Expenditure-based tax: What you need to know
Expenditure-based taxation can be a highly convenient way for non-Swiss citizens to pay their tax bill. Learn what you need to know about this favored method of taxation.
Thanks to its central location in the heart of Europe and its high standard of living, Switzerland has always been a preferred destination for immigrants. Relocating can also be an interesting option for high net worth private individuals. There are two main reasons for that. In terms of stability and privacy, Switzerland traditionally satisfies extremely high demands. Furthermore, the country offers expenditure-based taxation, a convenient method for high net worth private individuals to pay taxes.
Expenditure-based tax, also referred to as "lump-sum taxation" involves calculating the taxes owed by a high net worth individual on the basis of the living costs incurred in Switzerland and abroad – not on his or her worldwide income and assets.
The assessment basis for taxation is agreed upon as a lump sum with the tax authorities in advance and documented in a binding tax rulingbefore the person relocates to Switzerland. Lump-sum taxation diminishes bureaucracy and provides a reliable basis for establishing a financial plan.
High net worth private individuals can file a request to pay taxes under the expenditure-based system if they:
- Do not have a Swiss citizenship
- Are immigrating to Switzerland for the first time or returning after a ten-year absence period
- Have no gainful employment in Switzerland
In the case of spouses or registered partners, these requirements must be fulfilled by both individuals.
Most cantons allow individuals to submit a request for expenditure-based taxation. The only cantons that have abolished expenditure-based tax thus far are Appenzell Ausserrhoden, Basel-Land, Basel-Stadt, Schaffhausen, and Zurich. However, elimination of the expenditure-based tax option applies only to cantonal and municipal taxes. With respect to direct Federal tax, expenditure-based tax is still allowed in these cantons.
Expenditure-based taxes are generally assessed based on an individual's annual living costs incurred in Switzerland and abroad. Assessments are performed according to the following principles:
- For taxpayers with their own household: seven times the annual rent or home's rental value
- For all other taxpayers: three times the annual expenses paid for room and board in the place where they are staying
- On federal level, the government has established a minimum income of CHF 400,000 as the assessment basis.
The cantons are also required to determine a minimum assessment basis, but the amount is set at their discretion. The competent tax authority documents the individual's assessment basis in a tax ruling. The tax owed is calculated according to the ordinary tax rate for the person's place of residence.
The negotiated assessment basis is reviewed annually using figures calculated for comparison, the so-called control calculation. It involves adding together all forms of income from Swiss sources. They include the following:
- Income from immovable assets located in Switzerland, movable assets located in Switzerland, movable capital assets invested in Switzerland
- Income from Swiss copyrights, patents, and similar rights
- Pensions derived from Swiss sources
Income from foreign sources is also counted as part of the control calculation if a double taxation agreement (DTA) is to be applied. For example, that may be the case if taxes at source on foreign dividends are to be clawed back.
The following deductions can be taken from the gross amount:
- Costs of maintaining or managing immovable property in Switzerland as well as expenses for normal management of securities and assets when income from those sources is taxable.
- The deduction of capital debts and debit interest is excluded.
The lump-sum-based tax liability should be at least as high as the ordinary tax liability according tohe control calculation. Otherwise, the higher tax amount will be owed.