#68 New to Switzerland? Here's how you'll be taxed

Swiss federalism and its three levels of taxation

The foundation of the Swiss tax system differs significantly from that of centrally organized states. In Switzerland, taxes are levied at three different levels. In addition to the direct federal tax, which goes to the Confederation in Bern, taxpayers pay so-called state and municipal taxes. In this context, the term «state» refers to the canton. The pronounced federalism – commonly referred to as the «cantonal spirit» – means that the cantons enjoy a high degree of autonomy in setting their tax rates. For you as a taxpayer, this means that your place of residence has a massive impact on the actual amount of your tax burden, as rates can vary significantly from canton to canton and even from municipality to municipality. How you are taxed depends primarily on your current residence permit.

Direct deduction via tax at source

The majority of workers who immigrate to Switzerland from abroad receive a B residence permit to start with, or, in the case of temporary short-term stays, an L permit. For holders of these two permits, the tax at source applies. Under this procedure, the employer withholds a portion of the gross salary each month and remits this amount directly to the relevant cantonal tax office. This saves you from having to fill out an annual tax return. At the same time, the Swiss tax authorities use this direct deduction to ensure that foreign workers do not leave the country without having settled their tax liability.

When a regular tax return becomes mandatory

Even with a B permit, you are legally required under certain conditions to undergo a subsequent regular tax assessment and thus file a regular tax return. The most important threshold here concerns income: as soon as your gross annual salary exceeds the 120'000-franc mark, the pure tax at source privilege expires.

Another mandatory case arises if you earn less than 120'000 Swiss francs but have significant additional income or substantial assets. Such additional income includes, for example, dividends, interest, rental income, or even a lottery win. The threshold at which such income is classified as «significant» varies greatly from canton to canton. While the cantons of Bern and Zurich set the threshold at a moderate 3'000 francs per year, it is a relatively small amount of 500 francs in Basel-Stadt, whereas the canton of Aargau only requires a tax return starting at 10'000 francs. Assets can also trigger an obligation to file a tax return. The thresholds are relatively low. In the canton of Zurich, for example, assets of just 80'000 francs per person are sufficient.

Voluntary filing for maximum tax benefits

If your income is below the 120'000-franc threshold and you have no significant additional income, voluntarily filing a tax return may still be worthwhile. This is especially true if you contribute to a pillar 3a account. This is the only way to take advantage of the tax benefit. To claim this tax benefit as a person subject to tax at source, you must apply to the tax office for a retroactive regular assessment. This step is also recommended if your actual expenses for continuing education, childcare, or debt interest exceed the standard deductions.

Anyone wishing to take this route must submit the corresponding application for the previous tax year by the end of March at the latest. For married couples, please note that the application must be signed by both spouses. If you need more time to file your actual tax return, you can request an extension. Please note, however: Once you have opted for the voluntary tax return, you will generally remain in this system for subsequent years. A later return to pure tax at source is no longer permitted in most cantons. The tax office will then determine the exact tax liability based on your information and offset it against the tax at source already deducted from your salary. If the withholding during the year was too high, you will be refunded the difference. Of course, you should avoid the opposite scenario, in which you would have to pay additional taxes. That is why it is worth running a tax calculation in advance.

Taxation with a C permit, marriage, or self-employment

At the latest upon receiving your C residence permit, you will no longer pay tax at source. With this permit, you are treated for tax purposes like a Swiss citizen and will henceforth go through the standard tax procedure. The same applies if you marry a Swiss citizen or a partner with a C permit. Beyond traditional employment relationships, individuals who take up self-employment in Switzerland must also file a regular tax return from day one.

Completely different rules apply to cross-border commuters who work in Switzerland but maintain their primary residence abroad. And here’s another special case: Do you have significant assets and are considering moving to Switzerland? Certain cantons negotiate flat-rate tax deals with wealthy foreigners who do not work in Switzerland. This is called «lump-sum taxation.» Unfortunately, Swiss residents do not enjoy this privilege.

What has been your personal experience with the Swiss tax system? And as an expat in Switzerland, what other topics would interest you? Please send me your questions and suggestions via email.