The tax system in Switzerland

There are three levels of taxation in Switzerland: the Confederation, the cantons as well as the communes are empowered to levy taxes. The cantons are free to decide which taxes they choose to levy unless the Federal Constitution specifically bars them from collecting a given tax or reserves the exclusive right to do so to the Confederation. This explains why there are differences between tax laws at the federal and cantonal level and also between the individual cantons as well.

The highest tax portion is levied by the cantons and the communities, which leads to intense competition on both of these layers. In every canton, its population decides on the tax laws via direct democracy. However, all taxes are collected by a single authority.

Companies get taxed in the place where revenue is generated, i.e. at the company domicile or at the place of economic activities.

Low company taxes.

Compared to other European countries the taxes in Switzerland are very low. The federal tax is a universal rate—the cantonal tax rates vary in each canton and are sometimes measured by the amount of capital or profit. The current tax rates are in the following range:

- Direct federal taxes on profit: 8.5%

- Cantonal profit tax: 5.9–16%

- Cantonal capital tax: 0.05–0.3%

- Total taxation: 14.5 − 25%.

Taxation on profit after taxes (effective taxes).

The regular tax rate with the direct federal tax amounts to 8.5%. Because the taxes on profit are calculated after tax, the effective tax rate results in 7.83%.

Significantly lower tax rates of under 10% can be achieved through tax optimization. Companies can receive a binding tax ruling on the effective taxation. Tax exemption is granted individually, depending on location and type of business activity.

Low taxes for private persons.

Private persons pay taxes at their place of residence. Federal taxes vary based on the amount of income and the amount of assets. The taxation is progressive, whereby the highest rate only applies to very high incomes. Special regulations apply for self-employed people. Married people file a single return, income is combined. The second column still carries the term "taxable wife".

 

Federal income tax (maximum rate) 11.5%

Cantonal and communal income taxes (examples):

Taxable income of CHF 50,000 5-13%;

Taxable income of CHF 500,000 11-27%.

Cantonal and communal asset taxes (examples):

Assets of CHF 100,000 0-2.250 tenth of a percent.

Maximal taxation: 8.9 tenth of a percent.

Church tax (depending on denomination): 0 − 2.3%

Tax returns.

Tax returns are collected and processed by the tax office in the local communities. This means that there are some 4,600 tax departments who are overseen by 26 canton tax departments (not counting half cantons, etc). Unlike many other countries - all tax returns are hand checked by tax department staff to ensure that they are correct. The concept of taking a return at face value and doing spot checks (with the possibility of fines / jail) to encourage tax payers to be honest doesn't really apply. Foreigners who submit tax returns may have to wait 2-3 years before their returns are fully processed and they get their refunds.

Individual case treatment of expats.

For so-called expatriates, i.e. taxable foreigners who are temporarily working in Switzerland, there are special tax reduction possibilities with the direct federal taxes. Furthermore, most cantons have a favourable tax treatment for expatriates.

Expats get treated as individual cases. They are either evaluated by standard procedure, or taxes are deducted at source, which the employer deducts directly from the salary. The tax rates take into account certain tax-free amounts for business expenses, insurance fees, and family upkeep. Costs for moving or international schools are additionally eligible for tax reductions.

Avoiding double taxation.

The avoidance of double taxation is regulated by international treaties. Switzerland has signed such treaties with over 60 states, including almost all western industrial countries.

Lowest VAT in Europe.

Switzerland has the lowest VAT in Europe by far. The normal rate amounts to 8%. Accommodation services are taxed with 3.8%, daily goods are taxed with only 2.5%. Other goods and services such as medical treatment or education are fully excluded from VAT taxation.

No inheritance tax for direct descendants.

On the federal level, no inheritance tax applies. In the most cantons direct descendants are excluded from inheritance tax. The rates for inheritance and gift taxes for third parties are between 10 and 50%.

Further federal taxes:

· Capital revenue and lottery winnings: 35%

· Life annuities and pensions: 15%

· Other insurance services: 8%

Further cantonal and communal taxes:

· Real estate profit taxes: 3-64%

· Real estate transfer tax (partly abolished): 0.8 − 3.3%

Work in small groups. Make a list of the main peculiarities in the tax systems of Switzerland and Japan based on the previous texts. Use additional information from the web sites.

Read the text. Give English equivalents to the Russian word combinations in brackets.

Switzerland is a Confederation divided into cantons (states) and communes, all of which work alongside banks, lawyers, companies and consultants (для развития и поддержания финансовых и административных процедурных дел). The cantonal authorities are audited by federal administration. Switzerland (облагает налогами) on residents, companies, goods, real estate and savings.

 

Due to the federal structure of Switzerland (в ней нет централизованной налоговой системы), with some taxes being levied exclusively by federal authorities whereas others are levied by the cantons, the communes and the federal authorities concurrently. Even among the cantons(существуют значительные различия как между начисляемыми налогами, так и ставками налогообложения) though there is current legislation that aims to (снижать эти различия). Residence is the relevant criteria in determining (подлежит или нет физическое лицо личному подоходному налогообложению Швейцарии). A person (считается резидентом Швейцарии) if:

· He has Swiss employment (чтобы работать в Швейцарии иностранец должен получит разрешение на работу)- limited work permits of 90-120 days can be granted and where granted lead to limited taxation;

· (У него есть свой бизнес в Швейцарии); or

· He lives in Switzerland for not less 180 days in any one year. If however he remains in the same abode the time required to be a resident for tax purposes drops to 90 days.

 

With the exception of the 'fiscal deal' method mentioned below, Switzerland does not discriminate between Swiss residents and the foreign employees of "offshore" operations for purposes of personal income tax. In any event (швейцарские власти рассматривают различные виды компаний с налоговыми льготами как законные структуры с планируемым налогообложением) which are available to national and non-national alike and not as 'offshore' operations in the traditional sense of the word. Wealthy foreign nationals who wish to make Switzerland their home but do not wish to work in the country may qualify to pay personal income tax under the 'fiscal deal' or 'lump sum assessment' basis (что позволяет им платить значительно меньше налог, чем гражданину Швейцарии с эквивалентным доходом). This is the only discriminatory personal income tax levy that exists in Switzerland.

 

Single out the peculiarities of non residents taxation (both companies and individuals) in different countries.

Write a letter to you friend explaining to him the advantages and disadvantages of the tax systems in Switzerland and one of the leading European country (say Germany). Use additional information from the Internet.

TAXATION SYSTEM IN CYPRUS.

Cyprus is no longer an offshore jurisdiction in the strict sense of the word, but its tax regime, coupled with its location at the cross roads of Eastern Europe, the Middle East, North Africa and Asia, an extensive network of double-tax treaties, its membership of the European Union and its relatively sophisticated European business environment and stable economy mean that the island is an ideal place to locate holding, trading and intermediary companies.

 

Cyprus's taxation regime doesn't stand out particularly among its offshore competitors, but changes to tax legislation approved in 2002 gave Cyprus the lowest rate of corporate tax in the EU at 10%. Cyprus has also adopted the EU’s ‘Code of Conduct’ on ‘harmful tax practices’ and is placed on the Organization for Economic Cooperation and Development’s (OECD) ‘white list’ of tax compliant jurisdictions and therefore has a reputational advantage over some of its offshore competitors. Cyprus was also rated as the most attractive tax regime in Europe (with the net attractiveness score of 90%) by a 2009 KPMG poll, ahead of Ireland, Switzerland and Malta.

 

The Income Tax Act No. 118(I) of 2002 applied the 10% corporate tax rate to both ‘offshore’ and ‘onshore’ companies, although after a short transition period, this distinction has now been removed; as from January 1, 2003, an offshore company (IBC) no longer has a separate taxation status, and is taxed according to the same principles as a regular company. Thus, IBCs are now allowed to trade inside Cyprus. A pre-existing IBC which made an irrevocable commitment not to trade inside Cyprus until 2006 was able to claim the existing low tax rate for the three years 2003, 2004 and 2005.

 

Cypriot companies also pay a 2% levy on wage bills (meant to subsidize pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, profits from activities of a permanent establishment situated outside Cyprus are completely exempt. This exemption will not apply to a Cyprus company if: (i) its foreign permanent establishment directly or indirectly engages in more than fifty per cent (50%) of its activities in producing investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus (unlikely unless the foreign PE is located in no- or low-tax jurisdiction). In Cyprus, the term "Permanent Establishment" has the same meaning as defined in the OECD Model Tax Convention on Income and on Capital with the exemption of "a building site or construction or installation project", which constitutes a permanent establishment only if it lasts more than three months.

 

A substantial number of companies involved in the trading or distribution of FMCG and other physical goods use Cyprus as a trading base for the Mediterranean, Middle East and North African region. Non-resident enterprises (i.e. those neither 'managed and controlled' nor with a local permanent establishment) are allowed to store, maintain, break bulk or re-package their own transit goods in bonded warehouses, providing the handling doesn't result in any change of customs' tariff classification. They are also permitted to conduct sales activities on the island, as long as no local deliveries result, and no permanent establishment is created.

 

Cyprus is not a particularly convenient base for supplying the CIS and Eastern Europe in physical terms, but that does not prevent companies with interests in those regions from establishing holding companies in Cyprus, and very many do so. Not only are the Cyprus treaty withholding tax rates normally lower than those in other countries' treaties, but there will be no local taxation as long as no permanent establishment is created, and even if it is, Cyprus's own 10% tax rate on company profits is itself low. The combination is quite hard to beat.

 

A frequent feature of international trade and investment, particularly as between advanced and less advanced countries, is the transfer of technology or 'brand' or intellectual property in return for license, franchise or royalty payments. Due to its network of double-tax treaties (unusually for a ‘low tax jurisdiction, Cyprus has more than 40 double-tax agreements) and favourable taxation regime, Cyprus is a suitable place in which to locate an intermediary company to handle payments streams which might otherwise be highly-taxed in the receiving country.

 

Such payments would normally be deductible expenses in the originating country, and under the tax treaties will be subject to low or zero withholding tax (Central and Eastern Europe, China, India, South Africa and a number of Middle Eastern countries). At worst, the income received in Cyprus will be taxed after deduction of expenses at 10%.

There are a number of company forms available in Cyprus, but the most commonly used for a Cypriot holding company is the private limited liability company. When 100% foreign-owned, a private company used to be referred to as an 'offshore company', although the expression International Business Company subsequently came into favour to describe such entities.

 

Cypriot companies are formed under the Cyprus Companies Law, Cap. 113, which is virtually a copy of the English 1948 Companies Act. In order to form a foreign-owned company in Cyprus, a bank reference and copy of the owner's passport is required for the registration. The bank reference must be issued by a bank included on the Central Bank of Cyprus's list of qualifying banks. A holding company using the private limited company form will need at least one shareholder and the minimum share capital is EUR1,000, with share capital of between EUR5,000 and EUR10,000 the norm. A Cypriot private company must have at least one director which can be a natural person or a body corporate of any nationality.

 

Under amendments to the CyprusCompany Law in 2003, every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards, and every parent company that has one or more subsidiaries, other than a company which is itself a wholly owned subsidiary, should present consolidated financial statements. Under article 120, every company must complete an annual return within a period of 42 days from the date of its Annual General Meeting and must file immediately with the Registrar of Companies a copy of the annual return, signed by a director and the company secretary. Under article 121, the annual return filed with the Registrar of Companies must be accompanied by the full set of financial statements.

 

So, as described above, due to the island's combination of tax treaties and low-tax regime, and its membership of the EU, many international investors choose Cyprus as a location for financial holding and investment companies as conduits for investment to and from Eastern Europe, the Near and Far East, and Africa.