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Tax and Legal
David Merz | Founding Partner
Zurich, July 11, 2024
Getting to grips with the Swiss tax system can be a daunting task for newly established startups. With multiple layers of taxation at the federal, cantonal, and municipal levels, each with its own set of rules and regulations, it’s essential to have a clear understanding of your tax obligations.
This comprehensive all-in-one guide aims to equip you with the tools you need to manage your taxes with confidence, highlighting key dates, deadlines and obligations. Whether you’re running your startup as a sole proprietorship or distinct corporate entity, staying compliant and optimizing your tax strategy can significantly impact your financial health and pave the way to long-term success.
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Switzerland’s tax system is known to be very efficient and business-friendly, with more favorable tax rates and rules than in neighboring EU countries. However, it also has its share of complexity, which can be difficult to manage, especially for start-ups and the self-employed. The Swiss tax system is multi-tiered, with taxes levied at federal, cantonal and municipal level. Each level has its own rules and regulations, which can vary greatly within Switzerland.
Switzerland’s tax system is divided into three main levels. Taxes are levied at each of the three levels:
As a young startup in Switzerland, it’s essential to quickly come to grips with the intricacies of the Swiss tax system and learn about the different rules, regulations and specific tax obligations which apply to your startup. Understanding your tax obligations is important for several reasons, including:
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In principle, every natural person over the age of 18 who has their main residence in Switzerland, and every legal entity, must file a tax return. This includes those who do not have any income. Based on the tax return, the tax administration determines whether the legal person is required to pay income tax and the amount that is owed.
Therefore, all Swiss startups and self-employed individuals living and working in Switzerland must file a tax return. This includes:
Each legal form has specific tax obligations and filing requirements, especially when comparing sole proprietorships (not separate legal entities) and corporate entities (distinct legal entities).
Startups in Switzerland are subject to several types of taxes, which depend primarily on the legal form of the startup and the canton in which it operates. Here, we will briefly outline some of the key types of taxes to keep in mind, and we will explore them in more detail later.
Income tax (often referred to as “profit tax” when dealing with corporate entities) is levied at all three levels in Switzerland (Federal, Cantonal, and Municipal) on the profits generated by a business. In the case of a sole proprietorship, the startup profits are treated as personal income for tax purposes. The taxation rates and rules vary according to the legal form of the startup and canton in which it operates, which we will explore in more detail later.
Capital tax is the second major tax on businesses in Switzerland. It is a tax imposed as a percentage of the net equity value of a company. Capital tax is only levied at the cantonal and municipal levels, not at the federal level. The rate varies across cantons, with some also stipulating a flat minimum capital tax (more details on this later). Capital tax only applies to corporate entities, not sole proprietorships and self-employed individuals.
Value Added Tax (VAT) is a sales tax that is applied to the value added to goods and services at each stage of their production and distribution. It is a type of consumption tax that is applied as a percentage of the final price paid by the consumer. All Swiss startups (including sole proprietorships) with an annual taxable turnover exceeding CHF 100,000 must register for VAT in Switzerland.
The Withholding tax is a tax that is deducted directly from the source of income. In Switzerland, it is applied to wages, pensions, and other earnings of individuals who work or earn income in Switzerland but are not permanent residents. The employer or the paying entity withholds the tax and remits it to the tax authorities.
A flat rate of 35% is levied on certain types of income, such as dividends, interest, and royalties, in Switzerland. This tax is withheld at the source, meaning the paying entity deducts the tax before the recipient receives the income. This applies to both domestic and foreign recipients.
In many cases, the recipient can claim a partial or full credit for the withheld tax, depending on their country of residence and the applicable double taxation agreements between that country and Switzerland.
The purpose of the anticipatory tax is to ensure compliance with tax regulations by deducting the tax directly from the income at the source. Recipients can reclaim the tax later if applicable. Start-ups may also be subject to anticipatory tax if they receive income distributions from foreign sources. Additionally, they must be aware of the withholding tax they need to impose on their own dividend and royalty distributions.
This mechanism helps ensure tax compliance and prevents tax evasion through the immediate withholding of tax at the source.
Wealth tax in Switzerland is a tax levied at the cantonal and municipal levels on the net wealth of individuals. This includes both Swiss residents and non-residents who own property in Switzerland. While wealth tax is applied to individual persons and not directly to businesses, it’s an important tax for sole proprietors and self-employed entrepreneurs to consider.
As there is no legal distinction between personal and business assets of the owner of a sole proprietorship, so-called “business assets” are considered part of the owner’s personal net worth and may therefore be subject to wealth tax in the owner’s canton of residence.
Additionally, startup founders must learn about the various other types of taxes which may apply to their business or personal situation. Some examples include:
So far, we have given a brief overview of the Swiss tax system and outlined some of the main types of taxes that startups and self-employed entrepreneurs should understand. We will now explore, in more detail, various aspects and rules of taxation applying to startups in Switzerland, highlighting key differences between the tax treatment of sole proprietorships and corporate entities.
If you wish to establish a corporate entity in Switzerland, such as an AG or GmbH, you need to undergo the company registration process and be entered into the Commercial Register of the canton in which your business operates. As part of the legal company registration process, your startup will also automatically be registered as a corporate income taxpayer and receive a unique tax number. As such, the company is legally obligated to file annual tax returns and pay the corresponding federal and cantonal taxes owed.
While sole proprietorships are not defined as separate legal entities from their owners, entry into the commercial register is still usually required for those who generate a gross income of at least CHF 100,000 per year. Furthermore, those who carry out their self-employed or business activities in a canton or municipality outside of their place of residence must register for self-employment in the canton in which the business operations occur. This will then result in an inter-cantonal tax allocation, which we discuss in more detail below.
Additionally, both sole proprietorships and corporate entities with an annual taxable turnover in excess of CHF 100,000 are required to register for and charge VAT on their sales.
Companies and sole proprietors who meet the criteria for compulsory VAT registration must register online no later than 30 days after the commencement of their tax liability. VAT returns must be filed within 60 days of the end of the taxable period. A “zero declarations” must be submitted if there are no reportable transactions during the respective tax period.
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As there is no legal distinction between a sole proprietorship and its owner, sole proprietors must report their business income on their personal tax returns. The income is subject to both federal and cantonal income taxes.
Switzerland has a multi-tiered tax system, with income tax being levied at both the federal and cantonal levels.
Where are sole proprietors who operate their business in a different canton from their canton of residence obliged to file their tax return? In most cases, it is the canton in which the income is earned that determines where the taxes should be filed and paid, hence the canton in which the business operates.
If a sole proprietor generates personal income in their own canton of residence but operates their business in another canton, inter-cantonal tax apportionment may be required. I.e., cantonal income tax may be divided between different cantons in accordance with the proportion earned in each.
Income tax for sole proprietors is calculated based on the net profit of the business. This is made up of:
The net profit is then added to any other personal income the sole proprietor has (such as wages, rental income, etc.), and the total is taxed according to the progressive tax rates. The progressive tax rates at both the federal and cantonal levels applying to sole proprietors are determined by their total income, inclusive of both personal and business income.
Sole proprietors and self-employed individuals can take advantage of various deductions to reduce their taxable income. These may include:
Only expenses incurred in the operation of the business or self-employment activity may be deducted for tax purposes. This can make handling tax deductions as a sole proprietor very complex, especially when expenses cannot be clearly allocated to private or business use. However, if handled carefully with the right expertise, there is significant scope for legitimate tax optimization.
The tax laws governing how to allocate expenses which can be viewed as both for personal and business use are extensive, and we will not go through all the particulars in this article. However, here we can outline some key expense deductions for sole proprietors and how they are typically dealt with:
There are two main methods for calculating the private and business use: either by means of a logbook (often more time-consuming), or by applying a flat rate for the private portion (simpler approach). The particular rules and guidelines on these calculations can be quite complex, and we won’t go into them here. For a more in-depth explanation, read our article about the choice between a company car and a private car.
While there is no legal distinction between business and private assets of a sole proprietor, as all are deemed to be under the personal ownership of the owner, they must still be clearly separated when it comes to calculating tax liability.
There are two main tax areas where this distinction becomes necessary:
The tax authorities recognize a sole proprietor’s assets as falling into one of the following three categories:
In the case of the latter where assets are used both privately and commercially, the assets are still allocated either entirely to private assets or to business assets. The allocation depends on the predominant use of the asset (preponderance method). This contrasts with the treatment of expenses which may be apportioned to both private and business expenses in proportion to their respective usage.
While profits generated from a sole proprietorship are taxed in the same way as personal income, the owner must still either keep full commercial accounts or at least submit a detailed profit and loss statement along with their personal tax return. This statement should include all income and expenses related to the business. The deadline for filing the tax return varies by canton, but it is generally due by March 31st of the following year.
Founders who formally incorporate their startup as a corporate entity in Switzerland, such as an AG or GmbH, need to understand the various corporate taxes which apply:
Corporate entities in Switzerland are subject to corporate income tax on their profits. The federal tax rate is a flat 8.5% on profit after tax, which translates to an effective tax rate of around 7.8% on profit before tax. The cantonal and municipal profit tax rates vary significantly, so corporate entities can expect an overall corporate income tax rate on profit before tax of anywhere between 11.9 % and 21% including federal, cantonal, and municipal taxes.
Capital tax is levied on the net equity of the company at the cantonal level only. The rates vary between cantons and range from 0.001% to 0.5%. This tax is assessed annually based on the company’s equity as recorded in its financial statements.
In addition to their standard capital and profit tax rates, many cantons also impose a flat minimum tax which is applied irrespective of a company’s capital value and/or income. There are two types of minimum taxes: a minimum tax on capital only and a general minimum tax on the total of both profit tax and capital tax.
Read our article: Comparison of minimum capital tax rates for companies in all 26 cantons to learn more on this topic.
Founders of startups which are incorporated as legal entities need to know that, in addition to the corporate taxes the company itself is liable for, as shareholders they too are liable to pay personal income tax on any profit distributions received from the company, such as dividends and royalties. This effectively creates a situation of double taxation, whereby the profits generated by the company are taxed twice: firstly, at the corporate level, and secondly at the individual/personal level when they are distributed.
There are ways to optimize payouts to shareholders to minimize this double-tax burden. One legitimate method is to strike the optimal balance between salary payouts and dividend distributions to owners. Salaries are defined as a company expense which can be deducted from taxable income, and thereby only taxed once as personal income for the owner. However, this itself raises many important issues and considerations, as salary payouts need to be within reasonable limits to not be deemed as an attempt at tax evasion. Additionally, while salary payouts are more tax efficient for the startup itself, they are generally less tax-efficient for the recipient because they come with compulsory social insurance contributions and are fully taxable as opposed to dividends which qualify for partial taxation at the personal level.
Read our article for a more in-depth comparison between salary or dividends for the owner of a company.
Tax filing deadlines in Switzerland vary by canton and differ for natural persons and legal corporate entities. Here are some common dates and deadlines to keep in mind:
Every startup in Switzerland, whether a legal entity or a sole proprietorship, is required to register for VAT and remit it if it achieves a total annual turnover of at least CHF 100,000 from taxable supplies. This also applies to self-employed persons, who are liable to pay VAT if their annual income from self-employment exceeds the CHF 100,000 threshold.
Swiss startups with an annual turnover below the threshold can also decide to voluntarily register for VAT. This can be beneficial, because businesses who register for VAT can claim input tax deductions and therefore recover VAT paid on their purchases. This could have a net positive effect for some startups depending on their specific situation.
Switzerland has three VAT rates:
Additionally, some goods and services are exempt from VAT. These include certain healthcare, educational, and social care services, some unprocessed agricultural goods, and certain exports and international services.
VAT returns must be filed quarterly, with payment due within 60 days of the end of the quarter. Smaller businesses with a lower turnover may be eligible to opt for annual filing if they meet certain criteria.
Input tax deductions allow businesses to deduct the VAT they have paid on purchases from the VAT they have collected on sales when calculating their final VAT liability to the tax authorities. This allows them to recover the VAT they have paid to their suppliers, and therefore only hand over the net VAT they have collected.
All businesses that are registered for VAT in Switzerland can claim input tax deductions. To claim these deductions, they must have valid VAT invoices or other supporting documents for their purchases.
For startups who are sole proprietorships or self-employed persons, only VAT paid on goods and services used for business purposes is eligible for deduction. VAT incurred on personal or non-business expenses is not deductible. For these expenses to qualify as deductible for input VAT purposes, both the company providing the goods and services, as well as the one purchasing, should be registered for VAT in Switzerland.
For more information on input tax deductions, read our article: Input tax in Switzerland: What can be claimed?
Anyone who lives and works in Switzerland is required to contribute to mandatory social insurance. Social security contributions in Switzerland include:
The rules regarding social security contributions and the corresponding tax deductions differ depending on whether your startup is a corporate entity or sole proprietorship (the latter means that you are categorized as a self-employed individual for the purposes of social security and tax rules). The specific regulations can be quite complex, but we will break down the essential points simply:
If you establish a startup as a GmbH, AG, or other type of corporate entity, and go on to hire employees, the mandatory social security contributions will be split equally between the employees and your company (as the employer). The employer contributions made by the startup form part of the overall remuneration to employees and are hence tax-deductible as part of your operational expenses.
If you operate your startup as a sole proprietorship (i.e., as a self-employed entrepreneur) navigating social security can be more complicated.
As a sole proprietor, it is also mandatory to make AHV/IV/EO contributions (1st Pillar). The combined contribution rate comes to approximately 10.6%, and you must pay both the employer and employee portions of the contribution. The contributions are tax deductible.
Additionally, you may voluntarily join a 2nd pillar pension fund (BVG) and deduct the contributions paid into the pension fund from your taxable income up to a maximum of 25% of your AHV annual salary. These contributions are seen as 50% private expenses, while the other 50% can be recorded on your business income statement.
Finally, you can also opt to contribute a portion of your earnings into Pillar 3a each year tax-free. If you decide to voluntarily join a Pillar 2 pension fund, you may only contribute a maximum of CHF 7,056 tax-free to Pillar 3a. Otherwise, if you do not voluntarily contribute to a Pillar 2 pension fund, you may pay as much as 20 percent of your net earned income, up to a maximum of CHF 35,280 tax-free into Pillar 3a each year.
Determining which route is most tax-efficient and optimal for you as a self-employed startup owner depends entirely on your individual circumstances, preferences and financial standing. It is advised to work closely with an expert trustee who can help lay out the different options available and determine which is most beneficial and practical for your given situation.
The Swiss Code of Obligations (CO) requires all businesses to maintain proper accounting records, which are needed when it comes time to file tax returns. The specific requirements depend on the legal structure and size of the business:
For a detailed breakdown of accounting requirements and regulations in Switzerland for GmbHs and other types of businesses, read our article: Special features of accounting for a GmbH.
The complexity of the Swiss tax system, and the multitude of rules and requirements for startups to keep track of can easily lead to mistakes and missed opportunities if entrepreneurs aren’t careful.
One common mistake is failing to register for VAT when required, either willfully or simply due to oversight. The Swiss Federal Tax Administration (FTA) may impose penalties if your startup is liable for VAT in Switzerland but does not comply with the tax obligation. Negligent non-declaration can result in fines of CHF 10,000 to CHF 400,000, whereas the FTA can impose a fine of up to twice the amount of the tax obligation in the case of intentional non-declaration.
Ensure you carefully monitor your turnover and register promptly when you exceed the threshold for VAT registration.
We have mentioned some of the key dates and deadlines for tax filing and payment. Missing these deadlines can lead to penalties and interest charges. Keep track of all key dates and set reminders to ensure timely compliance. Entrusting your tax returns to a professional trustee can completely avoid this trouble, as it is your trustee’s job to ensure your tax returns are submitted well within the filing deadline.
Errors in tax calculations can lead to underpayment or overpayment of taxes. Depending on the severity of the error, there may also be significant penalties and even legal consequences. Using reliable accounting software or seeking professional fiduciary help can mitigate this risk.
Staying tax-compliant by submitting and paying your taxes on time is only a small part of what it takes to truly master your startup’s tax position. Many startups fail to take advantage of the numerous opportunities for tax deductions and optimization. This can be a major opportunity cost for your startup and can result in paying much higher taxes than you ought to. Familiarize yourself with the deductions allowed under Swiss tax law and the various ways to optimize your tax position. It’s always best to work closely with a trusted tax advisor to ensure you maximize your tax savings.
Careful tax planning is essential for ensuring compliance, avoiding mistakes, and minimizing your tax liability. By gaining a deeper understanding of your tax obligations and implementing some straightforward strategies with the support of a tax expert, you can optimize your startup’s tax situation and avoid unexpected liabilities.
Some of the key strategies and approaches to optimize your tax situation and minimize your tax liability include:
Given the complexity of the Swiss tax system and the significant scope for improving your startup’s tax efficiency,a professional trustee can provide invaluable guidance and support. The right tax advisor can help you streamline your tax filing process, optimize your tax position, and ensure compliance with all legal requirements in Switzerland. While you may be tempted to handle your own tax returns to save on the fees of hiring a tax consultant, keep in mind that a good trustee pays for themselves many times over in respect of the additional tax savings they help you secure, not to mention all the other numerous benefits they provide.
For a deeper exploration on whether it makes more sense to do your own tax returns or hire an expert, read our article on the topic.
Traversing the complexities of the Swiss tax system can be challenging and tiresome for entrepreneurs who would rather focus on getting their startup off the ground running. Fortunately, you don’t have to do it alone. As a trusted fiduciary partner with an impeccable track record in Switzerland, Nexova offers comprehensive tax management and accounting services tailored to the needs of Swiss startups and the self-employed.
Our experts can assist you with everything from tax registration to ongoing compliance, ensuring that you stay on top of your tax obligations and optimize your tax position. Let us take the stress out of tax management so you can focus on growing your startup into a successful business.
Contact us today to learn more about how we can assist you in managing your taxes and positioning your startup for lasting success.