Income tax is a direct tax levied on the income of individuals and companies in Switzerland. It is one of the most important taxes for financing public services such as health, education, infrastructure and security. The Swiss tax system is characterized by decentralization and the competence of the cantons in tax matters. This means that each canton has its own income tax rules, although the basic rules are governed by federal legislation (LIFD, LHID).
Individuals domiciled or residing in Switzerland are subject to Swiss income tax on the basis of a personal connection (art. 3 para. 1 LIFD). Individuals who are not resident in Switzerland, but who are gainfully employed there, are also subject to Swiss income tax on the basis of an economic connection (art. 5 LIFD). Companies resident in Switzerland are also subject to corporate income tax. Non-resident companies operating a business in Switzerland or owning real estate in Switzerland are also subject to corporate income tax. Tax domicile in Switzerland is determined by an individual’s place of habitual residence (art. 3 para. 2 LIFD) or the place where the company is domiciled. Individuals and companies are considered resident in Switzerland if they have their tax domicile or registered office there.
The calculation of income tax in Switzerland depends on taxable income, tax deductions and tax rates in force in the canton concerned. Tax deductions are discussed in section E of this text. Taxable income includes all income received by an individual or a company, including salaries, property income, capital gains, dividends, etc. To calculate income tax, we apply our canton’s tax rates to our net income, which corresponds to taxable income minus tax deductions. The tax rate in Switzerland is progressive, which means that individuals and companies with higher incomes are subject to a higher tax rate. Tax rates vary from canton to canton, with higher rates in urban cantons and lower rates in rural cantons.
There are certain types of income that are not taxable in Switzerland. First and foremost are sickness and accident insurance benefits. These benefits are generally paid directly to the beneficiaries and are therefore not subject to income tax. Unemployment benefits are also considered tax-free income in Switzerland. They are paid by the unemployment insurance scheme, and are generally subject to a minimum contribution period. Family allowances are also non-taxable income in Switzerland. They are paid by the employer or by the family allowance fund, and are usually subject to income and number-of-children conditions. In addition, disability insurance benefits are also considered as non-taxable income in Switzerland. Disability insurance benefits are generally paid directly to the beneficiaries and are therefore not subject to income tax. Compensation for damages is also non-taxable income in Switzerland. They are generally subject to certain conditions, such as proof of the damage suffered. Life annuities are also non-taxable income in Switzerland. These are usually paid for life, and are not subject to income tax. Finally, capital gains realized on the sale of personal property are considered non-taxable income in Switzerland. If the property has been held for more than one year, the capital gain realized on the sale is considered non-taxable. This means that the difference between the sale price and the purchase price of the property will not be taxed. If personal property is purchased for the purpose of realizing a short-term capital gain, the capital gain will be considered taxable income and will be subject to income tax.
Tax deductions are expenses that can be deducted from a person’s or company’s taxable income, thereby reducing the amount of tax payable. In Switzerland, there are several possible tax deductions for individuals and companies. Tax deductions for individuals include, for example, health insurance contributions, occupational pension contributions, commuting expenses, mortgage interest, training costs, etc. Tax deductions for companies include personnel costs, production costs, operating costs, interest, tax loss carryforwards, investment in research and development, etc. Individuals can also benefit from tax deductions for donations made to charitable organizations such as charities, benevolent associations, etc.