So far, we have not written much on Switzerland in Tax Free Today. This is because although Switzerland seems like a tax haven to its German, French, Italian and Austrian neighbours, there are actually many other more interesting options for personal or company residence.
Be that as it may, for those who like to live in Central Europe, Switzerland can be a very interesting option, both on a personal and business level (we have already spoken about the option of living and paying minimum taxes in Austria in another article). In this article we will talk about the advantages of setting up your company in Switzerland.
Given the proximity and the difference in tax burden, it is not surprising that Germany has undertaken measures to stop entrepreneurs emigrating to Switzerland.
From 2014 the so-called“überdachende Besteuerung” was applied, a kind of additional tax that employers with businesses in Germany who emigrate to Switzerland have to pay on their German income during the following 5 years after they have left.
However, taking into account that you are reading this article in English, you will probably not have this problem and your country of origin will not have any issues with your company being in Switzerland.
Since Switzerland is a highly decentralised country, it is very difficult to define it in a few sentences. The differences between the German, French and Italian-speaking regions, their mentality and their tax systems are too big.
Switzerland’s tax situation is definitely better than in typical European countries with a high tax burden, but we must bear in mind that living there is also much more expensive than in other European countries. For example, if you live in the UK, Cyprus or Malta would be a similar options for you and would be more interesting than Switzerland.
In Switzerland you generally become a tax resident by spending at least 90 days a year there. Having your centre of economic or vital interest there (children or spouse) can also make you become a tax resident in Switzerland.
Regarding personal taxes, in Switzerland you can take advantage of a flat tax rate. However, the fixed amount you pay is very high. The canton with the lowest fixed rate is Glaris which demands annual payments of 150,000 Swiss francs in taxes. Since Italy offers a non-dom regime with a fixed annual fee of €100,000, you would probably prefer to move to this Mediterranean country instead.
The tax and social security burden in Switzerland varies a lot depending on the canton and municipality, but without a doubt it is below the level of other Western European countries. At 22.7%, Zug is the canton with the lowest personal taxes, but you have to take into account that there are other cantons where you pay up to 45%.
However, if you have international mobility there are much more interesting options for your personal residence, like Cyprus, Georgia and Panama (if you want to read about all the options in the world, you can purchase our Encyclopaedia for Emigrants ebook).
Therefore, in this article we will look more closely at the advantages that Switzerland has for companies based there.
Why Switzerland can be an attractive option to register your company
Switzerland’s corporate taxation system has advantages as well as disadvantages for companies based there. However, the disadvantages are not very serious and can be resolved with the appropriate structure. Solutions though are not cheap, but neither is Switzerland as a location for your company.
Therefore, the solutions presented in this article are mainly aimed at online professionals and entrepreneurs with an annual income of €100,000 or more. For those who earn less than that, Partnerships like the Canadian LP or the LLC in Florida are definitely better alternatives.
Now, you will undoubtedly ask yourself, why should I choose Switzerland instead of other famous EU tax havens like Ireland, Malta, Andorra or Cyprus?
The reason is that in some Swiss municipalities corporate taxes are now lower than in these well-known EU tax havens.
Currently, in Switzerland there is a corporate tax rate of 8.5% at the federal level. This rate is added to the corporate tax rates at a cantonal and municipal level (the amount of these may even exceed the federal rate).
The maximum that your company will pay for corporate taxes will be 24% (in Geneva), whereas the minimum, in the cantons of Luzern, Nidwalden and Obwalden, is between 12% and 13%. The so called Domizilgesellschaften (domiciled companies) can avoid up to 70%-90% of cantonal taxes.
These domiciled companies are commercial companies registered in Switzerland that only generate income outside of the country but have an office with employees in Switzerland. The tax reduction at the cantonal level is linked to the number of employees that they have.
Despite the high wage costs, many international corporations establish their headquarters in Switzerland because cantonal taxes are reduced to the minimum.
In many of the cantons, the corporate tax rate ends up being less than 10%. The domiciled company may generate incomes in Switzerland, but if so, these would be taxed at normal rates.
As part of the EU BEPS initiative against tax evasion and the pressure of the EU, the Swiss State tried to put an end to this practice. However, the Swiss public did not see it the same way so held a referendum in 2017 where they decided to oppose the corporate tax reform that was proposed by the government.
If the revised draft was approved, domiciled companies would have a serious problem. If this happens, the cantons and municipalities would probably be forced to reduce their local taxes to avoid emigration. This tax reduction would come in handy for small businesses who before could not benefit from the tax advantages of domiciled companies.
Nowadays, even without having the status of a domiciled company, it is feasible to have a tax burden of between 12.3% and 14%. For the well-known city of Zug, corporate taxes are at 14.5%.
The canton of Lucerne scores high thanks to its reduced company taxes (12.32% in the city, and even lower in their municipalities).
Nidwalden, Obwalden and Appenzell are followed by poorly-known cantons with a rate of less than 14%. Tax Free Today works closely with an agent who can establish and manage companies in, among others, Lucerne and Zug.
In addition to having lower corporate taxes than other countries, Switzerland has the feature that taxes themselves are deductible. Therefore, the expected tax burden must be included in the calculation and then deducted. If in the right place, you could save some additional tax percentage.
In general, the Swiss tax administration is considered much more efficient and open to negotiations than other countries (compared for example to Germany, Spain or Mexico). Although there are not many differences in what you can deduct, in how the accounting is managed or how the balance sheets are closed, the Swiss entrepreneur does have the advantage, unlike what happens in other countries, audits and investigations in Switzerland are meticulous, but much less aggressive.
With a rate of 7.7%, VAT is considerably lower than in the rest of Europe (17-27%). There are reduced VAT rates in many areas and exports are not subject to this tax.
Another advantage is that Switzerland is completely integrated into the European VAT reverse tax system. So, if necessary, it is relatively easy to get tax identification numbers in other countries.
Social security costs are relatively low, which partly compensates the high salaries. Depending on the location, employers pay between 10% to more than 20% in social contributions. Even living outside of Switzerland, it is possible to enjoy their luxurious pension system by having a salary from a Swiss company. However, keep in mind that the Swiss pension system has similar problems to the ones faced by other developed countries in the world.
The tax provisions we have discussed apply to both public limited companies and limited liability companies. Aktiengesellschafts (AG, public limited companies) have a high reputation in Switzerland, but require a social capital of 100.000 Swiss francs, of which, at least half must be disbursed at the time of incorporation. GmbH (equivalent to LLC) is, with a capital requirement of 20.000 Swiss francs, a good alternative for small businesses.
The 3 disadvantages of companies in Switzerland: Administrator, withholding taxes and wealth taxes
As we already know, all that glitters is not gold. This also applies to the taxation and maintenance of Swiss companies. However, if we analyse them more closely, we will see that the three main disadvantages for businesses in Switzerland are minor.
Anyone who wants to set up a Swiss GmbH or a public limited company will have to face the fact that they need to hire a director who lives in Switzerland. This could be a huge burden for the company in salary costs.
However, in this case it is important to make a distinction between Swiss law and those of other countries. Under Swiss law, it is worth hiring a fiduciary as the company director. This usually costs around €200 per month rather than a minimum of €2,000 per month.
Of course, hiring a director does not give the company the necessary business substrate to avoid problems with the effective address if you run your company as a tax resident in Germany, Spain, Italy, France or any other country with high tax burden. However, as already mentioned, we can avoid hiring a director if we live near the Swiss border.
The second problem we face if we set up our company in Switzerland is the possible wealth tax on Swiss commercial companies. We say “possible”, because not all cantons apply this tax.
Unlike personal income taxes, corporate income taxes are not collected at a federal level, but by each of the cantons. In the states without wealth taxes, corporate taxes are usually somewhat higher.
Wealth taxes fluctuate between 0.001% and 0.525% of the net worth of commercial companies. Wealth taxes, if any, are not something to worry about if the profits are structured correctly and are regularly transferred, avoiding withholding taxes in Switzerland.
In addition, some cantons like Schwyz, Soleura and Turgovia also offer the possibility of compensating wealth taxes with the burden of the corporate tax.
The third problem is withholding taxes.
Switzerland retains up to 35% in case of profit sharing (dividends) from a Swiss commercial company. As you can see, the amount that the company has to withhold in case of dividend distributions to its partners is extremely high.
Fortunately, Switzerland, despite not being a member of the EU, takes part in the EU Parent Subsidiary Directive. This directive states that transfers of profits between EU countries (Switzerland included) are exempt from withholdings, provided that there is a minimum participation of 10% and the minimum holding periods are respected.
Consequently, a Swiss GmbH can transfer profits to other EU commercial companies without applying withholding taxes.
If it is not possible to have a holding company in any EU country, there is still the possibility of relying on the wide network of double taxation agreements that Switzerland has signed. These help reduce withholdings.
In more than 90 of these double taxation agreements, the withholding tax is reduced in most cases to only 5%, and rarely to more than 10-15%. So, a Swiss commercial company associated with a US company would only pay 5% for profit transfers; the 35% Swiss withholding tax and the 30% US withholding tax would not apply.
Those whose company headquarters are located in low-tax countries without double taxation agreements with Switzerland must be careful. When living in these countries, the holding company must be in the EU. Cyprus is a good option, since capital gains derived from asset management within the company are also tax exempt. Malta and Estonia are other interesting options for holdings.
Thanks to its wide network of double taxation agreements and its Parent-Subsidiary Directive, Switzerland itself is also an interesting country as an intermediate holder in order to gain access to advantageous agreements on double taxation However, Swiss holdings are usually not allowed to do business in Switzerland.
As we have seen, wealth taxes and withholdings, if the company is structured properly, would not be a problem.
Finally, it should be mentioned that taxes have long ceased to be the only decisive factor when choosing the location of the company.
Banking and payments in Switzerland
The ability of a company accessing good banking and payment services is becoming more and more important, and it is something that is increasingly difficult in the offshore world due to the numerous guidelines to avoid money laundering.
In this context, sometimes even EU companies like Malta have difficulties in getting company bank accounts with good conditions. Switzerland, as a prestigious tax haven, has an advantage in this case.
Swiss banks, famous in the past for the anonymity that they gave their clients, are no longer suitable for tax evasion. Nowadays, what distinguishes them is rather efficient service, modern online banking and a wide selection of card types. Whether at the Landesbank or at a large Swiss bank, Switzerland has a relatively wide offer (IBAN number included).
The same goes for payments and collections. Switzerland is one of the few low-tax countries fully compatible with Paypal and Stripe. Card payments do not incurre high costs or commissions and are rarely a problem.
Changing the currency of your business to Swiss francs can have its advantages. As a good haven of stability, Switzerland has a very secure currency. While you may not want to leave your money in your Swiss company, due to the wealth tax, most of the world’s offshore banks offer multi-currency accounts that accept Swiss francs, therefore avoiding currency exchange commissions.
You should not underestimate the good image that Switzerland projects at a time when reputation is becoming more and more important. That reputation can even allow you to ask your customers for a higher price (in Swiss francs).
Lucerne is now a very well-known city for having a lower tax burden than Ireland, Cyprus and even Liechtenstein (12.32%). However, whoever wants to settle in Zug or Schwyz may have other reasons for doing so. For example, Zug administration’s knowledge about the operation of crypto-currencies.
Switzerland is no longer what it was. Gone are the days when money could be taken to the bank in a briefcase and deposited in an anonymous account. Switzerland, or at least some of its municipalities, is becoming an attractive place for legal tax reductions and many people still do not know about it.
Now, if you want to register a company in Switzerland (including the holding structure wherever necessary), you can contact us by writing to [email protected]. If you are still not sure if you are interested in Switzerland as the headquarters for your company or as a country for your personal residence, you can book a consultation here.