Lump-sum taxation of individuals according to federal income taxation
According to Article 14, para. 1 of Federal Income Tax Law, individuals are entitled to benefit from a lump-sum taxation, instead of the ordinary tax on income, whether the following requirements are met:
- They are not Swiss nationals;
- For the first time or after a ten-year period they are subject in Switzerland to worldwide taxation;
- They do not carry out any independent or dependent activity in Switzerland.
Only foreign nationals can apply for lump-sum taxation. If a Swiss national also has the nationality of another State, then he or she is not considered as a foreign national and cannot thus benefit from this form of taxation.
If the individual entitled to the lump-sum taxation becomes a Swiss national, this regime no longer applies and he or she is subject to ordinary taxation.
The ten-year period
The lump-sum taxation can only be benefited from if the foreign national moves his or her tax domicile in Switzerland for the very first time or after a period of at least ten years, during which he or she was resident abroad.
Those individuals, that before leaving Switzerland benefited from the lump-sum taxation and that come back to Switzerland, can still benefit from the lump-sum taxation, despite of the ten-year period.
No independent or dependent activity in Switzerland
The lump-sum taxation regime does not apply for those individuals carrying out any business activity (i.e. professional independent activity or employment activity) in Switzerland, from which he or she derives income of Swiss or foreign source. This is particularly the case of artists, scientists, sportsmen and directors who personally carry out a profit-making activity.
In such cases, the taxpayer is subject to ordinary taxation.
Computation of the tax
The lump-sum tax is calculated upon the annual expenses borne by the applicant individual considering his or her standard of living, as well as by those people he or she takes care of. These expenses represent the taxable base for the computation of the tax due.
In any case, the taxable base should not be lower than any of the following amounts (i.e. the highest is taken into account):
- 400'000 CHF;
- Seven times the annual rent paid for his or her dwelling or seven times the rental value of the purchased dwelling;
- Three times the price of annual pension for board and lodging in his or her abode;
- The sum of the following gross income:
- Income from real estate situated in Switzerland;
- Income from movable assets situated in Switzerland;
- Income from copyrights, patents and similar intangible rights in Switzerland;
- Rent and pension income from Swiss source;
- Income for which the taxpayer claims a tax relief under a double tax treaty concluded by Switzerland.
The taxable base of the lump-sum tax is first calculated on the grounds of the annual expenses borne by the taxpayer in Switzerland and abroad to keep his or her standard of living, as well as those borne to take care of dependents. Extraordinary and non-recurring expenses are normally disregarded.
Such expenses mainly include:
- Expenses for board and clothing;
- Expenses for lodging (heaters, cleaning, gardening, etc.);
- Taxes and social charges;
- Costs for house-keepers;
- Payments of allowances;
- Costs for education, including those for the school of offspring, free time, sport, etc.;
- Costs for holidays, travel expenses, periods of treatments, etc.;
- Costs for keeping expensive pets (i.e. riding horses);
- Costs for keeping cars, motorboats, yachts, planes, etc.
The taxable base should be determined each tax year and no deduction is allowed.
The taxpayer wishing to apply for the lump-sum taxation must file a tax return and give evidence to meet the requirements.
The cantonal competent authority must check that the taxpayer meets the above-mentioned requirements and that he or she provided all the necessary evidences.
It is therefore strictly recommended to file a request in advance to the cantonal tax authorities, representing the personal and economic situation of the taxpayer and determine the taxable base on which the lump-sum taxation applies.
The Federal Tax Authorities made it clear in the new circular letter that the cost of living must be established every year. This implies that in every tax period during the yearly assessment process, the taxpayer should determine and check his or her taxable base and assume the highest of the values mentioned above, on which the taxes must be calculated.
Double tax treaties
Those taxpayers benefiting from the lump-sum taxation can in principle benefit from double tax treaties concluded by Switzerland and claim the tax relief provided there.
However, double tax treaties with Austria, Belgium, Canada, Germany, Italy, Norway, and the United States provide that individuals resident in Switzerland and benefiting from the lump-sum taxation can claim the benefits of the treaty only if income sourced in their territory is subject in Switzerland to ordinary taxation.
Accordingly, in the calculation of the taxable base, income sourced in these States should be included, provided that they are subject to tax in Switzerland under Swiss domestic law and they are not exempt under the relevant treaty. The applicant taxpayer can thus benefit from a "modified" lump-sum taxation and thus subject to ordinary taxation all income sourced in the above-said countries. In such cases, therefore, the right to claim the treaty benefits is still available.