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How investments are taxed in Switzerland: Expert interview with Aljoscha Moser
Aljoscha Moser is the founder of Become Wealthy. He is a jurist and advises companies and private individuals on tax, law and finance. Aljoscha Moser also lectures on taxes at the Institute for Financial Planning (IfFP) on the IAF Certified Financial Advisor course.
Mr Moser, how are investments taxed in Switzerland?
Thanks to innovative providers such as Alpian, access to the investment markets has been getting easier and easier for years. However, many people still find completing their tax return complicated. In Switzerland, investments are essentially taxed via income tax and wealth tax. To answer the question in concrete terms, we need to look at the taxation of capital gains, investment income such as dividends and wealth tax separately.
You say that a distinction must be made between capital gains and investment income - especially dividends - for tax purposes. How does this distinction work in Switzerland?
Correct. In Switzerland, a distinction must be made between taxable capital gains and tax-free private capital gains. As taxes always reduce the return, the distinction is not unimportant for portfolio planning.
Taxable investment income includes dividends from shares and interest income on bank accounts or bonds. Investment income is, in a sense, the "fruit" that your investment yields.
Capital gains, on the other hand, arise from the sale of investments. The difference between the purchase price and the sale price of securities is the capital gain.
Aren't capital gains abroad usually subject to capital gains tax? What is different in Switzerland?
That's right, many countries have a capital gains tax. The good news is that private investors in Switzerland do not have to pay capital gains tax. A capital gain arises when you sell a security such as a share at a higher price than you originally paid for it. Consequently, however, capital losses cannot be deducted from taxable income.
Can you give us an example of a tax-free capital gain?
Many years ago, you bought a share for 200 francs as part of a buy-and-hold strategy. Now you want to sell the share at the favourable price of CHF 500. We are therefore talking about a capital gain of CHF 300, which corresponds to a price increase of 250 per cent. This capital gain is a tax-free capital gain. In other words, you do not have to pay tax on the CHF 300 as income.
Are there exceptions or are capital gains always tax-free?
Yes, there are exceptions. If you are categorised by your tax authority as a professional securities trader, the capital gains are taxable. It is important to note that not only investment bankers but also private investors can be regarded as professional securities traders for tax purposes. The term "professional" includes not only traditional areas such as shares and bonds, but also cryptocurrencies, real estate and art. Whether you are categorised as a professional securities trader is assessed on a case-by-case basis using various criteria.
If you fulfil the following five "safe haven" criteria, you can sleep soundly and are not considered a professional trader:
you hold your investments for at least six months. Day trading is therefore problematic.
your annual transaction volume should not exceed five times your initial holding. For a portfolio of CHF 50,000, the transaction volume from buying and selling should therefore not exceed CHF 250,000.
you do not need the capital gains to finance your living expenses. As a rule of thumb, capital gains should make up less than 50 per cent of your net income.
you only invest your own funds and do not use external financing for your investments.
derivative financial instruments such as options are only used for hedging purposes.
In the event that you do not fulfil all the safe haven criteria, I can reassure you for the time being. In this case, you will not simply be taxed automatically, but it will be examined on a case-by-case basis to determine whether commercial securities trading is involved. The Swiss tax authorities are rather cautious in this respect. For professional securities traders, there is at least one ray of hope for tax purposes: Price losses can be deducted.
Now let's talk about taxable investment income. How are dividends & interest taxed in Switzerland?
Investment income - including, for example, interest on bank account balances or dividends - is generally taxed as income in Switzerland. There is also withholding tax to consider.
What is withholding tax all about?
In Switzerland, a withholding tax of 35 per cent is levied on dividends. This tax serves as a security tax to ensure that you declare your assets, such as shares, bonds or bank 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 is paid directly to the tax authorities. As soon as you have properly declared your assets in your tax return, you can reclaim the 35 per cent withholding tax withheld.
Incidentally, withholding tax is only levied on interest income from bank accounts above CHF 200, as the administrative effort involved is simply not worthwhile below this amount.
Are there also tax-free dividends?
Yes, there is. Dividends are normally financed from the profits of a company, in which case the dividends are subject to income tax. However, companies can also pay out dividends from capital contribution reserves. In this case, the proportion of the dividend distributed from the capital contribution reserves is exempt from income tax, whereby a maximum of 50% of the total dividend may be tax-free.
Mr Moser, what impact do the different forms of taxation have on the net return on capital investments?
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 should therefore also be taken into account when planning your portfolio.
Let's assume you realise a dividend income of 4% and your marginal tax rate is 35%. In this case, you are left with a net return of 2.6%. Capital gains, on the other hand, are tax-free. So if you primarily invest in dividend shares, you will be at a tax disadvantage compared to growth shares. This reduced return of 1.4% due to the income tax paid makes a big difference over time due to the so-called compound interest effect. To illustrate this, you can simulate the effect with a compound interest calculator.
What is the situation with foreign dividends?
This topic is very complicated in detail. It is estimated that Swiss investors give away over CHF 14 billion every year because they do not reclaim the taxes deducted on dividends from foreign shares.
Essentially, foreign dividends are usually subject to withholding tax, which is similar to Swiss withholding tax. For example, if you hold US or German dividend shares, your bank will only pay you part of the dividend, while the other part - often around 30 per cent - goes to the foreign tax authority. To avoid double taxation, Switzerland has concluded so-called double taxation agreements - DTAs for short - with many countries. These DTAs allow you to reclaim part of the taxes paid abroad - usually 15 per cent. However, this process involves considerable administrative effort and is hardly worthwhile for non-professional investors. The remaining 15% can be offset in Switzerland.
Now let's talk about wealth tax. What needs to be considered here?
Switzerland is one of the few countries to have 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. Assets include cash, precious metals, real estate, shares and cryptocurrencies. Assets are generally 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 using expert opinions, insurance values and the like.
Finally, do you have any tips for completing your tax return?
Of course. At first, a lot of things sound more complicated than they are in practice. Modern tax software make the correct declaration much easier today.
For the correct recording of securities in the tax return, the reference date is 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, which will automatically record all values. Otherwise, you can enter your shares using the security or ISIN number. Many shares are automatically recognised and added by the tax software. 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, as shown, the profit is tax-free. Remember to record all income from shares, other securities or bank accounts. Income from shares sold before 31 December must also be declared. The 35% withholding tax will be refunded if the correct declaration is made.
Would you like to summarise the most important points in one sentence?
Gladly. Realised capital gains - i.e. capital gains - are generally not subject to income tax. However, you pay income tax on dividends and other investment income. In addition, assets - including shares and other investments - are taxed in Switzerland. The valuation is based on 31 December. You can reclaim the Swiss withholding tax on dividends once you have made the correct declaration.
Thank you very much, Mr Moser, for this detailed and helpful information.
Thank you very much for the invitation, it was a pleasure.
