Lump-sum taxation, officially called “expenditure-based taxation”, is a special tax system defined by the Federal Law on Direct Taxation (LIFD) and the Federal Law on the Harmonization of Direct Taxes (LHID) applicable to certain categories of wealthy persons, who are of foreign nationality and domiciled in Switzerland. It can represent substantial tax savings for the beneficiary, but it is subject to binding conditions.
According to some experts, it can be seen as the Swiss equivalent of the UK’s “non-domiciled” status, which allows individuals of foreign nationality to minimize their tax bill in the UK during a given period of time. Unlike the British regime, however, the Swiss package is not time-limited. Granted for a fixed period, it can be renewed without limit by the tax authorities, provided that the beneficiary meets all the relevant conditions.
What does it allow?
It taxes the beneficiary’s income not on the basis of their total declared income, but rather on the basis of a lump sum determined by the tax authorities. The actual rate is determined by the federal and cantonal tax provisions.
How does it work?
Calculating lump-sum taxation is based on living expenses: at least seven times the amount of rent paid or the rental value, or three times the annual maintenance costs for housing and food. There is a lower limit, applicable to new arrivals, of 400,000 Swiss francs for the direct federal tax, while for cantonal and communal taxes this is determined by each canton (400,000 francs in the canton of Geneva, 415,000 francs in the canton of Vaud).
A person whose global income is 10 million francs would be taxed at the ordinary rate of 15.5% for the cantonal tax, to which is added the communal tax (in Lausanne: 79% of the cantonal tax, i.e. 12.245 %) and the direct federal tax (11.5%). This gives a total rate of 39.245% (in Lausanne). This person would therefore have to pay an income tax of 3,924,500 francs.
However, when the same person is the beneficiary of lump-sum taxation and is resident in an attractive mansion in the canton of Vaud paying a monthly rent of 12,500 francs, they would be taxed as follows:
Monthly rent: 12,500 francs. Per year: 150,000 francs
150,000 multiplied by seven gives the taxable revenue: 1,050,000 francs
Taxed at the rate of 39.245% = 2,884,507 francs owed in income tax
Tax savings: 3,924,500 francs - 2,884,507 francs = 1,039,992 francs
In addition, cantons must take into account the wealth tax in order to determine the threshold for expenditure-based taxation, which corresponds to a 10% to 15% increase in the threshold (with the subsequent increases in the taxation level). The beneficiary of lump-sum taxation is also liable for other taxes and duties such as property tax, VAT, etc.
In order for the person entitled to lump-sum taxation to be taxed at the lower limit (i.e. 415,000 francs in the canton of Vaud), they must seek a dwelling that costs one-seventh of that sum, or 415,000/7 = 59,285.70 francs.
In other words, a monthly rent of 4,940.50 francs. In this price range, it is easily possible to find a beautiful villa in La Côte or Lavaux, or a bright and spacious apartment in Geneva or Lausanne.
Who may benefit?
Only foreign nationals who are not engaged in lucrative activities in Switzerland may benefit from lump-sum taxation, as long as they come to settle here or are returning after an absence of at least ten years. Couples may also claim it, as long as both of them meet all the requirements. This means it is impossible for couples where one partner holds Swiss nationality, or works in the country, to benefit from lump-sum taxation.
In some cases, wealthy foreigners settling in Switzerland manage their own wealth or the companies in which they are invested. In this sense, administering or even being chair of their company or group of companies is not considered to be a lucrative activity. However, the positions of executive chairman, managing director or director general are deemed to represent a lucrative activity and therefore cannot benefit from lump-sum taxation. Note that this interpretation may vary slightly from one canton to another. Vaud applies a more restrictive interpretation.
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