Switzerland is famous for its favourable tax environment. It has some of the lowest tax rates in Europe, making it an attractive location for professionals and companies. Knowing these advantages can help you attract top international talent and optimise your business operations as an employer. In this blog, we’ll explain the critical tax benefits in Switzerland and how to use them to enhance your recruitment and business strategies.

Structure of the Swiss tax system

Switzerland’s tax system has three levels: federal, cantonal, and communal. Each level has its taxes, contributing to the overall tax burden and can include direct and indirect taxes. It’s good to know that Switzerland is divided into 26 different territories called cantons. For instance, a canton is similar to a state in the United States. Below, you will find how the taxes are divided across the three levels.

Tax levels and types

• Federal Taxes: Include direct (e.g., income tax) and indirect (e.g., VAT) taxes.
• Cantonal Taxes: Primarily direct taxes such as income and wealth taxes, but may also include other levies specific to cantons.
• Communal Taxes: Mostly direct taxes, particularly on income and property, varying
  by municipality.

The Swiss tax system includes direct and indirect taxes across federal, cantonal, and communal levels. Direct taxes are more prevalent and make up the bulk of the tax revenue, while indirect taxes are also significant, particularly at the federal level, with VAT.

Direct Taxes

Direct taxes are levied directly on income, wealth, and property. They are a significant component of the Swiss tax system, making up about 70% of total tax revenue. These include:

1. Income tax:

• Federal Level: The federal income tax is progressive, with a maximum rate of 11.5%.
• Cantonal and Communal Levels: These rates vary by canton and municipality, with combined rates reaching up to approximately 36%.

2. Corporate tax:

• Cantonal Level: Corporate tax rates on profits range from 11.7% to 21.6%, depending on the canton.
• Federal Level: There’s also a federal corporate tax component.

3. Wealth tax:

• Applied at progressive rates in most cantons.

4. Inheritance tax:

• Predominantly a cantonal tax, with most cantons imposing taxes on estates.

5. Withholding tax:

• A federal withholding tax of 35% on bank interest and lottery winnings is reclaimable if assets and income are disclosed in the tax return.

Indirect taxes

Indirect taxes are levied on goods and services rather than income or wealth. They account for about 30% of total tax revenue. These include:

1.Value Added Tax (VAT):

• Federal Level: VAT rates in Switzerland are among the lowest in Europe:
  – Standard Rate: 8.1%
  – Reduced Rate: 3.8% for accommodation services
  – Special Rate: 2.6% for necessities and everyday items
• Exemptions: Certain services, such as medical and educational, are exempt from VAT.

Tax levels and types

• Federal Taxes: Include direct (e.g., income tax) and indirect (e.g., VAT) taxes.
• Cantonal Taxes: Primarily direct taxes such as income and wealth taxes, but may also include other levies specific to cantons.
• Communal Taxes: Mostly direct taxes, particularly on income and property, varying
  by municipality.

The Swiss tax system includes direct and indirect taxes across federal, cantonal, and communal levels. Direct taxes are more prevalent and make up the bulk of the tax revenue, while indirect taxes are also significant, particularly at the federal level, with VAT.

Salary Withholding Tax

Income tax on employment in Switzerland is usually assessed through an ordinary tax assessment procedure. However, employers directly deduct and remit income taxes for employees subject to salary withholding tax. This ensures compliance and simplifies tax management for both employers and employees.

Categories of employees subject to salary withholding tax:

1. Employees not domiciled or resident in Switzerland, such as cross-border commuters.
2. Employees domiciled or resident in Switzerland without a permanent residence permit.

Employers’ obligations

Employers need to make sure they meet certain obligations when it comes to Swiss salary withholding tax. Employers must:

1. Register with the cantonal tax authority.
2. Withhold and remit taxes.
3. Provide employees with statements of tax deductions.
4. Maintain records and allow tax authority reviews.

Employers receive a collection commission of 1-2% of the withheld tax amount, incentivising digital invoicing in some cantons.

Utilising Employer of Record (EOR) services

Understanding Switzerland’s tax advantages is essential for attracting and retaining top international talent. Employers can use a specialised Employer of Record in Switzerland to simplify compliance, payroll, and tax requirements. These services handle administrative tasks, allowing employers to focus on business growth and effective international talent management. Employers can gain a competitive edge in the global market by leveraging these benefits while using the Swiss Employer of Record services. Contact us for more information and support in navigating Switzerland’s tax landscape.