Expenditure-based taxation, or lump-sum taxation, was introduced in Switzerland in 1965 in the canton of Bern and was extended to the federal level in 1990. This tax system is intended for foreigners residing in Switzerland who do not earn any income in Switzerland. Those who opt for this tax regime are taxed based on their standard of living.
The expenditure-based tax regime has two main objectives. First, it aims to facilitate the taxation of foreign nationals whose financial situation is complex due to their international status. Secondly, it seeks to simplify tax formalities for these individuals and encourage them to settle in Switzerland.
Taxpayers subject to this regime are not taxed on their income, but on their current expenses. Articles 16 of the Federal Direct Tax Law and 14 of the Cantonal and Communal Tax Law establish the legal bases for this type of taxation.
In many cases, the taxes of people subject to this regime would not be, or only marginally higher if they were taxed according to ordinary procedures. Indeed, part of their foreign-source income, such as that generated by real estate or businesses they own abroad, would not be taxed under ordinary procedures. Regarding other types of foreign-source income, such as dividends and interest subject to withholding tax, Switzerland would have to share the right to tax with other states according to the tax treaties concluded.
Eligibility for expenditure-based taxation
Individuals who meet the following cumulative conditions are entitled to pay tax calculated on the basis of expenditure instead of ordinary income tax:
- They are not Swiss nationals;
- They are subject to unlimited tax liability for the first time or after an interruption of at least ten years;
- They do not engage in any gainful activity in Switzerland.
Taxpayers wishing to benefit from the expenditure-based tax regime must apply for it.
Determination of the calculation base for income tax
Income tax is calculated based on the annual amount of current maintenance expenses incurred by the taxpayer for themselves and the people living in Switzerland whom they support. The tax must be calculated on the basis of the highest amount between the two following:
- For people who own their own home: seven times the rental value (for owned homes) or seven times the annual rent (for rented homes);
- For people who do not own their own home (e.g., hotel stay): triple the amount they pay for their lodging and food.
Expenditure-based tax must be at least equal to the sum of income and wealth taxes, calculated according to ordinary scales, for wealth located in Switzerland or for Swiss-source income such as real estate, bank accounts, annuities, etc.
Determination of the calculation base for wealth tax
In addition to income tax, individuals taxed based on expenditure must also pay a wealth tax. This tax is calculated based on the official value of real estate located in the canton of Bern.
The amount of the wealth tax is determined by multiplying the official value of Bernese real estate by the tax rate in force in the canton of Bern. Foreign real estate is not taken into account for the calculation of this tax.
For individuals who do not own real estate in Switzerland, the wealth tax can be calculated based on their total wealth. In this case, the amount of wealth tax is equal to a fixed percentage of their total wealth, as determined by the tax authorities.
In summary, expenditure-based taxation is a tax regime that allows foreign nationals residing in Switzerland and not earning income in Switzerland to pay taxes based on their standard of living rather than their income. Taxpayers wishing to benefit from this regime must meet certain conditions and apply for it. Expenditure-based tax is calculated based on the current maintenance expenses incurred by the taxpayer for themselves and their dependents. Wealth tax is calculated based on the value of real estate located in the canton of Bern, or based on total wealth if the taxpayer does not own real estate in Switzerland.