Founding a company in Switzerland: what taxes will I have to pay?

Founding a company in Switzerland is an exciting and rewarding venture, but you need to understand the associated tax obligations before embarking. Switzerland is known for its favourable tax system, which offers numerous incentives to businesses. In this article, we explore the main aspects of Switzerland’s tax system and the different types of taxes applicable to businesses. We will also explain how these taxes are calculated, who they apply to, and what can be deducted from taxable income.

Overview of taxes in Switzerland

Before we get into the specific details of the taxes a Swiss company has to pay, it would be useful to have a broad overview of taxation in Switzerland.

Switzerland has one of the more favourable tax systems in Europe, with generally low tax rates across the board. This applies both to taxes at the corporate level and at the individual level. In seeking to better understand the way Switzerland’s tax system operates, we can look at three aspects of it:

1. Switzerland’s multi-level tax structure.
2. The way in which tax treatment differs for sole proprietorships (and partnerships) compared to legal entities such as limited liability companies and corporations.
3. The territorial nature of Switzerland’s tax system.

Switzerland’s three-tiered tax structure

Switzerland has a federal system of government which translates to a multi-tiered tax system. Individuals and businesses are taxed at three levels: the federal, cantonal, and communal (municipal) levels. Each level has the authority to set its own tax rates within reasonable limits. This results in a combined tax burden after summing up the tax liability at each level.

The federal tax rates are consistent across the country, while the cantonal and municipal rates vary. On average, the Federal Treasury receives about 30% of total tax revenue in Switzerland, the cantons collect approximately 40%, and the remaining 30% goes to the individual municipalities.

The multi-level nature of the Swiss tax system is one of the key features which leads to overall lower taxation. This is because it creates competition between the cantons to lower their individual tax rates to attract more businesses and skilled workers.

Tax differences for sole proprietorships versus legal entities

Like other parts of the world, sole proprietorships and partnerships in Switzerland are not considered separate legal entities to their owners. This means that the income generated by the business, as well as its assets and liabilities, are attributed to the owner. The tax liability is therefore calculated based on the personal income and wealth tax rates applicable to the owner and are paid together with the rest of their tax liability.

On the other hand, legal forms such as limited liability companies (GmbHs) and stock corporations (AG) are considered separate legal entities from their owners. Therefore, they are subject to their own tax obligations in the form of corporate taxes such as profit and capital tax.

Territorial elements in the tax system

In Switzerland, a tax system with territorial elements is in place, meaning that companies are generally taxed only on their income generated within the country. Income earned abroad is not directly subject to corporate taxation in Switzerland, although there may be certain cases where income transferred or distributed to the Swiss entity is taxable.

Additionally, Switzerland has a network of double taxation agreements with many countries to regulate the taxation of cross-border income and ensure a fair distribution of taxing rights between states.

This type of tax system is highly beneficial to companies incorporated in Switzerland which derive majority of their income from foreign sources. With the right structuring, it can greatly reduce their overall tax burd

What types of taxes do businesses have to pay in Switzerland?

There are two primary types of taxes that apply to corporate entities in Switzerland: taxes on the profits they generate (i.e., corporate income tax or “profit tax”) and a capital tax on their equity value.

Profit tax is imposed at the federal and cantonal levels, whereas capital tax is only at the cantonal level. There are also various other types of taxes to consider such as VAT, church tax, wealth tax, withholding tax, etc. Let us explore each in turn:

Profit Tax

What is profit tax?

Profit tax is the main corporate tax in Switzerland. It is levied on the net income generated by a company during a fiscal year. It applies to corporate entities such as AGs and GmbHs. Profit tax is applied at all three levels (federal, cantonal, and municipal).

How is profit tax calculated?

Profit tax is usually calculated as a percentage of the profits that the company generates; however, some cantons also apply a flat minimum profit tax. The final tax liability is calculated by summing the taxes owed at the federal, cantonal, and municipal levels.

The federal profit tax rate for companies is set at a rate of 8.5%.

The cantonal profit tax rate varies across cantons and in some cases depends on the company’s profitability. The tax rates range from a low of 11.85% in Zug to 21.04% in Bern (although it should be noted that the first CHF 20,000 of profit is tax-free in Bern). While some cantons levy a fixed profit rate, others use a “mixed system” which considers factors such as the profitability of the company, as well as its level of capital and reserves in calculating the final tax rate.

In some cantons, the municipalities have the authority to charge a different tax rate compared to the rate set by the cantonal capital, whereas in other cases there is a uniform rate for all municipalities within the canton. Municipalities may collect profit taxes directly through a surcharge, or otherwise receive a part of the revenue collected by the cantonal tax authorities.

Capital Tax

What is capital tax?

Capital tax is levied as a percentage of a company’s net equity value, which is calculated based on their share capital, additional paid-in capital, reserves and retained earnings. Capital tax is not levied by the federal tax authorities and is only applied at the cantonal and municipal levels.

One major reason for the capital tax is to raise tax revenue by taxing companies regardless of whether they are profitable or not. The tax is also intended to prevent companies from avoiding taxes by investing their profits back into the business instead of distributing them to shareholders.

How is capital tax calculated?

Capital tax is usually calculated as a percentage of a company’s net equity value. The capital tax rate varies across the 26 cantons, ranging from 0.001% (in Obwalden) to 0.5% (in Neuchâtel). Some cantons also impose a minimum flat capital tax.

Who is subject to capital tax?

All corporate entities such as stock corporations (AGs), limited liability companies (GmbHs), limited partnerships, and cooperatives are liable for capital tax. Other legal entities such as associations and foundations are also subject to capital tax. Sole proprietorships and general partnerships are not liable for capital tax as they are not considered separate legal entities from their owners.

Value Added Tax (VAT)

What is VAT?

Value Added Tax (VAT) is a consumption tax that is applied to the value added to goods and services at each stage of their production and distribution. Businesses themselves do not bear any of the VAT liability. Instead, they simply act as intermediaries which collect VAT on behalf of the government. They charge VAT on their sales and deduct the VAT paid on their purchases, thereby paying only the net amount to the tax authorities. This mechanism ensures that the VAT burden is ultimately passed on to the end consumer.

Which businesses are liable for VAT?

Businesses with an annual turnover exceeding a threshold of CHF 100,000 are required to register for VAT and charge it on their taxable supplies. This includes sole proprietorships and partnerships who exceed this threshold (i.e., VAT is not only applicable to legal corporate entities).

How is VAT calculated?

VAT is calculated as a percentage of the taxable value of the goods or services provided. Switzerland applies three different VAT rates depending on the nature of the product or service being provided:

• The standard rate of 7.7% applies to the majority of goods and services.
• A reduced rate of 2.5%, is applicable to certain essential items like food, water, pharmaceuticals, and books.
• A special rate of 3.7% for hotel accommodation, and certain cultural and leisure services.
• In addition, certain raw materials, exports and international services are exempt from VAT in Switzerland.

These VAT rates are scheduled to be increased to 8.1%, 2.6% and 3.8% respectively from 1st January 2024.

Other taxes

In addition to profit tax, capital tax, and VAT, there are numerous other types of taxes that you may need to consider when founding a company in Switzerland. Some of these include:

• Emission tax: At the time of setting up a new company in Switzerland, you will have to pay a once-off emission tax (“capital duty” tax). The rate is 1% of the capital contribution in excess of CHF 1 million.
• Church tax: Many cantons levy a church tax on companies, which is used to fund the national churches and other religious organisations. In some cantons, the church tax is included in the cantonal taxes. Individuals are also subject to pay church tax but can choose to leave the church and stop paying these taxes. However, corporate entities cannot voluntarily avoid these taxes.
• Wealth tax: wealth tax is a tax that is applied to natural persons, not corporate entities as such. Therefore, for a sole proprietor, wealth tax would be the equivalent of the capital tax which is levied on companies. Wealth tax is calculated as a percentage of the net worth of a natural person, usually around 0.3 to 0.5 percent.
• Social security contributions: Social security contributions in Switzerland are mandatory contributions made by employers and employees to fund various social insurance programs. The contributions are calculated as a percentage of the employee’s income and are shared between the employer and the employee.
• Federal withholding tax: Federal withholding tax is a tax imposed at the federal level on certain types of income paid to individuals and businesses in Switzerland. It is primarily levied on income such as dividends, interest, and royalties. The payer of the income is responsible for deducting and remitting the tax to the federal tax authorities. The withholding tax rates vary depending on the type of income and the existence of any applicable double tax treaties between Switzerland and the recipient’s country of residence.
• Waste tax: Waste tax is a tax levied on businesses and individuals for the disposal of waste, based on the principal of “the polluter pays”. It aims to encourage waste reduction, recycling, and environmentally friendly practices. The specific regulations and rates for waste tax varies between cantons and municipalities.
• Stamp duties: Stamp duties are taxes which apply to various legal transactions, such as real estate transfers, securities trading, and the issuance of certain legal documents. The specific rates and extent of stamp duties varies based on the transaction type and cantonal regulations.
• Custom duties: Customs duties are taxes levied on the cross-border movement of goods entering the Swiss Customs Area. The rates are primarily based on weight, but may also depend on the value, type, and origin of the goods.

Tax deductions

The most effective way to reduce your tax liability is to take advantage of tax deductions. These refer to legitimate expenses and losses which can be deducted from your taxable income when calculating your final tax liability. In addition to ordinary business expenses incurred in the production and operational process, the following can also be deducted from taxable income:

• Depreciation can be deducted subject to certain rules of calculating and spreading the expense out over an item’s useful life.
• Accruals or provisions can be made when there is an expected future payout based on a present obligation. These provisions are also tax deductible subject to rules and regulations.
• Justifiable business losses can be deducted from taxable income when calculating your final tax liability and may be carried forward for up to seven tax periods. This can help reduce tax liabilities in subsequent years, providing relief during challenging periods.
• Donations to charitable organisations are also tax deductible at the federal level, granted they are to a value of less than 20% of the company’s net profit.

What about foreign income?

Switzerland applies a mixed system that includes elements of both a territorial tax system and a global income principle. This means that natural persons are generally liable to tax in Switzerland on their worldwide income and wealth, while companies primarily pay taxes on their income from Swiss sources, with certain adjustments and regulations that also consider international aspects.

Switzerland also has double taxation avoidance agreements (DTAAs) with over 80 countries, including most developed western nations. This ensures that foreign companies and expats living in Switzerland will not be subjected to double taxation if they are already paying taxes in their home country, or vice versa.