Lump sum taxation - Forfait fiscal

Background
Lump sum taxation is a special tax system, granted under certain circumstances, whereby Swiss tax is levied on the basis of domestic expenses (amount can, to some extent, be negotiated with the cantonal tax authorities) rather than their worldwide income and wealth (ordinary taxation). However, regarding the basis of expenses, certain minimum amounts apply in each canton and the amount of tax paid under this regime must not be lower than the income and wealth tax due on Swiss wealth and Swiss-source income as well as foreign-source income for which a partial or total refund of foreign taxes is obtained by virtue of an international tax treaty.
As a consequence of some cantonal and federal popular initiatives aimed at abolishing the lump sum tax regime (some still pending), the Swiss authorities have issued legislative amendments regarding lump sum taxation at a federal and cantonal level. The purpose of this reform is to increase the domestic acceptance of such tax regime by increasing certain minimal amounts. At this stage, the Cantons of Zurich, Schaffhausen, Appenzell Innerrhoden, and Basel Stadt have abolished this regime.

Conditions to qualify for lump sum taxation

Individuals may avail themselves of a lump sum taxation regime, provided they:
  1. are non-Swiss individuals;

  2. take up residence in Switzerland for the first time or after an absence of 10 years; and

  3. refrain from any gainful occupation in Switzerland, and to a certain extent, abroad.

1. Non-Swiss individuals

Foreign individuals can qualify for the lump sum taxation regime, provided they are and remain non-Swiss. As a consequence, it is in the foreigner’s interest not to apply for Swiss citizenship. On the other hand, Swiss citizens with multiple nationalities are not deemed foreign individuals.

Swiss citizens (provided that they fulfil the other requirements) may only qualify for the tax period of their arrival (one year).
 

2. Residence in Switzerland


In order to apply for the lump sum taxation regime, it is mandatory to take up residence (domicile under the civil-law concept, an objective test) in this country. In order to do so, a residence permit, which entitles the applicant to live in a particular canton, shall be obtained. A distinction (made by immigration laws and not by tax laws) should be made here between the citizens of EU (European Union) and EFTA (European Free Trade Association) countries, and the citizens of countries that are not members of the EU or EFTA.
 

3. No gainful occupation


The granting of the lump sum taxation regime is subject to a limitation of gainful activities. Generally, the applicant shall refrain from engaging in any gainful occupation in Switzerland, whether dependent or independent (e.g. manage assets or consult against consideration from third parties). For example, it is not possible to be appointed to the board of directors of a Swiss company (if such activity is compensated). However, several Cantons have recently imposed further restrictions, limiting the occupation that would be performed abroad. Such restrictions also depend on the type of activities: if the occupation can be easily carried out without a fixed place of business (e.g. merely from a computer), the authorities might refuse to allow the applicant to have a lucrative occupation on the grounds that it might well be performed in Switzerland, despite the applicant's allegations. Nevertheless, individuals may still have a lucrative activity abroad, provided that this point has been agreed on in advance with the tax authorities. In this respect, gainful occupation outside of Switzerland that is carried out for a foreign company or even for a Swiss company is admissible. However, the applicant is entitled to spend his time managing his own wealth, especially his movable assets, securities or similar financial instruments – regardless of whether these are held directly or through a legal vehicle. It is admissible to resort to the services of a Swiss resident to undertake these wealth management activities. Alternatively, it is possible to set up a Swiss service company in order to hire an employee. In such a case, it is recommended to secure a preliminary tax ruling for operating this cost centre and to disclose the shares of this company in the yearly tax return.

Tax base

The pure lump sum taxation or the "pure forfait"
The amount of the "pure forfait" is negotiated in advance with the tax authorities who grant a tax ruling to the taxpayer. If there is a change in the elements initially taken into consideration, the amount of the forfait may be adapted.

The lump sum amount is based on the expenses of the taxpayer in Switzerland and abroad.

The federal and cantonal tax laws provide that the relevant amount to be taken into consideration as minimal expense has to be equal to at least five times the annual rent paid by the taxpayer or of the rental value of the real estate owned by the taxpayer. In practice, Cantons require a minimum amount which varies between CHF 200'000 and CHF 600'000.

The "pure forfait" is the taxable amount, which is negotiated by the taxpayer with the cantonal tax authorities of his (future) place of residence. In principle, only this amount will be taxed at the ordinary income tax rate.

For instance, with a monthly rental expense of CHF 5'000, the pure forfait's amount (taxable amount) should not be less than CHF 300'000 (5'000 x 12 x 5). If in the canton of domicile, ordinary taxpayers who have CHF 300'000 of taxable income are taxed at the ordinary tax rate of 21%, the final tax bill calculated on the pure forfait of CHF 300'000 will be CHF 63'000 (300'000 x 21%).

For non-European citizen, the minimum pure forfait's amount is generally higher than for European citizens. As a result, the final amount of the "pure forfait" for non-European citizen may be higher than the multiplication by five of the annual rent / rental value.

On the federal level, no wealth tax exists in combination with lump sum taxation. On the cantonal and municipal level the Cantons have a duty to disclose how wealth tax is considered. In case the canton considers the wealth tax in the income tax calculation, any wealth tax can be waived.

 
The mitigated lump sum taxation or the "forfait mitigé"

As mentioned above, the tax paid on "pure forfait" negotiated with the tax authorities must not be lower than the income and wealth taxes due on Swiss wealth and Swiss-source income as well as foreign-source income for which a partial or total reduction of foreign taxes has been obtained by virtue of an international tax treaty.

Should the amount of tax due under the comparative calculation (forfait mitigé) exceed the lump sum taxation negotiated with the competent authorities (pure forfait), the comparative amount shall prevail.

These categories of assets and income taken into consideration for the "forfait mitigé" are the following:

Swiss source income

  • Income (or imputed income) from real estate situated in Switzerland;

  • Income from Swiss moveable asset, including claims secured by mortgages on real estate in Switzerland, such as:

    • bonds issued by a person domiciled in Switzerland, mortgage notes and real estate bonds issued in series, as well as registered notes (regardless of the fact that the securities are located in Switzerland or abroad);

    • stocks, shares in corporation, limited liability companies or cooperative, participation certificates or bonus certificates issued by a person domiciled in Switzerland (regardless of the fact that the securities are located in Switzerland or abroad);

    • units of collective investment schemes within the meaning of the Swiss Collective Investment Act (CISA; KAG; LPCC) issued by a Swiss domiciled person domiciled alone or jointly with a non-domiciled person (regardless of the fact that the securities are located in Switzerland or abroad);

    • client's deposits with banks or savings banks in Switzerland, including gold and other valuable goods;

  • Swiss mortgage instruments as well as other claims whose debtors are resident in Switzerland.

  • Income from intellectual property rights (copyrights, patents, etc.) exploited in Switzerland and;

  • Retirement pay, pensions and annuities from Swiss sources.

    Foreign source income

  • Foreign-source income upon which the individual claims a partial or total exemption from foreign taxes by virtue of a tax treaty.

    Assets taken into consideration for wealth tax purpose

  • Real estate situated in Switzerland;

  • Movable objects situated in Switzerland

  • Swiss moveable assets, including claims secured by mortgages on real estate and;

  • Intellectual property rights (copyrights, patents, etc.) exploited in Switzerland.

    From the gross income, it is possible to deduct the property maintenance costs and normal administrative costs involved in generating taxable income from movable assets

    Hence, an efficient tax planning consists in analysing each year all the expected sources of income and compare for each item of foreign income if the application of a tax treaty must be requested or not. For each item of foreign income, a comparison must be made between the tax supported in the foreign country and the final tax which would be paid in Switzerland if these items (assets and income) would be declared for calculation of the lump sum tax. Please note that the choice to declare or not a foreign income is part of the specificity of the lump sum tax and is perfectly legal.

The modified lump sum taxation or "forfait modifié"

According to some double tax treaties with Switzerland, all income arising from the foreign country for which a partial or total reduction of foreign taxes has been obtained by virtue of an international tax treaty - and not only the item of income for which the application of the double tax treaty is requested – should be taken into consideration for a comparative calculation subject to ordinary taxation. The relevant countries are Austria, Germany, Belgium, Italy, Norway, Canada and the United States. Hence, if the individual needs to benefit from the double tax treaty protection signed with one of these counties, he would need to declare all income arising from these countries with no possibility to choose which item of foreign income should be declared in the "forfait modifié". Please note that if the individual decides not to declare the foreign income subject to the "forfait modifié", he will support the foreign tax instead and will not be able to benefit from the double tax treaty protection and notably defend his Swiss residency according to the double tax treaty.

Should the amount of tax due under the comparative calculation (forfait modifié) exceed the lump sum taxation negotiated with the competent authorities (pure forfait), the comparative amount shall prevail. Hence, the tax planning may also include the geographic reorganization of the source of income and wealth.

 


New legislative amendments

As mentioned above, the Swiss authorities have issued legislative amendments regarding lump sum taxation at a federal and cantonal level. The new conditions are the following:
  • The worldwide expenses should amount to at least seven times the housing costs;

  • A minimum assessment basis of CHF 400'000 should now additionally apply for direct federal tax. The Cantons must also set, at their discretion, a minimum amount for the assessment basis;

  • The Cantons must take into consideration a wealth tax in their lump sum tax regime. This will be done by a hypothetical assumption, as the taxpayer does not have to declare his wealth;

  • In the case of spouses who wish to be taxed on an expenditure basis (lump sum tax regime), both parties must fulfil all of the prerequisites for expenditures-based taxation.

    For the federal tax (FTA) the legislative amendment will come into force on 1 January 2016. For the cantonal taxes (FAHC), the legislative amendment entered into force on 1 January 2014. However, the Cantons have until 1 January 2016 to amend their legislation in accordance with FAHC.

In addition, please note that the existing legislation will continue to apply for a period of five years for persons who were taxed on an expenditure basis (lump sum tax regime) at the time of entry into force of the FTA (2016). Hence, the new conditions will apply for them as of 1 January 2020.








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