Expenditure-based taxation, also known as lump-sum taxation, was introduced in Switzerland in 1965 in the canton of Bern and in 1990 at the federal level. This tax regime targets foreign residents in Switzerland who do not earn any income in Switzerland. Under this regime, taxpayers are taxed based on their lifestyle rather than their income. This means they are taxed on their living expenses instead of the income they earn. The legal basis for expenditure-based taxation is found in Article 16 of the Federal Direct Tax Act and Article 14 of the Cantonal and Communal Tax Act.
The expenditure-based tax regime has two main objectives:
- To facilitate the taxation of foreign nationals with complex international financial situations.
- To simplify tax formalities for these individuals and encourage them to settle in Switzerland.
Often, the taxes paid by those under this regime would not be significantly higher if they were taxed under ordinary procedures. Income from foreign sources, such as foreign real estate or businesses, would not be taxed under ordinary procedures. Other types of foreign income, such as dividends and interest subject to withholding tax, would be taxed jointly by Switzerland and other states according to tax treaties.
Eligibility for expenditure-based taxation
Individuals eligible for expenditure-based taxation must meet the following cumulative conditions:
- They are not Swiss nationals.
- They are subject to unlimited taxation in Switzerland for the first time or after an absence of at least ten years.
- They do not engage in gainful activity in Switzerland.
Taxpayers wishing to benefit from expenditure-based taxation must apply for it.
Calculation basis for income tax
Income tax under the expenditure-based regime is calculated based on the annual cost of living expenses incurred by the taxpayer and any dependents living in Switzerland. The tax is calculated based on the higher of the following two amounts:
- For individuals with their own home: Seven times the rental value (for owned homes) or seven times the annual rent (for rented homes).
- For individuals without their own home (e.g., hotel stay): Three times the cost of lodging and meals.
The expenditure-based tax must at least equal the sum of income and wealth taxes calculated according to ordinary rates for Swiss-based wealth or Swiss-sourced income such as real estate, bank accounts, pensions, etc.
Calculation basis for wealth tax
In addition to income tax, individuals under the expenditure-based regime must also pay a wealth tax. This tax is based on the official value of real estate located in the canton of Bern. The wealth tax amount is determined by multiplying the official value of Bernese real estate by the applicable tax rate in Bern. Foreign real estate is not considered in this calculation. For individuals without Swiss real estate, the wealth tax can be calculated based on their total wealth. In this case, the wealth tax amount is a fixed percentage of their total wealth, as determined by tax authorities.
Summary
Expenditure-based taxation is a regime allowing foreign nationals residing in Switzerland and not earning Swiss income to pay taxes based on their living expenses rather than their income. Eligible individuals must meet specific conditions and apply for the regime. Income tax is calculated based on living expenses, while wealth tax is calculated on the value of real estate in Bern or total wealth for those without Swiss real estate.
Advantages and requirements
- Facilitation: Simplifies tax assessment for individuals with international and complex financial situations.
- Attraction: Encourages foreign nationals to settle in Switzerland by providing a simplified tax procedure.
To benefit from expenditure-based taxation:
- Ensure you meet the eligibility criteria.
- Apply for the regime.
- Calculate tax based on living expenses and/or the value of Swiss real estate.
Given the complexity and specificity of tax laws, consulting a Swiss tax advisor is strongly recommended for personalized advice on tax optimization and wealth management.
