Lump-sum taxation and residence permit in Switzerland
By Jean Donnet & Mattia Deberti
Posted: 14th April 2015 09:41Foreign nationals who opt for Switzerland as their new place of living must obtain a residence permit in this purpose. Citizens of non EU countries, even if they do not intend to carry out any gainful activity in the country, are not entitled to the grant of a residence permit if they have no specific personal relation to Switzerland and are not over the age of 55. In such cases the usual practice is to apply for a residence permit and agree on a lump-sum taxation regime with the authorities of the canton of residence. This special tax regime, resulting in an expenditure-based taxation, is applied in Switzerland at Federal level and in some cantons, more particularly in the West part (French speaking part) of the country.
Lump-sum taxation has raised controversy in Switzerland during the past years. Some cantons of the German part of Switzerland, such as Zurich in early 2010, had to abolish this special tax regime as a result of a popular vote.
Finally, on 30 November 2014, two popular initiatives to abolish lump-sum taxation – one at Federal level and the other one in the Canton of Geneva – were strongly rejected by the population at both levels. So far, there are no other cantonal initiatives against lump-sum taxation pending in other cantons.
One can therefore consider that lump-sum taxation has now regained stability and will remain in force in Switzerland, at Federal level and in some cantons, more particularly in the French speaking part of the country (for instance in the cantons of Geneva, Vaud and Valais). However, following the abolition of this special regime in some cantons of the German speaking part of Switzerland, Confederation had already taken the lead in tightening the conditions for the application of lump-sum taxation at Federal and Cantonal levels. In this respect amendments, effective as at 1 January 2016, have been made to the Federal Direct Taxation Act (DFTA) and to the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal levels (DTHA).
Principles applicable to lump-sum taxation at Federal level (art. 14 DFTA) and at Cantonal and Communal levels (art. 6 DTHA)
- Expenditure-based taxation (lump-sum taxation) replaces ordinary taxes on income and wealth.
- The system is available only for foreigners who set up domicile in Switzerland for the first time or after an absence of 10 years. Swiss nationals cannot benefit from this tax regime.
- Spouses living in the same household must both meet the requirement for lump-sum taxation.
- The portion of expenditure–based taxation replacing the ordinary income tax is calculated on the basis of the annual expenditure / living costs of the tax payer, in Switzerland or abroad, for himself and for his family members or other people dependant from him and living with him. Taxes are levied on the highest of the following amounts:
o The minimum amount set by the law, which may not be less than CHF 400,000 for Federal direct taxation. (Cantons have to set forth in their legislation, at their discretion, the amount of the minimum assessment basis);
o Seven times the annual rent or annual deemed rental value of the home of the main tax payer;
o For other tax payers living for example in a hotel or in a pension: three times the price of the annual pension for food and housing at the place of residence of the tax payer.
- Tax is levied at ordinary tax rate.
- Cantons are free to determine how cantonal wealth tax is covered by lump-sum taxation.
- The amount of taxes due on the basis of the lump-sum assessment must be at least equal to the total of income and wealth taxes that would be charged to the tax payer if he would be taxed on following items, under the ordinary regime:
o Real estates in Switzerland and the income generated by such assets;
o Movable assets located in Switzerland and the income generated by such assets;
o Financial assets invested in Switzerland, including debts secured by real estate and the income generated by such assets;
o Copyright, patents and similar rights exploited in Switzerland and the income generated by such rights;
o Retirement pensions, annuities and other pensions from Swiss sources;
o Foreign income for which the tax payer requires partial or full exemption of foreign taxes based on any double taxation treaty entered into by Switzerland with the country where taxes are levied.
- If the income from a foreign state is exempted provided that Switzerland levies taxes on such income, applying the rate for global income, Swiss taxes are calculated not only on the basis of the income mentioned above but on the basis of all items of income from the state at source or attributed to Switzerland based on the relevant double taxation treaty.
Specific conditions at Cantonal level:
In the cantons where lump-sum taxation has been maintained the minimum annual assessment basis set forth by law varies from approximately CHF 220,000 to CHF 300,000. However, in practice, minimum amounts are more in the range of CHF 280,000 to CHF 350,000.
As explained above, renouncing to any gainful activity is a key condition in order to benefit from lump-sum taxation. Therefore, foreigners who become new Swiss taxpayers under this special regime are not allowed to take up any employment in Switzerland, should it be with a third person/entity or with a legal entity under their control, for instance as shareholder or beneficial owner of such entity. The same applies to any independent gainful activity. For the time being carrying out gainful activity outside Switzerland is still allowed. The conditions in this respect might become more tightened in the future, at least at Cantonal level.
Lump-sum taxation and residence permit
Any foreigner who decides to take up domicile in Switzerland with or without any gainful activity must obtain a residence permit.
Residence permit for gainful activity must be obtained from the first day of activity. Residence permit without any gainful activity is necessary after a continuous stay of 90 days in the country.
For European citizens, obtaining a residence permit with or without gainful activity is a simple and swift process based on the agreement between Switzerland and the European community supporting the free movement of persons.
For citizens from non EU countries the process is less straightforward. Residence permit with gainful activity requires a labour market survey to verify that there is no candidate available on local market and in the EU countries to take up the position. Authorisations are reserved for people at executive level for positions that will help develop the local labour market. For residence permit without gainful activity, the applicant must be over 55 and justify good ties with Switzerland. If none of these two prerequisites are met, the applicant may still show that he will be of a significant interest to his home canton in terms of taxation.
In this context, lump-sum taxation is frequently combined with the application for residence permit without gainful activity. Indeed, for non EU applicants who are not 55 of age or older and who have no ties to Switzerland, opting for lump-sum taxation is generally the only route to the grant of a residence permit without gainful activity. One must however be aware that the lump-sum amount must be of some significance in order to create a tax interest for the canton. Currently, the minimum amount of the lump-sum assessment (taxation basis) which is taken into consideration for the grant of a residence permit is in the order of CHF 800,000 to CHF 1,000,000 depending on the Canton of residence. Very roughly, the total amount of taxes to be paid on those basis, including Federal and Cantonal levels, should be in the range of CHF 280,000 to CHF 400,000 depending on quite a number of criteria in relation to the applicable tax rate, such as the canton and commune of residence as well as the family situation (married couple, children at charge etc.).
The recent confirmation of the lump-sum taxation system in Switzerland will quite certainly result in a renewed interest for foreigners who see the country as a possible place for immigration. In addition the political and economic stability in the country combined with a high quality of life will continue to make Switzerland a first choice for immigration.
Jean Donnet is an attorney specialised in commercial, tax and corporate law. He provides expert advices to international clients more particularly in relation to the launching of new business in Switzerland with all related matters such as immigration process. He is a member of the Geneva and Swiss Bar Association.
Attorney at law, Partner at NOMEA Avocats,Notter Mégevand & partners, Geneva
Tel: +41 (0) 22 703 47 50
Mattia Deberti is an attorney specialised in litigation, commercial and immigration law. He advises individual and corporate clients on various commercial, civil and criminal law matters. He is a member of the Geneva and Swiss bar Association.
Attorney at law, Associate at NOMEA Avocats,Notter Mégevand & partners, Geneva
Tel: +41 (0) 22 703 47 50