Last updated on 7 de April de 2023
We analyze taxes in Switzerland in an easy-to-understand manner. We cover income taxes, social security contributions, VAT, corporation tax and other taxes in Switzerland.
Content
- Introduction
- Cost of Living
- Taxes on Earned Income
- Capital Income Taxes
- VAT
- Taxes on the Purchase of a Home
- Corporation Tax
- Public Finances in Switzerland
- Conclusion
Introduction
Switzerland usually leads all rankings of economic development and quality of life. It has the richest middle class in the world, which proves this wealth is not concentrated in the hands of a very small segment of the population.
We will analyze the most important taxes in Switzerland and how they apply to workers, investors and companies. We will discuss how VAT works and what taxes are to be paid if we want to buy property in Switzerland. The goal is for us to have a deep understanding of how taxes work in the country.
As you will see, most taxes in Switzerland are set by different levels of government: federal, canton and municipality.
First the federal government sets taxes for the whole country. Secondly, there are 26 cantons, which have a lot of powers to set their own tax rates. Finally, we have about 2,500 municipalities, whose power to set tax rates are usually very limited.
Cost of Living
Switzerland is also one of the most expensive countries in the world. That is fine for its citizens as long as wages are high enough. Indeed, if we take a look at how high salaries are and how much income tax workers have to pay, we will understand why the standard of living in Switzerland is so high.
According to data from WorldData.info, the cost of living index in Switzerland stands at 142. The United States, which acts as the benchmark, is at 100. And the United Kingdom at 108. This means the cost of living is significantly higher in Switzerland.
However, salaries are also higher. The average salary in Switzerland is 28% higher than in the United States and nearly double the average salary in the United Kingdom.
Another aspect to consider is health. According to the Euro Health Consumer Index (EHCI), which analyzes the health systems of most European countries, Switzerland has the best healthcare in Europe, ahead of the Netherlands and Norway.
Something to bear in mind is that healthcare in Switzerland is for the most part not financed with taxes. The health system is composed of public companies, private companies and some mixed ownership corporations. And it is mandatory for all residents in Switzerland to have a health insurance.
All health insurance policies in Switzerland cover the most important treatments. But there are many types of policies, including a greater variety of professionals, clinics, coverage levels and deductibles.
An average medical insurance for an adult is usually around 300-400 Swiss Francs per month. If you want to read more about the Swiss healthcare system, check out this link from Expatica.
Taxes on Earned Income
Income from work in Switzerland is subject to social security contributions and income taxes (Einkommenssteuer):
Social Security
Let us first analyze the payments that need to be made to the Swiss Social Security, which are very moderate for both workers and employers. All social security contributions are paid exclusively to the federal government.
The Swiss Social Security is made up of three different insurance concepts. The first one is for retirement benefits, disability insurance and for military or civil service insurance. Both the employer and the worker pay 5.275% of the annual gross salary, without a cap.
The second is unemployment insurance, for which both the employer and the worker pay 1.1% of the gross salary, but only up to 148,200 Swiss Francs per year.
Any amount that exceeds this figure will be exempt from unemployment insurance and instead be subject to solidarity unemployment insurance, with the rate going down to 0.5% for both employer and employee. It should be noted that solidarity unemployment insurance does not give us the right to receive higher unemployment benefits if we lose our job.
The following table summarizes all payments that must be made to the Social Security in Switzerland. As you can see, for both the worker and the employer, the total burden is around 6% of the worker’s gross salary:
These social security rates are way lower than those of most European countries.
Income Tax (Einkommenssteuer)
Income taxes in Switzerland depend mainly on where we live. This is because they are determined by three administrations simultaneously.
Income taxes have rates set by the federal government, which are applicable in all of Switzerland, rates set by the canton in which we live, and a small rate set by the municipality where we live.
What determines how attractive someone’s income tax rates are is the canton where they live. In general, the canton with the most favorable taxation is Zug, on the outskirts of Zurich. On the other hand, the cantons with the highest tax rates are usually in the French-speaking are of the country, including Geneva.
It should be noted that Swiss income tax allows workers to use certain deductions. An example would be the cost of commuting to work.
If you want to know exactly how much is paid in each canton based on salary, you will find it right in the next section.
Total Tax Burden in each Canton of Switzerland
The following table shows us what is the total tax burden of workers in each canton of Switzerland, depending on their gross salary. Keep in mind this data also includes social security payments made by the worker, which are between 5.775% and 6.375% of their gross salary.
These calculations have been done for an individual who is single, has no children and without applying any type of optional deductions. Obviously, those who are married, have children or do use deductions will have a different tax burden.
The tax burden shown also includes the payment of municipal taxes. Because there are many municipalities in Switzerland, for each canton I have chosen its most populous city:
So that we can understand the total tax burden on labor, the next table also includes what the employer pays in social security contributions, above the gross salary. This shows us the percentage of total employment costs that end up going to the government. The rest will be the employee’s net salary:
Finally, we will conclude this section by looking at the percentage they receive in net salary, relative to all labor costs including the employer’s social security contributions. We see data for some cantons as well as the average in Switzerland:
As you can see, Switzerland treats its low, medium and upper-middle incomes pretty well from a tax perspective. As for high incomes, they do face a considerably high tax burden. Though probably still less than in most other Western European countries.
Capital Income Taxes
Let us now discuss about taxes are applicable to income from savings and investments:
Dividends, Interest and Rental Income
Both dividends and interest received are part of the tax base for income tax purposes, along with earned income. This means dividends and interest are subject to the same income tax rates as earned income. However, they are not subject to social security contributions.
For example, if our gross salary is about 100,000 Francs and we live in Zurich, our marginal income tax rate will be about 24%. If we receive 20,000 Francs in dividends, the applicable rate on that will be close to 24%.
It is worth mentioning that Swiss tax authorities apply a 35% withholding tax on all dividend and interest payments. However, if the tax rate applicable to us is lower than that, as in the simple example above, we will receive the different back.
Regarding rental income from properties we own and rent out, net profits are also subject to the same income tax rates. This means any expenses associated with the ownership of that property, including mortgage interest costs, are tax deductible.
Capital Gains
For tax residents in Switzerland, most capital gains are tax-free. For example, any capital gains coming from investments in stocks, ETFs, precious metals or any other financial instruments will not be subject to any taxes.
However, if capital gains come from real estate investments, in most cases we would have to pay taxes. The exact amount will depend on the canton, the municipality, the size of the capital gain and how long we have owned that property before we sold it.
VAT
Value added tax, known as Mehrwertsteuer in Switzerland, is one of the lowest in the developed world. It has 3 different rates, and the general one is only 7.7%.
The current VAT rates in Switzerland have been valid since 1 January 2018. Prior to that, they were slightly higher, with the general rate at 8%, after having been introduced in 2011.
The following table summarizes the three VAT rates applicable in Switzerland, as well as the products and services for which they are used:
It is expected that all three VAT rates will be reduced by 0.1% in 2030. This is because Switzerland plans certain changes in its laws and taxes very far in advance.
Taxes on the Purchase of a Home
The purchase of a flat or a house in Switzerland can also be subject to taxes. However, the amount payable is usually lower than in most European countries.
The main tax is the Handänderungssteuer, the property transfer tax, which depends on the canton in which the property is located. Some cantons, such as Zurich, Zug or Schwyz, do not tax real estate transactions.
In cantons where the Handänderungssteuer exists, the amount is usually between 1 and 3%. However, it must be noted that, very often, this tax is only paid on the amount that exceeds a certain figure. For example, Bern taxes real estate transactions with a 1.8% tax on any amount that exceeds 800,000 Swiss Francs.
Another tax is the Grundbuchgebühren, the land registration fees. As you can imagine, these rates also depend on the canton. They range between 0.15 and 0.20% of the transaction value, or a fixed amount for all properties in the canton.
Something very common is that the payment of these taxes, Handänderungssteuer and Grundbuchgebühren, is split equally between the buyer and the seller.
Finally, in some cantons the use of mortgage financing for the purchase of a property is also subject to certain fees, known as Gebühren für den Schuldbrief. This is usually between 0.1 and 0.3% of the mortgage debt.
As you can see, a regular buyer will rarely end up paying taxes of more than 1-1.5% of the value of the property.
Corporation Tax
Corporation tax in Switzerland is levied on corporate profits. It is also significantly lower than in most developed countries.
As with personal income taxes, corporate taxes also have three brackets: federal, cantonal, and municipal.
The federal tranche, which is applicable to the whole of Switzerland, is 8.5%. The cantonal rate is the one that makes the biggest difference. Finally, some municipalities also charge a small percentage on corporate profits.
The Swiss canton with the lowest corporation tax is Zug. The aggregate corporate tax rate in Zug, including federal, cantonal, and municipal bands, is 11.9%. The cantons with the highest corporate tax rates are Bern and Valais, with 21.6% in total.
The following table includes the total corporation tax in each of the 26 Swiss cantons. The municipal section has been taken from the municipality with the largest population in each canton:
As you can see, the country’s average stands at 15.1%. To put that in perspective, the only European countries with a lower corporation tax rate are Hungary (9%), Ireland (12.5%) and Lithuania (15%).
In fact, the continent’s largest countries all have higher corporation taxes: UK (25% from April 2023), Spain (25%), Italy (27.7%), Germany (29.8%) and France (32%). That gives companies domiciled in Switzerland an advantage over their competitors as they can invest more for the future, hire more employees, research and expand operations.
Public Finances in Switzerland
To assess whether a country’s fiscal landscape is attractive, analyzing its taxes is what matters most. However, if we plan to be there for the medium or long term, it is also necessary to analyze the state of its public finances to find out whether this fiscal policy is sustainable. Otherwise, tax increases may come at some point.
The best way to analyze a country’s financial situation is to look at its public debt over time. That will tell us two things: how much public debt there is and the trend for public debt in that country.
The following graph shows the level of public debt after combining federal, cantonal and municipal debt obligations, relative to the Gross Domestic Product (GDP) of the country.
As we can see, Switzerland has one of the lowest public debt levels of all developed countries. The financial crisis that started in 2008 had no impact on the country’s finances.
At the end of 2019, public debt stood at 41% of GDP. And by the end of 2020, the IMF expects this to have risen to 48.7%, a much smaller increase than in most other countries.
Such healthy public balance sheet is one of the reasons why the Swiss Franc is one of the strongest currencies in the world.
Conclusion
Switzerland has one of the most attractive tax systems in the developed world. It is true that some countries offer even lower tax rates, such as Monaco or the UAE. However, it is difficult to compare Switzerland with those countries.
Switzerland is a Western country that offers all the social services we find in other developed countries. In fact, Switzerland is better than its competition at those things too.
Switzerland is famous for its leading infrastructure, with one of the most efficient rail systems in the world, as well as world-class airports and roads.
In my opinion, the number one thing that makes Switzerland so successful is the fact that political power is very limited and highly decentralized. That promotes fiscal responsibility and fosters competitions between its 26 cantons.
If you want to learn more about why Switzerland is such a rich country, I recommend the following analysis:
Top 10 Reasons why Switzerland is so Rich
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And if you want to calculate what your net salary would be in Switzerland, based on your gross salary and the canton where you would like, check out talent.com.
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