In Switzerland, taxes are levied by the federal government, the cantons and the communes. Tax sovereignty is regulated by law. But how does this interaction work and what are the national and international challenges?
The Swiss tax system is characterised by a high degree of tax autonomy in the cantons. The Confederation, by contrast, may levy taxes only to the extent permitted by the Federal Constitution. This power must be reconfirmed periodically at the ballot box for the two most important federal taxes. For example, the financial regime approved by the people and the cantons extended the right to levy direct federal tax and value added tax from the beginning of 2021 until the end of 2035.
International developments are continuing to pose a challenge to the Swiss tax system, which is characterised by federalism. The most recent corporate tax reform entered into force on 1 January 2020. In order to implement the OECD/G20 project on minimum taxation, the Federal Council is proposing a supplementary tax.
Swiss tax federalism
Swiss federalism also characterises the country's tax system. All of the 26 cantons have their own tax laws and levy very different taxes on income, assets, inheritance and other tax items. Article 3 of the Federal Constitution outlines the basic features of the Swiss federal state and regulates the relationship between the Confederation and the cantons:
"The Cantons are sovereign except to the extent that their sovereignty is limited by the Federal Constitution. They exercise all rights that are not vested in the Confederation."
Applied to taxes, this results in the following distribution of powers:
- The Confederation is only allowed to levy those taxes whose imposition is expressly allowed for in the Federal Constitution.
- In contrast, the cantons are generally free to choose their taxes, except where the Federal Constitution expressly prohibits the levying of certain taxes by the cantons or reserves the right for the Confederation.
While the Confederation and the cantons have original taxing power, the communes may only levy taxes where the canton authorises them to do so. In contrast to original sovereignty, this is referred to as derived or delegated taxing power. The nearly 2,000 communes are of major importance in Switzerland's federal structure. Most of the cantons and communes levy the same taxes (income and wealth taxes, profit and capital taxes). In many cases, the communes only receive a share of the cantonal tax revenue or levy surcharges on the cantonal tax.
In 2018 (source: Switzerland's financial statistics for 2018), tax revenue was distributed among the three levels of the Swiss state as follows:
- Confederation: CHF 70 billion
- Cantons: CHF 48 billion
- Communes: CHF 30 billion
Tax reform and AHV financing (TRAF)
One of the most important changes in the Swiss tax system was brought about by the last tax reform. In the referendum of 19 May 2019, Swiss voters approved the new corporate tax reform TRAF, with 66.4% voting in favour. The bill entered into force on 1 January 2020. Since then, the same taxation rules have applied to all companies, be they large corporations or small and medium-sized enterprises (SMEs).
Thanks to this tax reform, the appeal and competitiveness of Switzerland as a business location will be safeguarded and jobs and tax receipts secured in the medium to longer term.
Previous tax privileges for companies that operate predominantly internationally (status companies) were abolished because they are no longer accepted internationally.
To ensure that Switzerland remains an attractive business location, the tax reform introduced new special arrangements:
- The patent box will allow a portion of the profits from inventions to be taxed at a reduced rate in the cantons in the future.
- The cantons can incorporate an additional deduction of no more than 50% for expenditure on research and development in their legislation.
- The cantons with an effective profit tax burden of at least 18.03% can introduce a deduction for self-financing.
These special arrangements are accompanied by a relief restriction. This relief provision includes a binding provision for the cantons, whereby at least 30% of companies' profits must always be taxed before the special arrangements are applied.
Moreover, the bill raises the cantons' share of direct federal tax revenue to 21.2% (previously 17%). This gives the cantons fiscal policy leeway to reduce their profit taxes if necessary and thus remain competitive.
New international challenges
Once again, international developments are posing a challenge to the Swiss tax system. The Organisation for Economic Co-operation and Development (OECD) has developed proposals in connection with the digital economy (for details, see the "Taxing the digital economy" factsheet):
- Pillar 1 provides for a shift of taxing rights to market jurisdictions.
- Pillar 2 provides for a minimum tax rate of 15% for companies operating internationally with more than EUR 750 million in annual turnover.
The Federal Council decided to implement the minimum tax rate agreed by the OECD and G20 member states by means of a constitutional amendment. To this end, a supplementary tax will be created, with 25% of the revenue going to the Confederation and the remaining 75% going to the cantons and communes. The minimum tax rate has been in force in Switzerland in the form of a supplementary tax since 1 January 2024 (for details, see the website "Implementation of the OECD minimum tax rate in Switzerland" factsheet ).
Last modification 22.02.2024