Severine Vogel11.09.2018

Lump-sum Taxation: New Federal Circular Letter No. 44

On 24 July 2018 the Swiss Federal Tax Administration published a new circular letter No. 44 ("Circular Letter 44") regarding the lump-sum taxation. Circular Letter 44 replaces circular letter No. 9 ("Circular Letter 9") which dates back to the year 1993. However, due to the transition period Circular Letter 9 remains applicable for tax payers that had already been subject to the lump-sum taxation regime at the time the new law came into force (1 January 2016). Such tax payers remain subject to the old legal framework until the five-year transition period ends on 31 December 2020. As of 1 January 2021 all lump-sum tax payers are subject to the new rules.

The new legal framework introduces stricter requirements for the application of the lump-sum tax regime. Circular Letter 44 summarises the new rules and practice with regard to federal taxes.

Concept of lump-sum taxation

The lump-sum taxation is a special way of assessing income and net wealth. Instead of taking the worldwide income and net wealth as the basis for the taxation which is the case for ordinary tax payers, the lump-sum taxation is based on the tax payer’s worldwide living expenses as a surrogate tax basis.

Under the lump-sum tax regime deductions from the tax basis are only granted for real estate maintenance costs and bank custody fees. All other deductions are not available. The so determined tax basis is subject to ordinary tax rates.

General requirements

Under the new law, the general requirements for the application of the Swiss lump-sum taxation remain the same. Non-Swiss citizens who are taking up residence in Switzerland for the first time or after an absence of at least ten years and who do not perform any commercial activity (employed or self-employed) in Switzerland may benefit from the lump-sum taxation regime.

Based on the new stricter rules, however, a married couple may only apply for lump-sum taxation if both spouses fulfil the requirements. The lump-sum taxation is no longer available if one of the spouses is a Swiss citizen. Furthermore, Swiss citizens may no longer apply for lump-sum taxation in the year they return to Switzerland after an absence of at least ten years.

Determination of income tax basis

The income tax basis needs to correspond to the annual worldwide living expenses. The worldwide living expenses include the following costs: costs for food and clothing, accommodation costs, taxes and social security contributions, personnel costs, alimony costs, educational costs, travel and holiday expenses, leisure time costs, costs for keeping of animals, vehicle’s costs (car, motor boat, yacht, plane, etc.). Furthermore, costs paid for a spouse and children have to be included as well in the worldwide living expenses.

Under the new regime, the annual living expenses as a surrogate tax basis must equal at least to the highest of the following amounts:

  • CHF 400’000 as minimum assessment basis for federal tax. The cantons must also define a minimum threshold for cantonal and communal taxes but may set the amount in their own discretion;
  • For tax payers with their own household: the equivalent of seven times the rental value of the tax payer’s home or the annual rent paid;
  • For all other tax payers: the equivalent of three times the amount paid for lodging and food;
  • Amount of the so-called control calculation with regard to Swiss-source income as well as foreign source income for which the benefits of a double taxation treaty are claimed (regarding certain jurisdictions all income from the respective country for which benefits of the double taxation treaty are claimed have to be taken into account).

If a tax payer has more than one real estate at his disposal in Switzerland, Circular Letter 44 clarifies that the highest annual rental value, or annual rent paid respectively, has to be taken into account even if this is not the main residence of the tax payer. With regard to assessing the worldwide living expenses all real estate is taken into account.

If the annual worldwide living expenses are higher than the amounts determined as described above, the annual living expenses are the relevant tax basis for income tax.

Circular Letter 44 points out that if a tax payer provides false information to the competent tax authority – for example with regard to assessing the annual worldwide living expenses – a supplementary tax proceeding due to tax evasion will be opened. This has always been the case, however Circular Letter 44 now explicitly draws attention to it.

Changing between lump-sum and ordinary taxation

Contrary to Circular Letter 9, which states that a lump-sum tax payer may choose with regard to every tax year whether lump-sum or ordinary taxation is applied, Circular Letter 44 provides that if a tax payer chooses to be subject to ordinary taxation, such tax payer generally may no longer have the right to apply for lump-sum taxation. This has already been the practice in some cantons despite Circular Letter 9.

Implications

Circular Letter 44 outlines the legislation and practice regarding federal income taxes and addresses various aspects that were not dealt with in a uniform manner by all cantons in the past. It remains to be seen whether the cantons that still provide for lump-sum taxation (all except Appenzell Ausserrhoden, Basel Landschaft, Basel Stadt, Schaffhausen and Zurich) will also update their lump-sum taxation regulations.

Tax payers subject to lump-sum taxation should review their existing tax arrangements with the tax authorities and keep an eye on the cantonal implementation of the new legal framework.

Addendum wealth tax
Wealth tax is not levied on federal level; hence Circular Letter 44 does not address wealth tax. However, under the new legislation the cantons are obliged to determine a wealth tax basis and tax such basis at ordinary tax rates. Most cantons have already taxed a wealth tax basis in the past. In several cantons the wealth tax basis is determined by multiplying the income tax basis by 20 provided that the control calculation with regard to Swiss situs assets does not generate a higher tax basis.