The tax package
The lump-sum taxation is a special system that allows certain taxpayers to be taxed not on the basis of their real income but on the basis of their expenses. This measure, which has been heavily criticized, remains in place, but will be subject to stricter conditions.
The lump-sum system is aimed at wealthy taxpayers, and more particularly at foreigners who have built up their wealth outside Switzerland and decide to settle here without carrying out any gainful activity.
To benefit from this system, the taxpayer domiciled in Switzerland must meet three cumulative conditions:
- not be a Swiss citizen ;
- to settle in Switzerland for the first time, or after an absence of at least 10 years;
- not to exercise any dependent or independent lucrative activity in Switzerland.
In practice, the amount representing the taxpayer’s lifestyle on which the tax is calculated is negotiated with the cantonal authorities upon arrival in Switzerland. In this respect, the law sets out certain rules aimed at imposing a minimum amount to be taken into account.
A predictable reform
In recent years, this derogatory system has been the subject of much criticism, leading some cantons to abandon the system altogether. This is the case of the cantons of Zurich, Basel-City, Appenzell-Ausserrhoden, Basel-Landschaft and Schaffhausen. Other cantons, like the federal government, have decided to maintain the system but have tightened the conditions of application.
Stricter conditions at the federal level
Thus, at the federal level, since January 1, 2016, the amount to be taken into account must be determined as follows:
• the amount of expenses taken into account cannot be less than seven times (instead of five times) the amount of the rent or rental value of the property assigned to the taxpayer’s home;
• the administration must take into account the total amount of the annual expenses related to the taxpayer’s lifestyle, whether they are incurred in Switzerland or abroad;
• The amount thus determined may not be less than 400,000 francs (previously 300,000 francs).
The law now also provides that when the taxpayer who applies for the benefit of the regime is married, the conditions for granting the regime must also be fulfilled for his or her spouse. In the past, this element was subject to a certain flexibility on the part of the administration.
In addition, the law provides for a control calculation to ensure that the tax determined by the lump sum is not lower than the Swiss tax, calculated according to the ordinary scale, which would be due on all Swiss source income and on foreign source income for which the taxpayer claims a relief under a double taxation treaty. In principle, the application of the lump-sum tax does not prevent the taxpayer from benefiting from double taxation treaties. The taxpayer who wishes to benefit from a deduction for his foreign income must simply declare it in his tax return.
Stricter conditions for the prevention of double taxation
However, some double taxation treaties are more stringent. This is the case with the treaties concluded with Italy, Italy, Canada, the USA and Norway. Under the terms of these new treaties, only those taxpayers who have declared in Switzerland all the income received in that other State may be considered as “residents” of Switzerland and thus claim the application of the provisions of the treaty. This income must, moreover, be included in the control calculation and be taxed at the rate corresponding to the taxpayer’s overall income.
These changes, both at the federal and cantonal level, came into effect on January 1, 2016 and apply in principle to both new and existing taxpayers. For the latter, a transitional regime is however applicable for 5 years.
Flat rate or ordinary regime?
For many foreigners settling in Switzerland, the application of the normal rules provided by the Swiss law for residents is already very advantageous compared to their tax situation abroad, without having to ask for the benefit of the lump sum. Thus, for average incomes, the ordinary regime is often preferable to the lump sum.
We advise both taxpayers planning to move to Switzerland and those who are already here to consult a specialist in order to determine which regime will be the most advantageous for them and to make the necessary arrangements.