A Multinational Survey Of The Treatment Of Income And Gains Of Individuals Who Change Residence Switzerland Chapter
Overview of Swiss tax system
Tax residence in Switzerland. Individuals are residents for tax purposes in Switzerland when they have their tax domicile or tax residence in Switzerland.3 An individual has a tax domicile in Switzerland if he resides in Switzerland with the intention of settling or has a special statutory domicile pursuant to federal law.4 A tax residence in Switzerland is regarded as existing when an individualregardless of temporary interruptionstays for at least 30 days while being employed or, without employment, at least 90 days in Switzerland.5
Basic taxation principles in Switzerland. Switzerland imposes tax on resident individuals on their worldwide income on federal, cantonal, and communal level.6 The tax base for residents only partially includes capital gains:
Capital gains on the sale of movable assets held in the individual's private wealth are generally tax exempt at the federal and cantonal levels.7 Exceptions apply in indirect partial liquidation and transformation situations (see below). Capital gains on the sale of real estate, including participations in real estate through other classes of assets (e.g., shares in a real estate company), are subject to real estate capital gains tax at the cantonal level;8 however, at the federal level, they are tax exempt for individuals.9 Commercial investments. Nevertheless, when selling real estate, securities, works of art, and other investment options, a private capital gain will, according to legislation and practice, be tax exempt only as long as the investment is not considered commercial and does not qualify as a self-employment activity. The mere management of private assets is not considered a self-employment activity. To assess whether an activity is considered commercial, the tax authorities and courts usually take into account, among others, the following criteria: nexus to taxpayer's professional activity; borrowing of capital; frequency of transactions; systematic approach to investing; and reinvestment of gains.10
According to Federal Supreme Court case law, the fulfillment of one criterion can lead to the conclusion that an activity is considered commercial.11 If an activity is considered commercial, direct federal taxes, cantonal taxes, and social security contributions are due on the capital gain as well as on the income from the self-employment. If an activity is considered a business activity, VAT may be due.12
Indirect partial liquidation and transformation. The "indirect partial liquidation" (indirekte teilliquidation) and transformation (transponierung) are further (codified) exceptions to the general tax exemption of capital gains realized by individuals on privately held movable assets. The indirect partial liquidation concerns the sale of shares held privately by one or more Swiss resident individuals to a Swiss or foreign resident purchaser and, to the purchaser, the shares will be business property (i.e., a change from private assets to business assets), when the shares that such individuals are selling represent in the aggregate a participation of at least 20% in the share capital or nominal capital of the target company.13 If, within five years of the sale, the target company makes a distribution of "non-operating substance"(funded from cash or other non-operating assets of the target company) already existing at the moment of the sale of shares and available for distribution according to the last commercial balance sheet of the target company prior to the sale of shares, the private Swiss sellers may be taxed on a deemed dividend from the target company provided that the private sellers have "co-operated" with such distribution of substance to the purchaser of the shares. According to Swiss tax law, the "co-operation" of the sellers is assumed as a fact when the sellers knew or must have known that "substance" would be taken out of the target company (and would not be put back in) to refinance payment of the purchase price of the shares.14 In practice, however, tax authorities generally stipulate the seller's knowledge in a distribution within the five-year period.
Similar to the indirect partial liquidation, transformation is a special rule according to which capital gains from the sale of shares might be recharacterized into taxable dividend income (for tax purposes). The transformation concerns certain sales of shares by private individuals to a "self-controlled" legal entity, which are not recognized as "genuine sales." A transformation is assumed when one or more Swiss resident individuals sell a participation of, in the aggregate, at least 5% in a corporate legal entity into the business property of a partnership or corporate entity in which the sellers, after the transaction, hold (in the aggregate) a participation of at least 50%. Accordingly, the difference between the share sale proceeds and the sum of attributable nominal share value and distributable retained earnings and reserves (excluding recognized reserves from capital contributions) are taxed on the sale of the shares as dividend income.15 However, if the seller (individually) held a participation of at least 10% in the target enterprise, the deemed dividends are only taxed in the amount of 60%.16
Capital gains tax on real estate. The real estate capital gains tax is levied as a special capital gains tax at the cantonal level (grundstückgewinnsteuer (real estate capital gains tax or RECGT)). While some cantons levy this special tax only on capital gains realized on real estate held as private property ("dualistic" system, also known as St. Gallen system), other cantons levy RECGT on all capital gains on real estate situated in their territory ("monistic" system, also known as Zurcher system), irrespective of whether the real estate sold was held as business or private property. Under the "monistic" system, real estate capital gains are split into two parts:
Any gain from the recapture of previous depreciation is exempt from RECGT and is included in taxable profit for regular income tax purposes. Any gain pertaining to realized value appreciation is subject to RECGT and is, thus, carved out from taxable profit for regular income tax purposes. For RECGT purposes, the taxable capital gain broadly corresponds to the net proceeds from the sale or exchange of the property, minus the original acquisition cost base and any further, value-adding investments made into the property.
In the cantons applying the dualistic system, all realized capital...
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