Published December 2017
This country-specific Q&A provides an overview to private client law in Switzerland.
It will cover taxes, succession laws, wills, trusts and their structures.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/private-client/
Which factors bring an individual within the scope of tax on income and capital gains?
Preliminary remark: As a consequence of the Swiss federalist structure, individual income tax is levied at the federal, cantonal and municipal levels. There is a federal law aiming at harmonizing the cantonal tax laws in certain respects.
Tax on income: The main factor which will make an individual taxable Switzerland is residence. An individual is deemed resident in Switzerland if she or he takes up residence there with the intention of permanently staying. Residents are subject to full taxation in Switzerland on their worldwide income and assets. However foreign real estate and permanent business establishment maintained abroad are exempt from Swiss taxation; the respective income and assets are, however, taken into account for the determination of the applicable tax rates.
An individual can also be subject to unlimited taxation in Switzerland if she or he is physically present in Switzerland for a minimum of 30 days and is in gainful employment, or if he or she is physically present for a minimum of 90 days in Switzerland without being gainfully employed.
There is an exception to the unlimited tax liability on worldwide income and wealth for Swiss residents, namely the "lump sum taxation" system (see below question 10).
An individual resident outside Switzerland may be subject to limited taxation with regard to certain types of income, such as income derived from dependent professional services performed in the canton, business income derived from a permanent establishment maintained in the canton, and income and gains from immovable property locate within the respective canton.
Tax on capital gains: At the federal level, any capital gains realized on private (movable or immovable) assets are exempt from income taxation. At the cantonal/municipal level, capital gains on private movable assets are also tax exempted, while capital gains on private real estate are subject to a specific real estate gains tax. The applicable tax rate varies depending on the canton and on the duration of the holding of the property (from 0% to 55%). If a capital gain is realized on a commercial asset of an individual, it will be taxable as an income deriving from an independent activity (in some cantons, it is subject to the specific real estate gains tax, at least partly).
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
According to Swiss tax law, all incomes are taxable, except if there is an exception expressly mentioned in the law (as capital gain on private assets).The income tax rates are progressive. The maximum tax rate at federal level is 11.5%. Tax rate vary substantially between cantons and even within a canton, between municipalities. The income taxes can together (federal, cantonal, municipal) reach up to more than 40%, which is not the case in certain cantons, such as Zug or Schwyz, where the total tax burden varies between 19 and 21%.
The federal, cantonal and municipal taxes on income of individuals and the cantonal real estate gains tax are levied using the so called "postnumerando method". Hence, taxation occurs on a yearly basis and the actual earned income is the basis of taxation. Therefore, the tax can only be assessed and levied at the beginning of the following year. For individuals, the tax period usually coincides with the calendar year. If the specific real estate capital gain tax applies, the (separate) tax return has to be sent generally within 30 days after the transfer.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Swiss withholding tax is relevant to individuals to the extent they receive income deriving from Swiss movable property, such as dividends and interests, prizes from Swiss lotteries and certain insurance payments. The Swiss debtor of the taxable income is liable for the withholding tax (e.g. a bank), which means that the withholding tax must be deducted by the debtor from the amount due to the individual recipient. The rate of the withholding tax is in principle 35%. Provided that certain conditions are met, in particular if income and capital are properly declared at the level of the beneficiary of the income, Swiss recipients can ask for a refund of the tax withheld. For non-Swiss resident taxpayers, a partial or total refund may be granted only if a Double Taxation Agreement applies. Interests on loans are not subject to Swiss withholding tax at the level of the debtor, except if loans qualify as bonds according to a Swiss tax law. Royalties are not subject to Swiss withholding tax.
Swiss withholding tax has to be distinguished from income tax levied at source, as they are two different taxes. Income tax is generally paid by the individual as a taxpayer and beneficiary of the income. However, in some cases, income tax has to be paid at source by the debtor of the benefit. A typical case where income tax could be levied at source is when a salary is paid by a Swiss company to an employee having his/her tax residence abroad or to a foreign national living in Switzerland and who do not hold a permanent resident permit. Rates also take into consideration certain standard deductions. Income tax at source is then actually only a mechanism of payment of the income tax.
Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
Only cantons and municipality levy wealth taxes on the individuals resident in the canton concerned, based on the worldwide net asset (valued at their market value), with the exception of real estate, enterprises and permanent establishment located abroad (which are however taken into account for determining the applicable tax rate). The wealth is calculated on 31 December, and cantons generally apply progressive tax rates which range from annually 0.15% and 1%.
Net wealth tax is in principle also levied on the non-Swiss resident owner of real estate, enterprises or permanent establishment in Switzerland. A worldwide tax rate applies.
Different rules apply for individuals who are taxed under the lump-sum taxation regime.
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
Inheritance tax: Inheritance tax is levied at the cantonal/municipal levels only, except in the canton of Schwyz (no inheritance tax at all). Tax jurisdiction normally lies with the canton of the last domicile of the deceased. The deceased worldwide estate (valued at market value) is taxable, with the exception of real estate located abroad and assets belonging to a foreign permanent establishment. The tax rates on bequests, which are generally progressive, vary depending on the relationship between the parties and the canton. Spouses, registered partners and descendants are typically exempt from inheritance tax. However, the tax rate may be as high as 55% in the event of a gift or bequest to an unrelated person.
Tax on gifts: At the cantonal/ municipal levels (only), tax on gifts is levied, except in the cantons of Schwyz and Lucerne (no gift tax at all). Gifts made by a resident in Switzerland are typically subject to gift tax in the canton of the donor's residence. The person liable for the tax on gifts is the recipient of the gift, not the donor. However, the latter is jointly liable to the gift tax. Gifts to spouses, registered partners and descendants are exempt in most of the cantons. Tax rates are progressive, reflecting the relationship between the donor and the recipient. Rates vary from zero to over 50%. Market value is determinant. Gifts have to be declared by the recipient in a separate tax return.
The canton of Geneva has a special rule for lump sum taxpayers (see question 10 below): a 6% gift/inheritance tax applies to spouse or descendants.
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (eg business or agricultural assets), and how do any such reliefs apply?
See above question 5.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Most cantonal gift and inheritance tax laws provide an exemption for gifts/donations to tax-exempt charities. Moreover, donations of individuals to tax-exempt charities in Switzerland are, in general, deductible for income tax purposes up to 20% of the taxable income of the taxpayer. For the definition of tax-exempt charities, see below question 26.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Various taxes are levied on real estate located in Switzerland, irrespective of the owner's residency.
Real property tax: More than half of the cantons levy real property tax at the place of location of the real estate. Real property tax is assessed based on the full market value of the property (no deduction of debts).
Wealth tax: Real estate properties in Switzerland owned by foreign individuals create a limited tax liability on the value of the properties for wealth tax purposes. Market value is determinant for the taxable basis. Debts are deductible. However, when allocating the debts, one has to take into consideration all taxpayer's debts (not only the debt related to the Swiss property) and allocate a percentage of them corresponding to the following ratio: value of assets located in Switzerland / value of worldwide assets. Worldwide tax rate applies. In some cantons, pragmatic approaches apply.
Taxation of current income from immovable property: Real estate properties in Switzerland owned by foreign individuals create a limited tax liability on the property income for income tax purposes. Taxable income includes the effective rental or, if the real estate property is not rented, a notional rental value which is determined periodically by the local tax authorities on the basis of fair market values. Generally all maintenance costs as well as financing costs (limited amount) can be deducted for income tax purposes. Deductible interests are allocated according to the same ratio applicable to deductible debts.
Special real estate gains taxes: Capital gains realized upon the disposition of real estate are subject to a special (cantonal/municipal) real estate capital gains tax (see above question 1).
Real property transfer taxes: Transfers inter vivos of real estate are subject to cantonal/municipal transfer taxes, calculated on the transfer price and due by the buyer.
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
VAT: VAT is levied at the federal level on all stages of production, distribution and the domestic service sector (domestic tax), on the acquisition of services supplied by companies domiciled abroad (service import tax) and on the import of goods (import tax). Each taxpayer may deduct VAT paid on inputs. Only the target consumer economically supports the VAT. VAT rates are currently of 8% (normal rate, which will be reduced to 7.7% as from 2018), 3.8% (special rate applicable to accommodation services, which will be reduced to 3.7% as from 2018) and 2.5% (reduced rate, applicable to food, medicine, newspaper, books and food).
Other taxes: Others Swiss taxes could be due by an individual, like tax on vehicles, tax on garbage bag. An individual could also economically support indirect taxes, as taxes on alcohol and tobacco.
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
At the federal level as well as in most cantons, foreign individuals taking up residence in Switzerland for the first time or after an absence of more than 10 years may opt for the so-called "lump sum taxation", provided they have no gainful activity in Switzerland.
Under this regime, Swiss tax is levied on the basis of expenses (amount negotiated with the cantonal tax authorities). In practice, the actual tax basis is determined by an advance ruling from the tax administration of the canton in which the individual wishes to take up residence. There is a practical minimum tax base, even if the expenses as determined above are less than this amount. For federal income tax, threshold of CHF 400,000 applies. As from 2016, expenses cannot be lower than seven time the annual rent or annual rental value. In cantons, wealth tax also has to be taken into consideration as well. When this lump-sum amount is determined, the taxpayer will have to mention it in his/her tax return as a taxable basis. In addition, the taxpayer will have to declare each year his/her Swiss wealth and Swiss-source income (like Swiss real estate property, Swiss shares, Swiss bonds, and their derived income), as well as foreign wealth and foreign-source income for which a partial or total refund of foreign taxes is requested by the taxpayer by virtue of an international tax treaty. Indeed, the yearly final tax due must not be less than the taxes determined on these elements (so-called "control calculation").
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
Before establishing residence in Switzerland, a taxpayer should consider the place of residence (because of the different applicable tax rates at cantonal and municipal levels for the main applicable taxes). One should also examine the possibility to opt for the lump-sum taxation regime when applicable. Finally, structures like trusts should be examined before the move to Switzerland, as trust can be recognized under Swiss tax law under certain conditions.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
On the death of the deceased, the heirs acquire the worldwide estate in its entirety, by operation of law. The estate consists of all movable and immovable assets owned by the deceased at the time of her/his death, as well as limited rights in rem or claims. In order to determine the net estate value to be divided among all the beneficiaries, liabilities such as outstanding debts, funeral expenses, administrative costs and taxes are deducted from the gross estate value. An heir can renounce her/his share in the estate within three months after becoming aware of her/his inheritance. In order to ease the decision making process with regard to the renunciation of the estate, each heir has the right to request a public inventory from the competent authority, within one month from the opening of the estate. This inventory will list all the assets and debts of the estate, together with an appraisal of the value of each item.
Absent any will from the deceased, statutory heirs inherit as follows: (i) surviving spouse or registered partner inherits 50% of the estate if there are surviving descendants, 75% if there are no surviving descendants but surviving parents or their descendants; 100% if there are no surviving descendants, surviving parents or their descendants; (ii) surviving descendants inherit in equal shares: 100% if there is no surviving spouse or registered partner; 50% if there is a surviving spouse or registered partner; (iii) surviving parents inherit in equal shares: 25% if there is a surviving spouse or registered partner but no surviving descendants; 100% if there are no descendants and no surviving spouse or registered partner.
Forced heirship regime: The testator is in principle free to depart from such intestacy rules. However there are statutory limitations protecting certain categories of statutory heirs: (i) for the surviving spouse or registered partner of the deceased: one half of her/his statutory portion; (ii) for a descendant of the deceased: three-quarter of her/his statutory portion; and (iii) for each parent of the deceased: one-half of their statutory portion.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
Swiss law provides for a standard matrimonial property regime, namely participation in accrued gains (the most common regime); and two specific regimes, namely community of property and separation of goods.
Under the participation in accrued gains regime, each spouse retains and manages her or his own assets and acquisition during the marriage. On dissolution of the marriage by death or divorce, each spouse retains (i) her or his own assets brought into the marriage; (ii) his or her assets acquired during the marriage by gift or inheritance; and (iii) one-half of all acquisitions made by each of the spouses during the marriage.
Under the separation of goods regime, each spouse retains and manages her or his own assets during the marriage. On dissolution of the marriage, each spouse retains her or his separate property.
Under the community of property regime, each spouse holds her or his personal property and the other assets of the marriage are jointly owned and managed.
In case of death of one of the spouses, the dissolution of the matrimonial regime needs to be taken care of first in order to determine the estate of the deceased.
Switzerland recognizes also same-sex registered partnership.
What factors cause succession laws to apply on the death of an individual?
In principle, if the deceased person was resident in Switzerland at the time of her/his death, her or his estate is subject to Swiss law. The deceased's domicile is the place in which she or he resided with the intention of living there permanently and where the deceased's personal centre of vital interests was situated.
Swiss law may be applicable even where the deceased has made a foreign will before taking up residence in Switzerland. As an exception, foreign nationals who do not have Swiss nationality may opt (by will or testamentary contract) to have their estate governed by the law of one of the countries of nationality (professo iuris).
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
The Swiss conflict of law rules are set out in the Swiss Private International Law Act (SPILA). With regard to inheritance, the SPILA is based upon the principle of the unity of the succession. Hence, it states that Swiss authorities have jurisdiction over movable and immovable property unless exclusive jurisdiction over real estate located abroad is claimed by foreign state.
Wills are generally subject to the laws applicable to the estate. Based on the principle of favour testament, the capacity of the testator to make a will is, however, determined separately and it is sufficient that capacity existed pursuant to one of several possible applicable laws enumerated by the SPILA. The formal validity of a will or a testamentary contract is determined in accordance with the Hague Convention to the Form of Testamentary Dispositions.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
An individual should make a will in a situation he wants to derogate to Swiss statutory rules (see above question 12).
Anyone who has the capacity to make rational judgments and is at least 18 years of age can, within the limit prescribed by law, draw up a will. Formally, there are three different types of valid wills: (i) the holographic will; such will must be hand-written by the testator, specify the date on which it was made and be signed; (ii) certified (or public) will; such will must be prepared and certified by a public notary (or other official designated under cantonal law), executed by the testator before two witnesses, and signed (by the witnesses and the testator); and (iii) oral (emergency) will; such will is only available in exceptional circumstances such as war, epidemic or imminent danger of death. The testator must declare his last will in the presence of two witnesses, who must, immediately afterwards, inform the judicial authorities.
Whether Swiss law may apply or not to real estate in Switzerland when the testator is deceased abroad will depend on the conflict of law rules of the applicable law to the estate.
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
If the deceased appointed an executor, the executor has sole possession of the assets of the estate and has extensive powers to manage and maintain them (he is competent to establish, collect and distribute the estate's assets). However, the ownership of the assets remains with the heirs.
If the deceased did not appoint an executor, the heirs are jointly responsible for the administration and distribution of the estate. The heirs can apply for the appointment of a public estate administrator, or the competent authorities can appoint such an administrator if they deem it to be necessary to safeguard the estate and its correct distribution.
Do the laws allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
Trust: Switzerland as a civil law jurisdiction does not directly provide for trusts in its laws. However Switzerland ratified the 1985 Hague convention on the law applicable to trusts and their recognition (Hague Trust Convention) with legal effects as of 1 July 2007.
The Federal tax administration has issued a Circular regarding trust taxation in 2007. This Circular is neither legally binding nor enforceable by law, but has been declared as an applicable standard for the purpose of income and wealth tax as well as withholding taxes with respect to trusts. In practice, tax ruling are recommended to confirm the tax treatment of trusts for Swiss residents. As per this Circular, trusts can be divided into two main categories:
A. Revocable trust: A trust under which a settlor does not dispose of the trust assets in a definitive manner is qualified as revocable trust. The settlor is deemed not to dispose definitively of the trust assets if she or he is appointed as trustee or beneficiary or if she or he keeps an influence of any kind on the trust. This result in an allocation of the trust assets and income to the settlor for tax purposes. Distributions to beneficiaries are taxed as gifts and that upon settlor's death a revocable trust becomes an irrevocable trust.
B. Irrevocable trust: Any trust in which the settlor disposes of the trust assets in a definitive manner so that he or she may not influence the use of the assets any more after the trust's establishment is qualified as an irrevocable trust. The settlor should not retain any rights or obligations with regard to the trust assets. The Circular distinguishes further between (i.) irrevocable fixed interest trust and (ii.) irrevocable discretionary trust:
i. If the irrevocable trust is fixed, the beneficiaries are directly designated by the trust deed, which determines also the frequency of the income distributions arising out of the trust. From a tax perspective, irrevocable fixed interest trusts are treated as donation upon establishment. The trust's assets and income are then directly attributed to the beneficiaries. Capital gains are not subject to tax.
ii. If a trust is of discretionary nature, the trustees have the sole and absolute discretion to make distributions. Hence, the trust deed grants only expectations. Irrevocable discretionary trusts are treated as a donation upon establishment. If the settlor was not a Swiss tax resident at the time of the trust's settlement, there is no Swiss gift tax. Assets are not attributable to the settlor anymore if he decides to move to Switzerland. Beneficiaries, if they live in Switzerland, are not taxable on trust assets and trust income, unless there is a distribution. Any distribution is taxable, except amounts corresponding to the distribution of trust capital (distributions of capital gains are taxable, as other type of income).
According to the Circular, irrevocable and discretionary trusts still remain taxable at the level of the settlor if the settlor was a Swiss tax resident at the time of the trust's settlement. In addition, irrevocable and discretionary trusts can be treated as irrevocable fixed interest if there are frequent and systematic distributions of income to the beneficiaries.
Foundations: Individuals may create a private foundation, which is a legal entity under Swiss law. Swiss foundations are themselves subject to profit tax and capital tax. The applicable rates are usually lower than the corporate tax rates. Distributions are in principle taxable (income tax) at the level of the beneficiaries. Swiss family foundations are permitted but only to cover the costs of education, endowment to family members or similar objects. Family foundations are not permitted to pursue further-reaching objectives. Therefore the use of Swiss foundations for the administration of private wealth is very limited. However, foundation form is a very popular form for charities that pursue a non-profit objective (see question 26 below).
Partnerships: Under Swiss law, the general partnership and the limited partnership do not have separate legal personality. They are both transparent for tax purposes. Therefore, their profits and assets are directly taxed at the level of the partners rather than at the partnership level.
How is any such structure constituted, what are the main rules that govern it, is there any requirement for registration with or disclosure to any authority or regulator, and what information about the structure is available to the public?
Please see answers in question 18 above.
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Please see answers in question 18 above.
Are foreign trusts, private foundations, etc recognised?
Please see answers in question 18 above.
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Please see answers in question 18 above.
To what extent can trusts, private foundations, etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
As a rule, creditors of an individual cannot attach assets that are in an irrevocable trust or in a foundation. However, Swiss bankruptcy law provides for a number of avoidance actions of the ground of fraudulent conveyance.
What provision can be made to hold and manage assets for minor children and grandchildren?
An individual can make a will to hold and manage assets for minor children and grandchildren, taking however into account the compulsory shares of the protected heirs (forced heirship, see above question 12).
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Swiss law provides for a specific power of attorney, known as the "lasting power of attorney", which allows a person of sound mind to appoint a trustworthy person in advance who will be required (i) to provide personal assistance, (ii) to manage her/his assets and/or (iii) to represent her/him in relations with third parties in case she/he becomes incompetent to look after her/his own interests. These three tasks can also be aggregated and the principal may also establish guidelines on how to perform them. Under the subsidiarity principle, such a power takes precedence over official protection measures. The principal typically designates as attorney-in-fact a trusted person such as his lawyer, his executor, a trustee, a family office or a bank.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Charitable organisations are recognised and hosted in Switzerland. Almost all type of Swiss legal entities (for example foundations, associations, limited liability companies, co-operatives and so on) can be used as charities. However, the majority of charities are either foundations or associations.
Swiss charities are typically exempt from profits and wealth tax, on the federal level, as well as on the cantonal and municipal levels if they pursue public or charitable purposes. The circle of beneficiaries must remain open. Profits have to be exclusively and irrevocably devoted to these particulars interests.
To establish a charitable foundation, the donor (founder) must contribute the assets for a specific charitable purpose. The founder can set up a charitable foundation either by public deed during his/her lifetime or by testamentary disposition in the last will (or inheritance contract).
What important legislative changes do you anticipate so far as they affect your advice to private clients?
The Swiss Federal council is currently involved in a legislative process intended to modernise Swiss inheritance law. The main objectives of this reform are:
- to take into account the realities of family in the twenty-first century (i.e. blended family, single-parent household, live-in partnership, unmarried couple with children);
- to grant more freedom to the testator with regard to the forced heirship rights;
- to introduce a bequest regime in favour of the cohabitant and children;
- to facilitate the transfer of family-owned business.
The new Swiss legal regime governing adoption will enter into force as of 1 January 2018 (adoption possible for same-sex partners; minimum age of adopters reduced from 35 years old to 28 years old).