Taxation based on expenditure, also known as lump-sum taxation, was introduced in Switzerland in 1965 in the canton of Bern, and federally in 1990. This tax regime is designed for foreigners residing in Switzerland who do not earn any income in Switzerland. Those who opt for this tax regime are taxed based on their lifestyle.
Taxpayers under this regime are not taxed on the income they earn but on their regular expenditures. The legal basis for expenditure-based taxation is established in Article 16 of the Federal Direct Tax Law and Article 14 of the Cantonal and Communal Tax Law.
The expenditure-based taxation regime has two main objectives. First, it aims to facilitate the taxation of foreign nationals whose financial situation is international and complex. Second, it aims to simplify tax formalities for these individuals and to encourage them to settle in Switzerland.
In many cases, the taxes for individuals under this tax regime would not be higher than if they were taxed under ordinary procedures. Indeed, a portion of their foreign-sourced income, such as that generated by properties or businesses they own abroad, would not be taxed under ordinary procedures. Regarding other types of foreign-sourced income, such as dividends and interest subject to withholding tax, Switzerland would have to share the right to tax with other states according to the tax treaties concluded.
Eligibility for expenditure-based taxation
Individuals who meet the following cumulative conditions are entitled to pay a tax calculated on the basis of expenditure instead of ordinary income tax:
– They are not Swiss nationals;
– They are subject to unlimited tax for the first time or after an interruption of at least ten years;
– They do not engage in any gainful activity in Switzerland.
Taxpayers wishing to benefit from the expenditure-based taxation regime must apply for it.
Calculation of the tax base for income tax
Income tax is calculated based on the annual amount of current living expenses incurred by the taxpayer for themselves and for people living in Switzerland under their care. The tax must be calculated on the basis of the higher of the following two amounts:
– For those with their own housing: seven times the rental value (for owned properties) or seven times the annual rent (for rented properties);
– For those without their own housing (e.g., staying in a hotel): triple the pension they pay for their lodging and food.
The expenditure-based tax must be at least equal to the sum of income and wealth taxes, calculated according to ordinary scales, for assets located in Switzerland or for Swiss-sourced income such as real estate, bank accounts, pensions, etc.
Calculation of the tax base for wealth tax
In addition to income tax, individuals taxed based on expenditure must also pay a wealth tax. This tax is calculated based on the official value of real estate located in the canton of Bern.
The amount of wealth tax is determined by multiplying the official value of Bernese real estate by the tax rate in force in the canton of Bern. Foreign real estate is not considered for the calculation of this tax.
For those who do not own real estate in Switzerland, wealth tax can be calculated based on their total wealth. 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, expenditure-based taxation is a tax regime that allows foreign nationals residing in Switzerland and not earning income in Switzerland to pay taxes based on their lifestyle rather than their income. Taxpayers who wish to benefit from this regime must meet certain conditions and apply for it. Expenditure-based tax is calculated based on the regular living expenses incurred by the taxpayer for themselves and their dependents. Wealth tax is calculated based on the value of real estate located in the canton of Bern or on the basis of the total wealth if the taxpayer does not own real estate in Switzerland.