Many people decide to live in Switzerland because of the quality of life. However, Switzerland is also a popular choice for wealthy people because it offers numerous tax advantages. Have you heard about lump-sum taxation? This is one of the main advantages. If you aren't familiar with this term, don't worry. Continue reading our article to find out all about lump-sum taxation.
1. What is lump-sum taxation?
The lump-sum tax agreement is a tax agreement between the Swiss tax authorities and foreign nationals settling in Switzerland. The lump-sum taxation is also called “taxation according to expenditure”. It’s a simplified and advantageous taxation procedure.
Instead of calculating tax based on income and wealth, it’s based on the taxpayer’s lifestyle. Thus, this tax status guarantees a fixed annual tax based on taxpayer expenditures, previously negotiated with the tax authorities.
2. What are the conditions to benefit from lump-sum taxation in Switzerland?
The lump-sum taxation system has many advantages, but it’s only available to people who meet certain conditions:
- Being a foreign national;
- Haven’t worked in Switzerland for the last 10 years;
- Not being gainfully employed in Switzerland
- Having a residence in Switzerland;
- Being insured with a health and accident insurance company;
- Being able to prove, in one way or another, that they have substantial assets.
Both spouses must comply with these conditions to qualify for lump-sum taxation when a couple is involved.
To obtain a residence permit without gainful employment, individuals from the European Union or the European Free Trade Association must provide proof of meeting the conditions described above.
3. How is the amount of lump-sum taxation calculated?
Taxation at the federal, cantonal, and communal levels requires different calculations, so a distinction must be made.
A taxpayer’s expenses made in Switzerland and abroad to maintain his lifestyle and dependents define the lump-sum tax at the federal level. However, it amounts to at least the highest of the following amounts
o CHF 400’000;
o For taxpayers who are heads of household: seven times the annual rent or rental value of their property;
For other taxpayers: three times the yearly pension for board and lodging at their place of residence;
o The sum of the following gross elements:
- Income from real estate in Switzerland ;
- Income from movable properties in Switzerland ;
- Income from movable capital invested in Switzerland;
- Income from copyright, patents and similar rights exploited in Switzerland;
- Pensions from Swiss sources;
- Income for which the taxpayer claims partial or total relief from foreign taxes under a double taxation agreement with Switzerland.
At the cantonal level, the system is identical. Each canton, however, is free to define the first threshold, that is, the minimum amount of the lump sum, currently fixed at CHF 400,000 at the federal level. More specifically, in the canton of Valais, the lump-sum tax enacted on 01.01.2021 is relatively low. The minimum taxable base is:
- CHF 250,000 for the calculation of cantonal and communal income tax;
- CHF 1,000,000 or the calculation of wealth tax;
- CHF 400,000 for federal income tax.
Based on the above elements, the tax amount for a married couple is approximately CHF 102,000.
Laws establish these minimum values for the basis of calculation and a control calculation. Therefore, the lump-sum tax cannot be lower than the Swiss tax on various aspects of gross income and wealth, determined according to the ordinary scale.
4. What are the advantages of lump-sum taxation?
A lump-sum tax system has many advantages, but the most notable one is tax predictability. Additionally, this tax status guarantees a fixed annual tax based on the taxpayer’s expenses.
Having a tax package gives you access to other advantages:
- Moderate income taxation;
- Wealth taxation limited to four times the amount of cantonal tax;
- No taxation on inheritances or donations made to blood relatives in the direct line, to spouses who are not legally separated and to adopted children;
- The acquisition of real estate is not subject to the federal law on the purchase of real-estate by individuals of foreign nationalities;
- The tax on property gains is a maximum of 3% after a minimum holding period of 25 years.
You may be able to enjoy many tax benefits if you invest in real estate located within the canton of Valais, given that rents and rental values are generally lower there than in other Swiss cantons.
The real estate and movable investments you make abroad won’t be subject to tax in Switzerland if you have a tax package in Switzerland. However, it will be necessary to research double taxation agreements — income that is partially or wholly exempted from foreign taxes must be taxed in Switzerland.
Whenever you have any questions or need additional information, please feel free to contact us to guide you or put you in contact with specialists who can give you answers to your questions.