Partial Taxation of Dividends in Switzerland

Partial taxation of dividends in Switzerland offers a welcome respite from the economic burden of double taxation. In this article, we discuss the issue of double taxation of dividends and the solution of partial taxation implemented in 2009, as well as the adjustments brought about by the STAF initiative in 2020. We provide insights into eligibility criteria, methods of partial taxation, and other key considerations. We also explain the importance of seeking expert guidance when navigating the intricacies of taxation of dividends while staying compliant.

The issue of double taxation of dividends

If you are the owner or shareholder of a registered company in Switzerland, such as a GmbH or AG, the dividends you receive are generally subjected to a double tax burden. This is because the company must pay corporate profit tax on the income it generates, and thereafter you have to pay personal income tax on the dividends you receive from these post-tax company profits.

Fortunately, the Swiss tax authorities recognise the issue of double taxation of dividends, and the fact that it is not always a fair outcome for the receiver of dividends. This is especially the case for single business owners, family businesses, or SMEs where the recipient of the dividends have a significant stake in the company. In these situations, it doesn’t make sense for the owners to be disadvantaged in the form of having their earnings taxed twice (at both the corporate and individual level), and which could otherwise incentivize dubious methods of tax avoidance, such as overinflating salary, or other hidden profit distributions.

The solution? Partial taxation of dividends

The solution to double taxation of dividends, which was first implemented as early as 1 January 2009 in Switzerland, is for dividends and non-cash benefits to only be partially subjected to personal income tax at both the federal and cantonal levels, subject to certain conditions being met.

This represents a tax break on the taxation of dividends at the personal level, which directly alleviates some of the burden of double taxation. Later, on 1 January 2020, the STAF initiative was implemented whereby the percentages and methods for partial taxation were adjusted. We will discuss STAF in more detail later.

Who qualifies for partial taxation?

Not all shareholders benefit from partial taxation of the dividends they receive. According to the provisions in the StHG, partial taxation of dividends only applies to shareholders with a shareholding of 10% or more of the company shares (known as the participation rate).

In the case of spouses and dependent children who are assessed together for tax purposes, their total shareholding is added together and qualifies for partial taxation if the combined shareholding is above 10%.

Partial taxation at the federal and cantonal levels

If the shareholder has the required minimum 10% participation rate to qualify for the privilege of partial taxation of dividends, the tax reduction is applied at both the federal level and at the cantonal level depending on the specific canton in which the dividend is taxed.

At the federal level, only 70% of the dividend income is taxed using the partial income method (outlined in the section below). For example, if you own 15% shares in a company (and therefore qualify for partial taxation) and you earn a dividend of CHF 100,000, only CHF 70,000 of that is added to your taxable income for the federal tax calculation.

It is important to note that the partial tax rate of 70% applies equally to investments held as private assets and to business assets held by a natural person. In the case of business assets, partial taxation is also applied on the sale of investment in business assets provided they have been held for at least one year.

The partial taxation rate varies across cantons; however, two important points should be noted since the implementation of STAF in January 2020:

1. A minimum of 50% of the dividend must be taxed at the cantonal level (less than that is no longer allowed). Generally, the rate ranges from 50 – 80 % across the various Swiss cantons.
2. The cantons must now apply the partial income method (the partial rate method is no longer permitted). This usually benefits the taxpayer as it results in an overall lower tax rate due to the taxable income potentially being in a lower tax bracket.

Methods of partial taxation

There are two methods for applying partial taxation of dividends, namely, the partial rate method and partial income method:

Partial rate method

When applying the partial rate method, the entire dividend amount is included in taxable income but is taxed at a reduced rate. For example, if a partial rate of 50% is applied, the entire dividend amount is taxed at a rate of 50% of the ordinary income tax rate that applies to the taxpayer.

This also means that the entire dividend is reflected in the taxpayer’s rate-determining income (i.e., it increases the income value for the assessment basis). The partial taxation is applied in the form of a tax rebate for the taxpayer. 

Partial income method

The partial income method is used to calculate partial taxation of dividends at the federal level, and since the introduction of the STAF initiative, it has also become the standard method at the cantonal level.

It involves only including a portion of the investment income in the assessment basis, which thereby directly reduces the total taxable income. Therefore, this method also reflects on the rate-determining income and can result in a lower overall income tax rate.

Implementation of Federal Law on Tax Reform and AHV Financing (STAF) in 2020

Partial taxation of dividends has been in effect since 1 January 2009 in Switzerland; however, the STAF guidelines were implemented on 1 January 2020 and brought in some key changes.

Prior to 2020, some cantons applied the partial rate method and gave much greater partial tax benefits (for example, the canton of Glarus applied a partial tax rate of only 20%). Since the new STAF initiative, cantons must tax at least 50% of the dividend value, and are expected to use the partial income method. Cantons are allowed to apply a partial rate of more than 50%, and it is now as high as 80% in some cantons.

Other key points to consider

We have covered the basics of partial taxation of dividends above, but there are some other key aspects to keep in mind:

Dividends from foreign companies

Partial taxation also applies to dividends and other profit distributions from companies based abroad. Previous attempts of Swiss cantons (e.g., Bern) to restrict partial taxation to the territory of Switzerland were declared unconstitutional by the Federal Court, and now the rules governing partial taxation of dividends are applied equally to companies domiciled in Switzerland and those based abroad.

Date of taxation

When determining the minimum participation rate in the company, the date on which the dividend is due is the determining factor.

In other words, for the dividend to qualify for partial taxation, the participation rate should be at least 10% on the date on which it is due, which is also seen as the time at which dividends are taxable. This date either corresponds to the date of the general meeting or a later date decided by an explicit resolution at the general meeting.

Spouses, registered partners, and dependent children

When determining whether the 10% participation rate is achieved, the shares of spouses, registered partners and dependent children who are assessed together for tax purposes are also added together. If the combined shareholding is above 10%, the dividends qualify for partial taxation.

Other profit distributions eligible for partial taxation

Dividends are not the only form of investment income which qualifies for partial taxation in Switzerland. Other types of monetary and non-monetary benefits may also be eligible, including par value increases of shares, non-cash benefits, hidden profit distributions, and direct and indirect partial liquidations.

Capital gains from sale of shares is still more tax efficient

While the partial taxation of dividends does serve to alleviate some of the double tax burden, capital gains realised from the sale of private shareholdings are completely tax-free and, therefore, more tax efficient.

This means that the general tendency is still to retain profits in the company which can be realised later in the form of a tax-free capital gain when shares are sold.