental income from Swiss property is only taxed in Switzerland and vice versa (see below: potential frictions between the U.S. and the Swiss tax system).
Even if not all of your worldwide income is taxable in Switzerland, the applicable income tax rate is determined by your worldwide income. Therefore, the actual taxable income in Switzerland may differ from that used to set the tax rate determining income. As the income tax rates are progressive at the federal level and in most of the cantons, this can have an significant impact on the income taxes due (please see the following link for a calculation of the applicable income tax rate: Tax calculator: Calculate and compare taxes | FTA (admin.ch)).
Generally, all income is taxed at the same rate, but income from substantial participations, i.e., dividends from legal entities in which you privately hold at least 10 % of the capital, is only partially taxed. At federal level 30 % of this participation income is excluded and at cantonal and municipality levels between 20 % and 50 % of this participation income is not taxed, depending on the respective canton of residence.
It this important to pay your taxes on time. Several cantons allow for the possibility of the advance payment of cantonal and communal taxes, in some cases also for direct federal taxes. In some cantons, taxpayers have the option of paying the entire tax due in a one-off advance payment upon receipt of the provisional tax bill or before a certain date. In return, the taxpayer gets a discount (for details regarding the tax collection please follow this link: The Swiss Tax System (Publication) | AFC (admin.ch).
Swiss net wealth tax
All cantons levy a net wealth tax based on the balance of the worldwide gross assets minus debts (see also Wealth tax and how it can be reduced - Part 1 - VISCHER). Some cantons allow additional social deductions. The position on what is taxable is usually as follows:
- Bank account balances, bonds, shares, funds, and other equities;
- Life insurances with a surrender value;
- Cars, boats, airplanes, etc.;
- Properties/real estate;
- Other valuable assets, e.g., paintings, art collections, jewelry, etc.; but household goods are not subject to wealth taxation;
- Recognized pension plan assets are not subject to wealth taxation.
The taxation is generally based on the fair market value. Consequently, the value of some assets as own-used vehicles decreases each year, whereas other values as properties are subject to a revaluation from time to time on a unregular basis and at very long-time intervals. Cash, cash equivalents and listed securities are valued at the stock market closing price at the end of the year. Leased assets are not taken into account for wealth taxation. Movable assets are deemed to be located in Switzerland and therefore subject to wealth taxation in Switzerland. Properties abroad are only considered for tax rate determination purposes but are exempted from actual taxation in Switzerland.
Worldwide debts (e.g., mortgages or other loans) are deductible with no applicable cap. If some of your assets are located abroad, the total debts are subject to an international allocation in accordance with the allocation of the total gross assets.
Church Tax
Almost all cantons levy a church tax for registered members of one of the respective official religious affiliations. The determination of the religious affiliation is part of registration process with the municipal authorities. Individuals without religious denomination or members of religions other than the official Swiss churches (e.g., Muslims, Jews, Anglican church members) are not subject to cantonal church tax. Members of religions other than the official churches may have to pay their religious contributions directly to their community.
Inheritance and gift tax
With the exception of two cantons (i.e. Schwyz and Obwalden), all cantons levy an inheritance tax and with the exception of three cantons (i.e. Schwyz, Obwalden and Lucerne) all cantons levy a gift tax if the deceased or donor is / had been resident in the respective canton, or if real estate located in the canton is transferred. In all cantons, spouses are exempt from inheritance and gift taxes, and most cantons also exempt direct descendants. The tax rate is progressive and is in most cases multiplied by a factor depending on the relationship between the deceased and the recipient. Switzerland has concluded a tax treaty with the U.S. concerning inheritance tax, but gift tax is not covered. However, the U.S. applies exclusions from the gift tax based on unilateral law.
Potential frictions between the U.S. and the Swiss tax systems
The U.S. is one of the few countries in the world that knows two nexuses for becoming subject to unlimited tax liability: Tax residency and citizenship. Even if a U.S. citizen is tax resident only in Switzerland and is therefore subject to unlimited tax liability in Switzerland, the U.S. citizen remains subject to unlimited tax liability in the U.S. as well. The U.S. tax system knows some exclusions, notably the foreign earned income exclusion and the foreign housing exclusion (see below), but these exclusions are capped at a certain maximum amount. Therefore, the portion of your income that does not benefit from an exclusion is still subject to potential taxation in the U.S. and in Switzerland (so-called double taxation). Fortunately, the United States and Switzerland have concluded a double-taxation treaty that ensures in most cases that an income is only taxed by one of these countries or if both countries tax the income that the tax paid in Switzerland (the resident country) is deducted from the tax to be paid in United States (so called foreign tax credit). The double-taxation treaty covers U.S. federal income tax and the combined (federal, cantonal, and municipal) Swiss income tax. U.S. State taxes are not covered by the treaty so that the adherence to the tax treaty provisions varies by state.
If the U.S. tax law does not know an exclusion, e.g. as foreign earned income or under the foreign housing exclusion, your total tax burden on all income (Swiss and U.S.) will generally be at least as high as the U.S. federal income tax liability, since the combined Swiss income tax rate is generally lower than the U.S. federal income tax rate. This means that for a U.S. citizen living in Switzerland, Swiss income tax saving measures are only effective on the excluded income. Another point to consider is that Switzerland taxes the net wealth of its individuals, whereas the U.S. does not know a wealth tax. If you are a U.S. citizen and live in Switzerland and want to reduce your overall tax burden, it is therefore important to compare the different wealth tax rates of the cantons and municipalities in Switzerland ((see also Wealth tax and how it can be reduced - Part 2 - VISCHER).
Conclusion
Unlike the U.S. tax system, the Swiss tax system only knows one nexus for becoming subject to unlimited tax liability. Only if you are tax resident in Switzerland, i.e., if you have your 'center of life' in Switzerland will you become subject to unlimited tax liability. Income and wealth from real estate and business is only taxed if the real estate or the business (permanent establishment) is located in Switzerland, otherwise this income and wealth is only considered to determine the applicable tax rate. As the income tax rates are progressive at federal level and in most of the cantons, this can have a significant impact on income taxes. Due to the fact that the U.S. always taxes worldwide income – unless U.S. tax law provides an exception - it is important to be aware that many tax-saving strategies available to Swiss tax residents may not be effective for U.S. individuals, as they can ultimately result in higher U.S. tax liabilities.
In the second part, we will take a deeper look at the potential frictions between the U.S. and the Swiss tax systems as well as the social security consequences of a relocation.
Footnote
1. Capital gains are taxable if a taxpayer qualifies as professional securities/investment dealer.
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.
