Relocating to Switzerland: Swiss tax residency
This article is part of the series of articles that began with an article published in June on Relocating to Switzerland: key points.
The aim of this article is to provide an overview of the criteria for qualifying as a Swiss tax resident, and the risks triggered by having multiple residences.
Swiss tax residency
An individual is deemed to be a tax-resident under Swiss domestic tax law when he/she is i) domiciled or ii) has a qualified abode in Switzerland.
i) Domicile in Switzerland
The creation of a domicile under Swiss tax law requires the fulfilment of two cumulative conditions, one objective, the other subjective: i) residence in a given place, on the one hand, and ii) the person's intention to reside there permanently, on the other.
From a Swiss point of view, a person qualifies as a resident for tax purposes if he/she lives in Switzerland with the intention of staying there permanently and if his/her centre of vital interests is in Switzerland (the ‘centre of vital interests’ test). The centre of vital interests is defined as the place where that person has the strongest personal (e.g., spouse, family, friends, social life) and economic ties (work, business etc.). If he/she lives or spends significant time in two or more places, the determination of the centre of the personal and economic interests for the centre of vital interests test can be a matter of discussion.
ii) Qualified abode in Switzerland
Alternatively, if the individual spends 30 days pursuing a gainful employment or 90 days without gainful employment in Switzerland (notwithstanding temporary interruptions), he/she will be deemed to have a qualified abode in Switzerland which means that he/she will be a Swiss resident for tax purposes (the ‘qualified abode’ test).
iii) Consequences of tax residence in Switzerland
Satisfying either of the centre of vital interests test or the qualified abode test leads to being subject to unlimited taxation in Switzerland, i.e., all Swiss tax-resident individuals are taxed on their worldwide income and wealth, except in particular for real estate property located abroad. Taxation in Switzerland which will be discussed in greater detail in the following articles.
Plurality of residence
From an international point of view, an individual may become a tax resident in several jurisdictions (i.e., if you satisfy the criteria for tax residency in each place). Switzerland has negotiated a number of double taxation agreements ("DTAs") to provide a set of rules for determining tax exposure in these instances. This is important to mitigate potential taxation charges on the same assets in several jurisdictions as a result of a plurality of tax residencies. Tax exposure is determined by DTA residency criteria.
Firstly, the DTAs look at where that person has a permanent home base. If it is in both jurisdictions, the DTAs then look at where the centre of vital interests is. If the centre of your vital interests cannot be determined, the place where the habitual residence is will prevail. Finally, if the habitual residence is in both jurisdictions or in neither, citizenship determines tax residence.
It is important to note the distinction of treaty residence and actual tax residence – for example, one can be tax resident in both Switzerland in accordance with Swiss law and the UK in accordance with English law at the same time. The UK/Swiss DTA does not prevent this. What the UK/Swiss DTA does, however, is determine your ‘treaty residence’ status as per the above – this will then determine which jurisdiction has priority taxing rights in relation to certain assets.
Switzerland has also signed DTAs with certain countries for the avoidance of double taxation in respect of inheritance tax, under which residence is determined by reference to domestic law, i.e., in Switzerland according to i) domicile or ii) qualified stay.
Proof of residency
Swiss tax residence is only recognised if the person is physically in Switzerland and has the intention of settling there permanently. However, this intentional component of domicile is only taken into account if the intention is recognisable by third parties. In other words, this condition must be objectively demonstrable.
In principle, it is up to the tax authority to demonstrate a taxpayer's tax residence, but it sometimes happens, and more frequently recently, that the tax authority asks the taxpayer to demonstrate his or her tax residence in Switzerland, particularly when the taxpayer has interests in other States. This could be the case, for example, of a taxpayer who relocates to Switzerland from the UK or France and keeps assets there, e.g., a property. The tax authority may ask the taxpayer to demonstrate that the centre of his/her vital interests has effectively been transferred to Switzerland and that his/her Swiss tax residence is not a ‘false’ one.
The above-mentioned key points must be considered when relocating to Switzerland.
We are an international law firm with a focus on private capital, at the intersection of personal, family and business with a presence in major financial centres worldwide. Our expert Swiss lawyers specialise in advising families and entrepreneurs on wealth, estate, and tax planning issues, with a strong expertise in cross-border matters.
Please contact Grégoire Uldry and Alexia Egger Castillo, lawyers specialising in private client matters, should you require assistance and/or have any query.
