The Swiss tax system

Status as at January 2020

Brief summary

In Switzerland, original taxing power lies with the cantons. The Confederation has only a limited right to levy taxes. As a result of the tax autonomy, there is tax competition between the cantons. This competition promotes efficiency in the provision of state services and high-quality infrastructure.

The features of the Swiss tax system

The cantons' autonomy in respect of fiscal policy is firmly anchored in Switzerland. The Confederation may levy taxes only where this is permitted under the Constitution. Its tax powers are thus limited. Even today, the Confederation's power to levy direct federal tax and value added tax is granted only for a limited period of time. This authority must be renewed each time by the people and the cantons. The existing financial regime is valid until the end of 2020. The new 2021 financial regime will see the Confederation's right to levy direct federal tax and value added tax extended to the end of 2035. In the referendum of 4 March 2018, the proposal was clearly accepted with 84% of votes in favour.

Cantonal tax autonomy leads to intense tax competition between the cantons. However, there has been no ruinous "race to the bottom" with tax rates as occasionally feared. The Confederation and cantons provide a high-quality infrastructure on which the people decide, as they do on the taxes needed to fund it. Moreover, national fiscal equalization curbs tax competition and prevents disincentives.

Tax and competition between locations

Just like any other country, Switzerland also strives to be an attractive business location with advantageous conditions. Given the small size of the domestic market, the lack of natural resources and the geographical and topographic conditions, Switzerland is forced to seek its niche elsewhere, such as in an attractive tax policy.

Corporate taxation is an important factor in this regard. In order to increase Switzerland's appeal as a tax location and to be in line with international standards, adjustments to corporate taxation have to be made. Hence, the electorate clearly accepted the Federal Act on Tax Reform and AHV Financing (TRAF) on 19 May 2019, with 66.4% of votes in favour. It entered into force on 1 January 2020. The starting point for the proposal is the replacement of existing tax regimes that are no longer in keeping with international standards.

Corporate taxation is by no means the only reason to explain Switzerland's appeal. Modern infrastructure, a flexible, multilingual and highly qualified workforce, strong research and development capacities, flexible labour law, moderate taxation of individuals and double taxation agreements with the country's most important economic partners are also key reasons for Switzerland's appeal as a business location.