This guide sets out the work and residence permit rules applicable to EU/EFTA nationals and third country nationals, the tax consequences for foreigners living and working in Switzerland, together with the Swiss import and customs regulations, and details the Swiss social security regime.
1. Work and residence permits
Generally, prior authorisation will be required for foreigners wishing to live in Switzerland for more than three months of the year or wanting to work in the country for more than 8 days in a year.
On 1 June 2002, seven bilateral agreements which were concluded between Switzerland and the EU, and separately between Switzerland and each of its EFTA partners, entered into force. One of these bilateral agreements (the “Agreement”) relates to the free movement of individuals. This Agreement has subsequently been extended, with effect from 1 April 2006, to the ten countries which joined the EU in 2004 and will be further extended, before the end of this year, to include Bulgaria and Romania.
As a consequence, the permit rules in respect of EU and EFTA nationals have been substantially amended and relaxed, although, until 2011, in principle, different rules apply to the fifteen “old” EU/EFTA nationals and the ten “new” EU nationals. Malta and Cyprus are subject to the rules for the fifteen “old” EU member states.
In any event, job seekers from the EU/EFTA states may stay in Switzerland for a period of three months without a permit, which may be extended up to a maximum of twelve months.
For third country nationals, stringent rules still apply.
The fifteen “old” EU/EFTA member states, including Malta and Cyprus
From 1 June 2007, the quota system for nationals of these countries was abolished and the free movement of individuals was introduced for a trial period. A safety clause currently protects Switzerland against excessive immigration from the other old states in the EU.
From 1 June 2014, full freedom of movement of individuals will be introduced but the protective clause will remain in place in the event of serious economic or social problems arising.
A work and residence permit can be obtained if an individual can prove that he has adequate financial resources to live in Switzerland, such proof being, for example, an employment contract, and that he has a health insurance policy covering all risks in Switzerland.
The ten “new” EU/EFTA member states, excluding Malta and Cyprus
A gradual relaxation of the rules applies to the ten new members.
Until 2011, priority is still given to domestic workers and controls are in place on wages and working conditions. However, a certain quota is reserved for nationals of the new states, who can evidence, as noted above for the old member states, that they have adequate financial resources to live in Switzerland together with a suitable health insurance policy.
This quota is set to gradually increase from 2006 through to 2011. The long-term permit (more than one year) quota will increase from 1,700 employed individuals to 3,000. The short-term permit (less than one year) quota will go from 15,800 up to 29,000.
“Family reunification” rules
Under the Agreement, more extensive rights of family reunification were introduced. Family reunification allows spouses, children under the age of 21 and immediate relatives of permit holders to move to Switzerland. Permits granted under these rules are not subject to quota restrictions.
Third country nationals
As noted above, strict rules apply in respect of non-EU/EFTA nationals. Whether a third country national is able to obtain a work permit will depend upon a number of issues, including (but not limited to) the permit quota in operation in the relevant canton at the time of the application, the position of the proposed employer within the canton and the level of seniority of the employee within the employing company. The relevant factors to be considered will only be established when the application is made.
A certain quota of jobs is also reserved within Switzerland for third country nationals. For long term work permits, this is limited to 4,000, and for short term permits, the quota is restricted to 5,000.
The General Agreement on Trade in Services (GATS Agreement) facilitates the inter-company transfers of executives, specialists and other essential personnel and provides some relief from the strict immigration rules. Any such transfers, however, are still subject to the applicable quotas.
“Family reunification” rules
The rules for third country nationals are not as generous. Permit holders’ spouses and children under the age of 18 may move to Switzerland and, again, permits granted under these rules are not subject to quotas.
2. Tax and customs duties
2.1 Income and net wealth tax
Income tax is levied in Switzerland at federal, cantonal and communal level and also often by church districts etc. Net wealth tax is only levied at cantonal and communal level.
The tax systems vary substantially from one canton to another and the effective tax burden can be significantly different, not only between different cantons, but also between different municipalities within the same canton. It is not possible to indicate the level of tax burden without confirming the canton and municipality in which a tax payer lives, the type of residence permit the individual has, marital status, number of children, if any, income earned abroad and details of any net wealth which is located abroad.
Historically, ‘cheap’ cantons for income and net wealth tax purposes are those located in central Switzerland, such as Zug. The maximum income tax rate is around 24 per cent and the maximum net wealth tax rate is around 0.4 per cent. ‘Expensive’ cantons are Geneva, Vaud and Zurich, where the income tax rates vary from 40 to 45 per cent and the net wealth tax from 0.7 to 1 per cent.
On a federal level there is a tax relief for individual shareholders who own a 10 per cent participation in a company. Only 60 per cent of the dividends are subject to tax if it regards private ownership. For commercial ownership, 50 per cent of the dividends are subject to tax. Most of the cantons have introduced similar reliefs for individual shareholders. However, the conditions vary from canton to canton. For instance, most cantons limit the relief to dividends received from Swiss companies. This is not the case at the federal level or in e.g. canton Vaud and Valais.
2.2 Tax shield for wealthy individuals
Several cantons, for example, Vaud and Valais, have a special legal provision to limit the level of taxation on wealthy individuals. In Vaud, the cantonal and communal income and net wealth tax cannot exceed 60 per cent of an individual’s income. For the purposes of this calculation, the canton considers that the theoretical revenue on net wealth is a minimum of 1 per cent, although this percentage is fixed annually in the “loi annuelle d’impot” (the “annual law on taxes”).
- Net wealth: CHF 50 million (theoretical revenue 1 per cent = CHF 500,000)
- Income: CHF 500,000
Based on the ordinary tax rates in the canton of Vaud, approximately CHF 530,000 income and net wealth tax would be due on a cantonal and communal level. Using the tax shield, this would be reduced to CHF 300,000. In addition to this, federal income tax is due, in the sum of approximately CHF 52,000.
2.3. Special tax regime for foreigners
Under certain conditions a foreign national can elect for a special tax regime, i.e. taxation on the basis of lump sum (calculated on the basis of the standard of living costs) amounts of income and net wealth, also called “Pauschalbesteuerung“, “Imposition forfaitaire” or “Impôt d’après la dépense“. Both the federal tax laws, and the cantonal tax laws, provide for “Pauschalbesteuerung” for (i) foreigners who come to live in Switzerland for the first time (or after an absence of ten years) and (ii) who will not be gainfully active in Switzerland (and were not working in Switzerland during the last ten years). It is in principle possible to work outside Switzerland.
In a referendum held on February 8, 2009, the people of canton Zurich voted for the abolition of the lump sum tax system on a cantonal and communal level. It is expected that the abolition of the lump sum taxation will take effect as of January 1, 2010. For the time being, the outcome of the Zurich vote has no consequences for lump sum taxpayers in other cantons. However, after the vote in canton Zurich, discussions regarding the lump sum system in general may be initiated in other cantons as well. At federal level, an initiative is pending to abolish the lump sum taxation system also in the Federal Law on Harmonization of Cantonal Taxes. The outcome of this initiative is yet unclear.
2.3.2. Calculation of standard of living
The lump sum taxation system implies that income tax and net wealth tax are not levied on the basis of the taxpayer’s real income and net wealth, but on amounts of income and net wealth, which are related to the level of expenses and the lifestyle of the taxpayer (e.g. housing, employees, cars, boats). In most cantons the lump sum income must amount to at least five times the annual rent paid by the lump sum taxpayer or five times the annual rental value of his home.
During recent negotiations with different cantonal authorities large differences have come to light in the indicative amounts of minimum taxable lump sum income and net wealth. In most cantons the required income varies between CHF 200,000 and CHF 450,000. The cantons that levy net wealth tax from lump sum taxpayers often require a taxable net wealth of minimum CHF 2 million to CHF 6 million. In most cases, the total annual Swiss tax burden for a lump sum tax payer will vary between CHF 60,000 and CHF 200,000 depending on the canton and depending on the facts and circumstances of the case (i.e. mainly the rent paid / rental value of the house).
It has to be noted, that if there is a significant change in the level of expenses of the taxpayer, the lump sum amount might be reviewed by the tax authorities. If in any year the amount of Swiss source income and treaty protected income exceeds the amount of the lump sum, income tax will be due on the higher amount.
2.4 Double tax treaties
Switzerland has double tax treaties covering income and net wealth tax with at least 65 countries, including the UK, the US, the Netherlands, Belgium, Luxembourg, France and Germany.
2.5 Swiss import VAT and customs duties
2.5.1 Duty free importation of household goods, subject to certain conditions
Foreign individuals wishing to move to Switzerland permanently and give up their residence abroad may import household and personal goods without paying Swiss import VAT or customs duties. However, in order for these to be imported free of VAT or customs duties, the goods must have been used abroad by the foreign individual for personal or professional purposes for at least six months before importation and the goods must continue to be used in Switzerland.
On goods which have been used for less than six months before the move, Swiss import VAT will be due at a rate of 7.6 per cent and, in some cases, customs duties may also be payable.
2.5.2 Duty free importation of cars and other motor vehicles
Motor vehicles being imported by a foreign individual seeking to move to Switzerland will be exempt from Swiss import VAT and customs duties provided the vehicle has been used by the individual for his personal or professional purposes for at least six months before and will be used for these purposes for at least one year after the date of importation in Switzerland.
If the above conditions are not satisfied, Swiss import VAT will be due at a rate of 7.6 per cent, calculated by reference to the value of the vehicle. In addition, for a car, a federal car tax will be payable at a rate of 4 per cent of the value of the car.
Import duty may also be due but cars and motor bikes manufactured in the EU and EFTA countries will, in principle, be exempt from import duty if proof of origin is shown.
3. Social security and compulsory health insurance
3.1 EU/EFTA nationals
The Agreement provides for co-ordination of the social security systems of the various countries. The idea of the Agreement is that an individual will be subject to the social security system of only one country, even if the individual has connections with several countries.
The general rule for employed individuals is that a person who is employed in only one country must contribute to the social security system of that country, even if that person is resident in another country or the head office of the employing company or group is elsewhere. An exception to this general rule may apply if an individual is sent on a short assignment to Switzerland from a company which is headquartered in an EU country.
The rules set out above also apply in respect of Swiss compulsory health insurance. An individual living and/or working in Switzerland must therefore, in principle, acquire the necessary health insurance.
3.2 Third country nationals
Generally, third country nationals are subject to the Swiss social security system and must obtain compulsory health insurance if they live and/or work in Switzerland. Certain exemptions may apply under the relevant social security treaties.
EU – Austria, Belgium, Germany, Denmark, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the UK; EFTA – Iceland, Liechtenstein and Norway.
Countries acceding to the EU in 2004:
Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia
Under a lump sum taxation system no net wealth tax is levied in the French speaking cantons.
This article was produced by, and re-produced with kind permission of, our correspondent firm Loyens & Loeff N.V. www.loyensloeff.com
Content is for general information purposes only. The information provided is not intended to be comprehensive and it does not constitute or contain legal or other advice. If you require assistance in relation to any issue, please seek specific advice relevant to your particular circumstances.