International Background Paper Wealth Tax Commission Wealth taxation in Switzerland Authors Jean-Blaise Eckert Lukas Aebi WEALTH TAXATION IN SWITZERLAND Jean-Blaise Eckert, Lenz & Staehelin, Switzerland Lukas Aebi, Lenz & Staehelin, Switzerland Wealth Tax Commission Background Paper no. 133 Published by the Wealth Tax Commission www.ukwealth.tax Acknowledgements The Wealth Tax Commission acknowledges funding from the Economic and Social Research Council (ESRC) through the CAGE at Warwick (ES/L011719/1) and a COVID-19 Rapid Response Grant (ES/V012657/1), and a grant from Atlantic Fellows for Social and Economic Equity's COVID-19 Rapid Response Fund. 2 1. Historical Background Switzerland is well known to be one of the few countries to levy a general wealth tax (‘impôt sur la fortune’, ‘Vermögenssteuer’, ‘imposte sulla sostanza’). A wealth tax was first introduced in Switzerland during the time of Helveticism (1789-1803) when Switzerland was a centralised uniform state with a centralised tax system. After the collapse of Helveticism, the cantons regained tax autonomy. Accordingly, cantonal tax systems developed quite differently: while some cantons returned to levying (only) indirect taxes (in particular custom duties, regalia, such as salt rights, etc.) as in the period before Helveticism, others retained the taxes levied in the Helvetic system, in particular the wealth tax. In 1848, when the Swiss Federal State (Swiss Confederation) was founded, the Swiss tax system changed fundamentally: only the newly created Swiss Confederation was competent to levy customs and the cantons saw themselves forced to find alternative tax sources to compensate for the loss of tax revenue, namely the taxation of wealth and income. Until the First World War, a political understanding existed that the main tax revenue source of the Swiss cantons were direct taxes, whilst indirect taxes in the form of customs duties formed the backbone of the federal tax revenue. Depending on the canton, direct taxes were levied on wealth in the form of movable and/or immovable property as well as on income. In response to budget shortfalls due to the First World War, the Swiss Confederation was in 1915 accorded the competence to levy one-time war taxes, inter alia, a wealth tax with maximum tax rates of 0.15% on the wealth of individuals. This wealth tax was accompanied by a wage tax, and for the first time the Swiss Confederation itself levied a direct tax. Due to the further budget constraints caused by the First World War and subsequently, the Second World War, the Swiss Confederation continued to levy direct taxes. The one-time war tax of 1915 was re-enacted in 1919 and levied six times during the 1920s and early 1930s. After the Great Depression, the Swiss Confederation again levied from 1934 to 1938 a crisis tax, which was, however, mainly an income tax. It also levied a supplementary wealth tax with maximum tax rates of 0.25%. From 1941 to 1958, the Swiss Confederation levied an income tax at rates of up to 6.5% with supplementary wealth tax of up to 0.35%. The federal wealth tax was abolished in 1959 for individuals (and the federal capital tax on corporate equity was abolished in 1998). The cantons continue to levy wealth taxes today. However, in the course of the 20th century the cantons successively reduced the wealth tax and increased the income tax. Thus, today income taxes have become the main source of tax revenue for the cantons. Politically, there have been a series of (rather fringe) parliamentary initiatives at the Swiss federal level to abolish or reform the wealth tax but none of them were successful. In general, the wealth taxation regime as such is respected in Switzerland and no major effort to abolish or fundamentally reform the Swiss wealth tax has been made in the last two decades. A motion filed in 2019 in the Swiss federal parliament calls for the Swiss Federal Council to elaborate a reform project which would abolish the Swiss wealth tax and introduce a capital gains tax with a maximum rate of 10% on private assets (cf. section 4.1, below). The Federal Council has recommended that the Parliament reject this motion and we think it is likely that this motion, which in an unconstitutional way limits the competences of the cantons to set their own tax rates (cf. section 2, below), will be rejected by the Swiss federal parliament. 3 2. Allocation of taxation competences between jurisdictions within Switzerland The Swiss Federal Constitution allows the Swiss cantons to exercise all (tax) competences not explicitly exclusively reserved for the Swiss Confederation (Article 5). The Swiss Confederation itself may only levy a tax if the Swiss Federal Constitution explicitly allows it to do so. Furthermore, the Swiss federal constitution authorises the Swiss Confederation to legislate principles on the harmonisation of direct taxes, including wealth taxes, regarding (i) tax liability, (ii) tax object and tax period, (iii) procedural rules and (iv) criminal tax law. Although the Swiss Confederation has accordingly important harmonisation competences concerning cantonal wealth taxes, it may not harmonise tax rates. Based on its constitutional authority, the Swiss Confederation has enacted the Federal Act on the Harmonisation of Direct Taxes of Cantons and Municipalities, which requires the cantons to levy a wealth tax and provides inter alia for specific rules regarding the object of the wealth tax and valuation. The legal framework thus requires the cantons to levy a wealth tax (albeit the tax rate may be close to 0%). The Swiss Confederation, on the other hand, due to the lack of explicit constitutional authorisation, is precluded from doing so. All 26 cantons levy a wealth tax. However, since the cantons are free to set wealth tax rates, the minimum and maximum cantonal wealth tax rates, the tax rate schedule, and accordingly, the tax burden can vary greatly between the cantons (cf. section 0, below). Furthermore, a series of cantons tax certain assets differently, e.g. they levy an additional tax on certain forms of the holding of real estate (as does Geneva) or they lower the wealth tax rate on qualifying shareholders in closely held companies (as does Nidwalden). 4 3. Taxable basis 3.1. In general Swiss resident individuals are as a matter of principle subject to wealth tax on their worldwide assets (unlimited wealth tax liability). Individuals are Swiss resident if they either (i) have their domicile in Switzerland or (ii) spend without significant interruption (a) at least 30 days for work purposes or (b) 90 days for non-work purposes in Switzerland. Wealth tax is due from the first day of residency until the end of said residency, and is levied on a pro rata temporis basis in the case of arrival or departure during the year. The canton, in which the taxpayer is resident or, in the case of real estate, in the canton where the real estate is located, levies the wealth tax. In principle, all asset classes are subject to wealth taxation. Hence, real estate, including private residences, all types of securities, including shares of private companies and all other moveable assets, including e.g. works of art, jewellery, vehicles, etc. are subject to the cantonal wealth taxes. Important exemptions apply to personal household items and to claims on pension fund payments and assets invested in recognised personal pension schemes, which are not subject to wealth tax. The cantonal wealth taxes are assessed on a net basis, i.e. a taxpayer may deduct all personal liabilities from the wealth tax base. Although theoretically there is no difference in the deduction system for debt against Swiss real estate whether held by Swiss residents or non- residents, in certain key practical aspects differences do arise and in some cases a mortgage debt incurred on real estate in Switzerland may be virtually non-deductible for a non-resident. All cantons have a general wealth tax allowance of between 70,000 Swiss francs and 200,000 Swiss francs depending on the canton (see section 8). Although married couples are each a separate tax subject, their wealth is added together to determine the applicable wealth tax rate. However, even though a majority of cantons has progressive wealth tax rates, not all cantons provide married taxpayers with a reduced tax rate. For example, the canton of Geneva does not distinguish between single and married taxpayers, whereas the canton of Zürich does (cf. section 0, below). Last, the net assets of minor children are also included in the parent's wealth tax base. The source of the minor child’s wealth is irrelevant. The wealth of the child is attributed to the parent who has legal guardianship over the child if the parents are separated. Where the parents both have legal guardianship, the wealth is attributed to the parent with whom the child lives most of the time. The wealth tax due on the minor child’s wealth can be funded out of that child’s wealth.1 3.2. Swiss international wealth taxation With regards to international taxing rights, the cantonal wealth tax regimes unilaterally exclude from the tax base assets attributable to foreign businesses or permanent establishments and real estate situated abroad, although these elements are taken into account for determining the 1 In December 2019, the Swiss Federal Parliament sent back a current reform project for the taxation of families to the Federal Council, so that the Federal Council may rework its project. The reform proposed by the Federal Council envisaged an ‘alternative tax calculation’. The tax administration would start by determining the married couple's tax as in the case of ordinary joint taxation. It would then proceed to a second tax calculation (alternative calculation) based on the individual taxation of the cohabiting couple.