Expense-based taxation, also known as lump-sum taxation, was introduced in Switzerland in 1965 in the canton of Berne, and in 1990 at federal level. This tax system is aimed at foreigners resident in Switzerland who do not receive any income in Switzerland. People who choose this tax regime are taxed on the basis of their lifestyle.
Taxpayers subject to this tax regime are not taxed on the income they receive, but on their living expenses. Article 16 of the Federal Direct Tax Act and article 14 of the Cantonal and Communal Tax Act provide the legal basis for taxation on the basis of expenditure.
Taxation on the basis of expenditure has two main objectives. Firstly, it aims to facilitate taxation of foreign nationals whose financial situation is international and complex. Secondly, it aims to simplify tax formalities for these people and encourage them to settle in Switzerland.
In many cases, the taxes of people subject to this taxation system would be little or no higher if they were taxed according to ordinary procedures. In fact, part of their foreign-source income, such as that generated by real estate or businesses they own abroad, would not be taxed under ordinary procedures. As far as other types of foreign-source income are concerned, such as dividends and interest subject to withholding tax, Switzerland would have to share the right to tax with other states in accordance with its tax treaties.
Entitlement to lump-sum taxation
Individuals who meet the following cumulative conditions are entitled to pay tax calculated on the basis of expenditure instead of ordinary income tax:
- They are not Swiss nationals;
- They are subject to unlimited taxation for the first time or after an interruption of at least ten years;
- They are not gainfully employed in Switzerland.
Taxpayers wishing to benefit from the expenditure-based taxation system must apply for it.
Determining the basis of calculation for income tax purposes
Income tax is calculated on the annual amount of current maintenance expenses incurred by the taxpayer for himself and for persons living in Switzerland for whom he is responsible. The tax must be calculated on the basis of the higher of the following two amounts:
- For people with their own home: seven times the rental value (for owned homes) or seven times the annual rent (for rented homes);
- For people who do not have their own accommodation (e.g. staying in a hotel): triple the board and lodging they pay.
The tax based on expenditure must be at least equal to the sum of the income and wealth taxes, calculated according to the ordinary scales, for assets located in Switzerland or for Swiss-source income such as real estate, bank accounts, pensions, etc., and must not exceed the sum of the income and wealth taxes calculated according to the ordinary scales.
Determining the basis for calculating wealth tax
In addition to income tax, people taxed on the basis of expenditure must also pay wealth tax. This tax is calculated on the basis of the official value of real estate located in the Canton of Berne.
The amount of wealth tax is determined by multiplying the official value of Berne real estate by the tax rate applicable in the Canton of Berne. Foreign real estate is not taken into account when calculating this tax.
For persons who do not own any real estate in Switzerland, wealth tax may be calculated on the basis of their total assets. In this case, the amount of wealth tax is equal to a fixed percentage of their total wealth, as determined by the tax authorities.
In summary, lump-sum taxation is a tax regime that allows foreign nationals domiciled in Switzerland and not earning income in Switzerland to pay tax on the basis of their lifestyle rather than their income. Taxpayers wishing to benefit from this system must meet certain conditions and make a request. Expense tax is calculated on the basis of current maintenance costs incurred by the taxpayer for himself and his dependants. Wealth tax is calculated on the basis of the value of real estate located in the canton of Berne, or on the basis of total wealth if the taxpayer has no real estate in Switzerland.
