Taxes in Switzerland
Income tax in Switzerland for foreigners
Switzerland is famed for its financial arrangements both nationally and internationally. Its tax rates may at first seem complicated, but there are benefits if the rules are followed. This article examines how taxes work in Switzerland.
Switzerland tax rates
Switzerland is a federal republic, officially known as the Swiss Confederation, and is divided into administrative areas known as cantons. Taxes are levied by the individual cantons as well as the government. Municipalities can also levy taxes, often referred to as a communal tax. Since the 1990 Federal Tax Harmonisation Law, cantons can set their tax rates or establish new taxes – with the exception of taxes set by the state.
Tax is deducted at source – this means it is deducted by the employer. This is inclusive of all taxes – federal, cantonal and communal taxes. It is calculated on the basis of the gross income achieved by the individual.
Swiss citizens and foreign employees who have a residence permit must file a tax return each year. Foreign employees who do not hold a permit, but who are in employment are subject to a process known as ‘withholding tax’ and is deducted from monthly salaries by the employer. If you are married to a spouse who holds Swiss citizenship, or a residence permit, then you are exempt from the withholding tax.
Tax brackets in Switzerland
Confusingly, for a lot of people who are not used to the Swiss system, there is not a singular tax bracket system that is applicable to everyone in the country and is subject to huge variants which are dependent upon a number of factors.
Tax at source (or withholding) rates are based on the average rate of so-called ‘ordinary’ taxes by each individual canton. This can be affected by different circumstances, including marital status, the number of children you have, and general deductions. Each circumstance will present its own individual tax rate, making the Swiss system particularly complex, especially when you also consider there is a federal and communal tax rate which is also applied. In the instance of the chart below as an example, we shall focus on a populous area (Zurich) for a single person.
Zurich cantonal tax - single taxpayers income tax 2018 (in CHF)
Income tax on single persons and couples can vary widely and is dependent upon which canton one lives in. In Basel-Stadt for example, there is no tax on anyone earning below 20,000 CHF, but taxes become significantly higher the more an individual earns.
Tax rates for married couples or a Swiss-registered partnership is calculated by the combined income of the two people in the relationship, which is then divided by 50 per cent - known as ‘splitting’.
The tax rate applied to single, widowed, divorced or separated individuals with whom a dependent is living (a dependent can be either a child or an adult) is the rate applicable to 50 per cent of their income.
Please remember: If you fall within the withholding tax bracket, it depends entirely on which canton you live in as to how much is withheld.
It is important to note that the communal tax can range widely depending on the area. For example, the communal tax of Geneva is 45.5 per cent of basic cantonal tax. The highest taxes in Switzerland levied at communal level can be found in Chancy and Avully and is 51 per cent of basic cantonal tax. However, the municipality of Genthod is 25 per cent.
If you are unsure about how much tax you will be paying, you can find a state-run online tax calculator here.
Switzerland tax rates vs US tax rates
Just like in Switzerland, taxes in the United States are levied at both state and federal levels – which sees large differences in income tax paid in different parts of the country. Federal income tax rates range between 10 per cent and 40 per cent and depending what state you live in you can pay an additional state income tax ranging from 0 per cent (no tax) or at the highest end 13.3 per cent (in California). So, there are clear parallels between the two countries. US States are like that of the cantons in Switzerland and both produce systems concurrent, but also separate to, federal levels.
Double taxation agreements
To avoid double taxation or generating income in two countries, Switzerland operates Double Taxation Agreements (DTA). The agreements are with over 80 countries, including the UK, the United States, Canada and most of Europe. The effect on non-residents from treaty countries means they can obtain a partial or total tax refund withheld by the Swiss authorities. Where the tax is held at source, the difference can be re-claimed by non-residents from the Swiss tax authorities.
Benefits for researchers
Research and development (R&D) is a key component to Switzerland’s aims around innovation – an area the country prides itself on. Private companies are offered generous expenses and deductions in Switzerland for the activities of the company and the employees themselves – and this varies from the country of origin of the company, as individual arrangements have been established through the federal government. Expenses and costs can be tax-deductible.
Those in employment can also deduct work related expenses such as the cost of commuting to work. Under some conditions, the amount of distance driven to the workplace can be deducted when using a private vehicle. Transportation passes and flat amounts for bicycles are included under commuting expenses.
Other expenses can include the cost of food, work clothing, tools, professional literature and there is a flat rate deduction for these items.
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If you are working under a fellowship, these are defined under Swiss law as money which people get without a former contract of employment. Under this description, this means that fellowships are tax-free. However, such guidance must be taken with care, as it entirely depends on the circumstances in which the fellowship is obtained.
If a fellowship is gained without any conditions, this is tax-free
If you are in receipt of money because of a signed contract of employment, then the figure is subject to tax assessment
People who work in a specific canton but whose residence is abroad will be taxed at source. It is advisable to check your terms of employment and seek advice from your institution.