Relocating to Switzerland: lump-sum tax regime

This article is part of the series of articles that began with an article published in June on Relocating to Switzerland: key points and another article published in September on Swiss tax residency.

The aim of this article is to provide an overview of the conditions to be eligible for the lump-sum tax regime, and how it works in general.

General considerations

Most of the Swiss cantons offer the possibility to foreign nationals relocating to Switzerland to pay taxes under the lump-sum regime (so-called “forfait” in French), by opposition to the ordinary tax regime applicable to the vast majority of people living in Switzerland. This means that the taxable basis is calculated based on the taxpayer’s living expenses rather than on his/her effective income and wealth.

Conditions

The forfait is available only to foreigners who come to live in Switzerland for the first time or after an absence of ten years and who will not be gainfully active in Switzerland. It is in principle possible to work outside Switzerland (at least according to the authorities of some of the cantons), but under restrictive conditions. The management of personal wealth is not considered as a gainful activity in this respect.

The lump-sum regime requires an advance tax ruling confirmation by the competent cantonal tax authority whereby the facts and assets of the taxpayer are discussed. The application for a tax ruling must be filed before submitting the first tax return as the possibility for a lump-sum agreement may be forfeited after an ordinary tax return has been filed. It is important to plan ahead, as it can take several weeks/months for the tax authority to issue a ruling, depending on the canton and its workload.

Taxable basis

The taxable basis (i.e. the amount on which the actual taxes will be determined) is assessed on the taxpayer’s worldwide living expenses, which includes in particular costs of accommodation, general living, cars, housekeeping, etc.

The taxation basis is then subject to the ordinary income tax rate applicable at the federal, and cantonal and communal levels. The tax rates vary considerably among the cantons and municipalities.

The taxable basis cannot however not be lower than:

• the equivalent of seven times the annual rental expense;
• a minimum expense threshold of CHF 429,100 for federal tax and the minimum threshold set by the relevant cantonal tax legislation for cantonal and communal tax purposes; or
• the taxable amount resulting from the control calculation (see below).  

In practice, depending on the canton, EU and EFTA nationals can expect to pay a minimum annual tax liability of between CHF 100,000 to CHF 160,000, and third-country nationals between CHF 250,000 to CHF 400,000.

Control calculation

Each year, lump-sum taxpayers must file a special tax return, the so-called ‘control calculation’. The tax burden resulting from the living expenses, as set by the tax ruling, is subject to this control calculation and must be at least equivalent to the ordinary tax payable on the following taxable items:

• Swiss-source income (e.g. Swiss real estate, securities issued by Swiss entities, Swiss source pensions or royalties, etc.); and
• foreign income for which the benefits of a double tax treaty is claimed, i.e. partial or total relief from foreign taxes. 

In other words, the taxpayer must pay the higher of the above-mentioned amounts (seven time the annual rental expense, minimum expense threshold or control calculation).

Application of double tax treaties (DTT)

In principle, individuals taxed on the basis of the forfait are deemed Swiss residents within the meaning of DTT and may therefore claim treaty benefits. However, some DTT concluded with Switzerland prohibit those individuals which are under the forfait from enjoying treaty benefits.

It is therefore important to review every year the source of income and wealth of the taxpayer and, if necessary, to request the ‘modified lump-sum’ tax regime. The latter allows the taxpayer to claim the benefits of DTT only if all his/her income from these States (and not just income taxed at source) is taxable under Swiss tax law and subject to federal, cantonal and communal taxes.

In practice, taxpayers who request the modified lump-sum tax regime must declare, each year if they wish to benefit from the DTT benefits, all their income from these countries.

The above-mentioned key points must be considered when relocating to Switzerland, and in particular if you wish to benefit from the forfait.

Swiss law firm with an international reach (throughout his offices in the majority of the financial centres), Charles Russell Speechlys SA is specialised in advising families and entrepreneurs on all their wealth, estate and tax planning issues, with a strong expertise on cross-border matters.

Please contact Mr Grégoire Uldry, or Mrs Alexia Egger Castillo, lawyers specialising in private client matters, should you require assistance and/or have any query.