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NEWSLETTER

December 8, 2011

Lump-sum taxation: changes to the horizon!

The lump-sum taxation has not always been seen very positively at a local and international level. Some changes are necessary to change the perception of what is a big administrative simplification more than a real tax benefit.

This special tax regime simplifies the administrative work relative to the preparation of the annual tax return for foreign individuals who, without performing a professional activity in Switzerland, establish their domicile in Switzerland for the first time or after a period of absence of at least 10 years. Currently, Swiss nationals returning to the country after an absence of at least 10 years can benefit from this taxation regime during the arrival year. The tax liability is set taking into consideration the family’s expenditure in Switzerland.

The expenditure (lump-sum) cannot be lower than 5 times the rent paid or the acquired property’s rental value or 2 times the pension for housing and food paid annually. The lump-sum’s tax liability cannot be lower than the actual taxes that would be paid on the Swiss sourced elements added to the elements that benefit of the application of a double tax treaty. In other words, the lump-sum taxation regime does not prevent the taxpayer from filing an annual tax return, which is also called the control calculation.

Consequently, the annual tax return has to be completed taking into consideration the following elements (article 14 LIFD):

• - income from real estate property located in Switzerland;
• - income from movable assets invested in Switzerland, including loans secured by real estate;
• - income from copyrights, patents and other similar rights used in Switzerland;
• - pensions and annuities from Swiss sources;
• - foreign income for which the taxpayer requires total or partial foreign tax relief based on an agreement concluded by Switzerland to prevent from double taxation (double tax treaty).

The tax liability resulting from the control calculation (annual tax return) shall be considered as the payable tax liability if this one exceeds the tax liability resulting from the negotiated lump-sum (amount of the expenditure).

The Lump-sum taxation continues to raise many discussions at government level in Switzerland. In this regard, several votes at the cantonal level took place in 2011 and a few more will take place during 2012 to determine the continuity of application of this tax regime and set new conditions applicable.

With the intention to ensure the continuity of the lump-sum taxation, the Federal Council proposed amendments to the Federal Tax Law on direct tax (LIFD) and the Cantonal and Communal Direct Tax Harmonization Law (LHID).

The changes that will come into force quickly are the following:

• - minimum taxable expenditure will be 7 times (5 times today) the rent paid or the acquired property’s rental value or 3 times (2 times today) the pension for housing and food paid annually;
• - the minimum lump-sum threshold for the LIFD is set at CHF 400'000. According to the LHID, each canton will set their own lump-sum threshold;
• - the wealth tax will be included in the lump-sum taxation;
• - Swiss nationals will no longer benefit from this taxation regime.

There will be a transition period of 5 years once the new law enters into force. People currently taxed at lump-sum will see their lump-sum amount increase on an annual basis during the transition period until the level of the new legislation is reached.

The date of entry into force of the new law is not set yet but might be very soon. With the exception of the canton of Zürich which abolished the regime, all other cantons which voted on the topic preferred to accept the amendments of the regime rather than its abolition.

Are you or your clients interested in further developing this topic? Feel free to contact our team of specialists. We are happy to answer your questions and lead the necessary discussions with the relevant authorities.