There are many clichés about Switzerland. Two are definitely true: the best chocolate and low taxes – if the taxpayer makes the right choice twice. If you are looking for a beautiful tax residence, Switzerland has the answer. The Swiss forfait tax regime is an advantageous taxation system for wealthy private individuals. It has a historical background as a British non-dom regime and is internationally established but also has a well-known namesake. Charlie Chaplin made the right choice twice.
This article explains in a nutshell the Swiss tax system, the choice of the best tax home, the choice of the best tax regime, and the Swiss forfait tax regime.
Historical background
The Swiss forfait tax regime goes back to the canton of Vaud and the year 1862. The tax base was living expenses. It is not known due to official tax secrecy, but it can be assumed that Charlie Chaplin was one of the first celebrities who benefited from the Swiss forfait tax regime. The Swiss forfait tax regime is, therefore, also referred to as the Lex Chaplin. Historically, it was, indeed, wealthy English people who moved to Switzerland to benefit from the Swiss forfait tax regime.
In 1819, François-Louis Cailler opened one of the first mechanised chocolate factories, in Corsier-sur-Vevey, thus founding the oldest chocolate brand still in existence in Switzerland. In 1952, Charlie Chaplin chose Corsier-sur-Vevey as his tax home. Based on his choice of tax home, it can be assumed that Charlie Chaplin also liked Swiss chocolate.
The Swiss tax system
Switzerland is a federation of 26 cantons. Each canton is composed of communes. In total, there are 2,131 communes in Switzerland.
The federal government levies an income tax. The cantons and communes levy income and wealth taxes, as well as gift and inheritance taxes. The cantons Schwyz and Obwalden do not levy gift or inheritance taxes and Lucerne does not levy a gift tax. Most cantons and communes do not levy gift or inheritance taxes on transfers between spouses or from parents to descendants.
The choice of the best tax home
The taxpayer can choose between 2,131 tax homes. The choice of the best tax home is an important pre-immigration tax planning point. There are high- and low-tax jurisdictions. The top progressive total income tax rates are between 20 and 45% and the top progressive wealth tax rates are between 0.1 and 1%.
The choice of the best tax regime
The choice of the best taxation regime is another important pre-immigration tax planning point. There are two taxation regimes: ordinary taxation and forfait taxation.
Upon request, a taxpayer may be granted the right to pay a Swiss forfait tax instead of Swiss income and wealth taxes. Some cantons do not have Swiss forfait taxation or provide Swiss forfait taxation for the first tax year only (e.g., Zurich, Schaffhausen, Basel-Stadt, Basel-Land, Appenzell Ausserrhoden, and Appenzell Innerrhoden).
Swiss forfait taxation
The advantage of the Swiss forfait tax is that the tax is not calculated on real income and real wealth but on the basis of living expenses or notional amounts of income and wealth.
Requirements
The requirements of the Swiss forfait tax are:
The taxpayer does not have Swiss citizenship;
The taxpayer is becoming subject to Swiss residence taxation for the first time or after an interruption of at least 10 years; and
The taxpayer does not physically work in Switzerland.
Spouses who live in a legally and de facto unseparated marriage must both meet the requirements.
The ban on exercising physically an employment or a self-employment activity in Switzerland is the most important stipulation. Employment or self-employment activity outside Switzerland is not prohibited. Employment or self-employment activity requires a compensation. Individuals who stepped down from management functions and only perform supervisory board member activities, wealthy individuals who focus on the management of private assets or family held businesses, retired persons, sports persons, and models may meet this requirement. Either the activity is abroad or the activity is not for compensation, or both. It is not always easy to draw the qualitative boundary and the territorial boundary; in particular, due to the telecommunications technology available today.
Expense-based taxable amounts
The Swiss forfait tax is basically calculated on the basis of the annual worldwide living expenses incurred by the taxpayer, the spouse, and the dependants. The taxpayer must fill out a one-page form for the living expenses.
The Swiss forfait tax is calculated on the basis of the highest of the following amounts:
Notional income and notional wealth (lump-sum amounts); or
Seven times the annual rent (rented property) or the rental market value (owned property) determined by the canton according to cantonal administrative guidelines.
The federal and cantonal tax acts stipulate minimum amounts for the notional income and notional wealth amounts that cannot be undercut. The minimum amounts vary between the federal tax act and the cantonal tax acts and also from canton to canton. The average minimum amount for the notional income is between around CHF 250,000 and 650,000. The method for determining the notional wealth amounts varies between the cantons. As a rule, the notional income amount is multiplied by a factor between 4 and 20 to determine the notional wealth amount. The average minimum amount for the notional wealth is between CHF 2 million and 12 million. In one canton, the notional wealth amount corresponds to the value of the real estate located in the canton. In two cantons, the notional wealth amount corresponds to a percentage mark-up on the notional income amount.
Additionally, the tax authorities determine the notional income and notional wealth amounts, at least de facto, from the estimated real wealth of the taxpayer and usually have an internal list with gradations (e.g., for the wealth and age of the taxpayer). Furthermore, the cantonal tax authorities increase these notional amounts slightly for non-EU nationals. Non-EU nationals must meet higher hurdles than EU nationals in order to obtain a residence permit.
The notional income and notional wealth amounts (lump-sum amounts) are specified and guaranteed in a cantonal advance tax ruling.
The annual rent is the annual amount that the taxpayer pays to the landlord for the property. The rental market value is determined according to cantonal administrative guidelines and is ultimately based on the purchase price of the property. A high purchase price can therefore result in a high rental market value.
The highest income and wealth amounts which are determined according to the above two methods are then multiplied by the ordinary income and wealth tax rates respectively to determine the Swiss forfait tax burden. At the lower end of the tax burden scale, the minimum amounts for the notional income and notional wealth may result in low tax burdens of around CHF 150,000 and fall within the range of the Italian imposta forfettaria, which is not yet internationally established. However, depending on the real wealth (in particular, the cantonal internal list with gradations), the living expenses of the taxpayer, or the value of the annual rent (rented property) or the rental market value (owned property), the Swiss forfait tax burden may be significantly higher.
Territorial-based taxable amounts
The Swiss forfait tax is calculated on the basis of territorial-based amounts. Taxable income and taxable wealth must be at least equal to the sum of the total gross amount of Swiss income and the total gross amount of Swiss assets (control calculation). The control calculation for income also includes income for which the taxpayer claims relief from foreign-source taxes on the basis of a double tax agreement concluded by Switzerland and a foreign state (domestic tax modification for treaty entitlement for a particular income sourced in the other contracting state).
Determination of the taxable amount
It can be summarised that the Swiss forfait tax is calculated with four schedules:
Schedule I – living expenses;
Schedule II – notional income and notional wealth amounts (lump-sum amounts);
Schedule III – seven times annual rent (rented property) or the rental market value (owned property); and
Schedule IV – Swiss income and Swiss assets (control calculation).
The highest amount is determined in each schedule. The Swiss forfait tax is calculated by multiplying the highest amount of schedules I to IV by the ordinary income and wealth tax rate.
International tax planning
Swiss forfait tax planning essentially boils down to two points:
Do not rent or do not buy property that is too expensive (reduce the amounts of Schedule III to the minimum); and
Do not hold Swiss assets that generate Swiss income (reduce the amounts of Schedule IV to the minimum).
Swiss tax treaty network
The Swiss forfait tax is a hybrid tax that includes elements of personal consumption tax (living expenses) and territorial income tax (Swiss income). Nevertheless, the Swiss forfait tax regime is recognised as income tax under the double tax agreements concluded between Switzerland and foreign contracting states. Furthermore, the taxpayer is recognised by foreign contracting states as tax resident in Switzerland.
Switzerland has a large tax treaty network and has double tax agreements with over 100 foreign contracting states. Some double tax treaties concluded between Switzerland and foreign contracting states require that the taxpayer includes all income from the other contracting state that is taxable in Switzerland under the double tax treaty in the Swiss forfait tax calculation (tax treaty modification for treaty entitlement) (e.g., Belgium, Germany, Italy, Canada, Norway, Austria, and the US). If the taxpayer does not fulfil this requirement, they are not recognised as a treaty resident under the double tax treaty between Switzerland and the foreign contracting state, so the double tax treaty is not applicable.
