How are investments taxed in Switzerland?

This blog post was prepared by one of our partners, Become Wealthy. It was written by Aljoscha Moser, the founder and managing director. He is a lawyer and advises companies and private individuals on tax, legal, and financial matters. Aljoscha Moser also lectures on taxes at the Institute for Financial Planning (IfFP) for the IAF Certified Financial Advisor course.

 

 

Thanks to innovative providers such as Splint Invest, access to the investment markets has been getting easier and easier for years. However, many people find completing their tax return less straightforward. We show you how the taxation of shares, Splints and other investments works in Switzerland and what you need to consider for the correct declaration.

 

 

Various taxes can apply to assets and profits:

 

• Capital gains tax
• Income (interest, dividends)
• Wealth tax
• Investment income vs. capital gains

 

In Switzerland, a basic distinction is made between taxable investment income and tax-free (private) capital gains.

 

Investment income includes, in particular, dividends from shares. However, it also includes interest income on bank accounts or bonds. Investment income is, so to speak, the "fruit" that your investment yields.

 

Capital gains, on the other hand, result from the sale of investments. The difference between the purchase price and the sale price of securities is known as a capital gain.

 

How are capital gains taxed in Switzerland?

 

Principle: Tax-free capital gains

 

The good news first: in Switzerland, the principle applies that private investors do not pay capital gains tax. This is a major advantage, as taxes are a burden on your returns. A capital gain occurs when you sell a security, such as a share or a split, at a higher price than you originally paid. You may be wondering what the reverse is true for capital losses. Capital losses are not deductible from taxable income.

 

Example of tax-free capital gains

 

Let's illustrate this with an example: You bought a share for CHF 50 10 years ago. Since then, you have held the share as part of a buy-and-hold strategy. As the share price has developed very favourably, you now decide to sell your share at the current price of CHF 200. This price increase of 400% corresponds to a price gain of CHF 150. As this price gain is a tax-free capital gain, you do not have to pay tax on the CHF 150. It would be the same if you had invested in a Rolex split instead of a share 10 years ago.

 

Exception: Professional securities traders

 

The situation is different if you are categorised as a professional securities trader by the tax authorities. You do not have to be an investment banker for this categorisation; private individuals can also be classified as professional securities traders by the tax authorities.

 

In contrast to private investors, capital gains are taxable for so-called professional securities traders. The term "professional" covers not only traditional areas such as shares and bonds, but also cryptocurrencies, real estate and even art. Whether you could be a professional securities trader is assessed on the basis of a number of criteria. If you fulfil the following five "safe haven" criteria, you are not trading professionally:

 

1. Observe a minimum holding period of six months. This is dangerous if you are day trading.

2. Your annual transaction volume should be a maximum of five times your initial holding (for a portfolio of CHF 1,000, the transaction volume from buying and selling should therefore not exceed CHF 5,000).

3. You do not need capital gains to finance your living expenses (rule of thumb: capital gains make up less than 50 per cent of your net income).

4. You invest with your private funds: So preferably no debt financing of your investments.

5 Derivative financial instruments (such as options) are only used for hedging purposes.

 

If you do not fulfil all the safe haven criteria, this does not automatically lead to your capital gains being taxed. Instead, it must be assessed on a case-by-case basis whether you are trading in securities on a professional basis. The tax authorities are rather cautious in their assessment. For professional securities traders, there is one ray of hope for tax purposes: Price losses can be deducted.

 

How is investment income (dividends, etc.) taxed in Switzerland?

 

Investment income such as interest (e.g. from bank account balances) or dividends are taxed in Switzerland like any other income. Investment income is generally subject to income tax. Let's take a closer look at taxation using the example of dividends.

 

Withholding tax

 

Switzerland levies a 35% withholding tax on dividends. If you are resident in Switzerland, this is a security tax designed to ensure that you declare your assets such as shares, bonds or account balances correctly in your tax return. This means that initially only 65 per cent of the income is paid out to you, while the remaining 35 per cent goes directly to the tax authorities. As soon as you have properly declared the assets in your tax return, you can reclaim the 35 per cent withholding tax.

 

The withholding tax on interest income from bank accounts is only deducted from CHF 200 in interest income, as it is not worth the effort below this amount.

 

 

Example for the taxation of dividends

 

Let's assume that you hold Swiss shares in your portfolio and a dividend of CHF 100 has been declared. You must declare this CHF 100 as income in your tax return. However, you were initially only paid CHF 65, as 35% (CHF 35) was paid directly to the Federal Tax Administration. However, as you correctly declared the full CHF 100 in your tax return, you will receive the remaining CHF 35 back with your final tax bill.

 

Tax-free dividends

 

Dividends are normally financed from profits. However, companies can also pay out dividends - if available - from capital contribution reserves (KER). In this case, the portion of the dividend distributed from the capital contribution reserves is exempt from income tax (a maximum of 50% of the total dividends may be tax-free).

 

Good to know

 

We have seen that capital gains are generally tax-free, while income such as dividends are subject to income tax. Taxes reduce your net return and must therefore be taken into account in your portfolio planning.

 

If we assume a dividend yield of 3% and your marginal tax rate is 30%, this leaves you with a net yield of 2.1%. Capital gains, on the other hand, are tax-free. This means that if you invest primarily in dividend shares, for example, you will be at a tax disadvantage compared to growth shares. This reduced return of 0.9% due to the income tax paid makes a big difference over time due to the so-called compound interest effect. Simulate the effect with the compound interest calculator to illustrate this. Splints are therefore attractive from a tax perspective, as the potential return accrues as a tax-free capital gain.

 

Wealth tax

 

Unlike many other countries, Switzerland has a wealth tax for private individuals. In contrast to income tax, wealth tax is only levied by the cantons and municipalities, but not by the federal government. Wealth includes gold bars, real estate, shares, cryptocurrencies and Splints.

 

But how are assets valued? As a rule, assets are valued at their market value, i.e. the value that could be realised if they were sold on the market. For exchange-traded assets such as shares, the valuation is simple. In the case of paintings, jewellery or other works of art, the market value must be estimated. This is done on the basis of expert opinions, insurance values, purchase prices or auction proceeds.

 

Tips for your tax return

 

So let's briefly summarise again: Realised capital gains - i.e. capital gains - are generally not subject to income tax. However, you pay income tax on dividends and other capital gains. A wealth tax is also payable.

 

Enter securities correctly in the tax return: The valuation is based on 31 December. Some custody account providers do all the work for you and provide you with an electronic tax statement. You can upload this directly into the tax software and all values are automatically recorded. Otherwise, you can enter your shares using the security or ISIN number. Many shares are automatically recognised by your tax software and added directly. If a fund or share cannot be added automatically, you may be able to find the values in the price list of the Federal Tax Administration. If you can't find it there either, you can use the bank's valuation as at 31 December or enter it without a value, leaving it to the tax authorities to determine the value. A share sold at a profit during the year must also be declared correctly. To do this, you must enter the purchase and sale dates. However, the profit is tax-free as shown.

 

List income in full: Remember to list all income from shares and other securities or bank accounts. The following also applies here: Income from shares sold before 31 December must also be declared. The 35% withholding tax will be refunded if the correct declaration is made.

 

Income from foreign sources, such as dividends, is generally subject to withholding tax - i.e. it is taxed in the country of origin in the same way as Swiss withholding tax. To avoid double taxation, you can apply for a credit of the foreign withholding tax against your Swiss tax. However, part of the withholding tax remains abroad and would have to be reclaimed from you in your country of origin. However, this involves a small amount of paperwork and is therefore not usually worthwhile for non-professional investors.

 

How will my Splints be taxed?

 

Splints are regarded as tangible assets that make you a co-owner of an investment. You must declare your Splints in your tax return in the same way as other assets. Splint Invest will take care of the valuation as at 31 December with the help of the annual tax report.

 

As Splints do not generate any income during the holding period, you do not have to pay tax on them - unlike dividends on shares.

 

If your Splint is sold at a profit, you must declare the sale in your tax return, including the date of sale. As a private investor, however, you benefit from Swiss tax legislation, according to which private capital gains are tax-free. Only in the event that you are categorised as a professional by the tax authorities due to failure to comply with the Save Haven criteria are the profits taxable.

 

As a rule, your Splints are therefore only subject to wealth tax.

 

Good to know - the Bansky in your living room

 

You may know that household effects and personal belongings are exempt from wealth tax. You may now be wondering whether you should bring your alternative investments such as a Bansky or a Rolex into your home for tax reasons in order to save yourself property tax.

 

For tax purposes, household effects are everything that serves the purpose of your home and is actually located in your home as normal furnishings - whether in the living room, garage or garden. This includes carpets or pictures, but not a motorbike, for example.

 

Personal effects are items that you use in your everyday life and not primarily as an investment. Examples are clothing, watches or jewellery.

 

There is no general answer to the question of which assets are categorised as tax-free. Rather, it depends on the so-called "customary measure" and therefore on your specific income and financial circumstances. If you live in privileged financial circumstances, an expensive work of art may still be classed as household effects for you, while the same work of art may be classed as a taxable asset for less well-off people. The intended purpose and your actual use of the item are also taken into account.

 

The Zurich Administrative Court has ruled that a painting worth CHF 150,000 can no longer be regarded as an item of furniture. In another Zurich case, a private art collection was assessed. In this case, the court recognised household effects amounting to CHF 300,000 (3% of CHF 10 million) with taxable assets of CHF 10 million. The remainder - an art collection of CHF 2 million - was treated as a capital investment and taxed accordingly.

 

If you trade in alternative investments such as furniture, jewellery or art, there is also a risk that this could be a commercial activity. The capital gains would then be taxable and would also trigger the AHV obligation.

 

If you store alternative investments at home, it must be checked on a case-by-case basis whether a declaration is necessary in the tax return. If a declaration is necessary, the next question is the valuation. As you can see, Splint Invest not only simplifies the purchase of alternative investments, but also the proper declaration in the tax return thanks to the free tax statement.