Wealth tax and how it can be reduced

As shown in the first part of our article, there are sometimes considerable differences in the tax burden on taxable assets between the cantons and even between the municipalities within a canton, so that a change of residence is an effective way of reducing wealth tax. However, a change of residence is not always possible or desirable - after all, people choose a place of residence primarily for personal reasons such as family, friends or place of work, or because of its attractive location. Taxes usually play a subordinate role. Fortunately, there are ways to reduce wealth taxes even without changing your place of residence. The following explanations are aimed at individuals holding private assets.

Ways to reduce wealth taxes

There are five main ways to reduce wealth taxes:

Residence in a tax-favourable municipality/canton;
Investment in real estate (domestic or foreign);
Investment in units of collective investment schemes with direct real estate ownership;
Retirement savings;
Investment in securities or items with no market value.

As already explained in the first part of this blog post, the choice of a tax-favourable domicile is an effective measure. The four other possibilities are discussed below.

Investment in real estate

Wealth taxes can also be reduced by investing in properties in tax-favourable locations - in Switzerland or abroad. Although the amount (progression) of the applicable wealth tax rate is determined on the basis of the amount of the worldwide wealth, the wealth tax on real estate is due at the location of the property and not at the place of residence. There is a so-called tax segregation of assets, whereby the assets of a taxpayer are divided between the place of residence and the location of the real estate. In addition, the wealth tax values of the properties are often lower than their market value. If the value of the property is not taxed at all at its location or is taxed at a lower rate than at the place of residence, the wealth tax can be reduced as a result. However, it should be borne in mind that foreign tax authorities can also levy taxes or fees on real estate - although only a few countries have a wealth tax. Moreover, certain cantons levy wealth taxes or fees in addition to income and wealth taxes, which must also be taken into account when making investment decisions. Investments in real estate in another canton or abroad can therefore make perfect sense, but should be planned carefully. This also applies to the tax consequences in the event of an exit. The respective risk of an investment must also be taken into account, and care must be taken to ensure that a risk strategy appropriate to the assets is pursued across the entire portfolio.

Investment in units in collective investment schemes with direct real estate ownership

Investing a portion of your assets in investment funds that hold real estate directly, so-called investment funds with direct real estate holdings, is also a good way to reduce your taxable assets. In the case of these funds, most of the taxation takes place at the level of the fund at the generally low tax rates for legal entities. The investors are for the most part exempt from income tax on the fund's distributions and from wealth tax on the assets invested in the fund. They are taxed only on distributions from the movable income of the fund and on the fund's proportionate movable assets (bank deposits, securities, receivables, etc.). However, income and assets from movable property are typically insignificant in the case of real estate funds with direct real estate holdings. If, for example, the market value of a fund unit is CHF 100 and the fund holds 96% of its assets directly in real estate, the taxable value for wealth tax purposes is reduced to CHF 4 (- 96%).

Retirement savings

Furthermore, an employed person who is affiliated to a pension fund (occupational benefit scheme or 2nd pillar) can make voluntary payments into his or her retirement assets or make a so-called purchase into the 2nd pillar. The amount of the purchase depends on the insured salary and the payments made in the past as well as the pension fund regulations. There are often large gaps, particularly for people who have moved to Switzerland from abroad - however, there are restrictions on the permitted payments during the first five years after moving to Switzerland.

In most cases, not the entire annual salary is insured under the occupational benefit plan. On the one hand, the annual salary is only compulsorily insured up to the amount of CHF 86,040.(1) Secondly, only that part of the salary that exceeds the so-called coordination deduction is subject to compulsory insurance. The current coordination deduction amounts to CHF 25'095 per year. If a company only insures the legal minimum, it is possible that even with a relatively high annual salary of CHF 150,000, for example, only an annual salary of CHF 60,925 is insured (CHF 86,040 minus CHF 25,095). Since the amount of the purchase depends, among other things, on the amount of the insured salary, the permissible purchase amount can therefore be increased if a higher salary, up to a maximum of an annual salary of currently CHF 860,400 without coordination deduction, is insured. However, this decision is up to the employer. Of course, the insured salary may not exceed the annual salary actually received.

By increasing the insured salary, it is possible to optimise the purchase amount in the area of non-compulsory occupational benefits. However, the pension plan and thus the amount of the insured salary can only be changed by the employer. Only owners of companies who are themselves employees of these companies have it in their own hands to determine the amount of the insured salary. For example, by setting up a management insurance for senior executives, the purchase potential for these employees can be increased by insuring not only the statutory minimum salary, but also a salary in excess of this, i.e. in our example the entire annual salary of CHF 150,000. The increase of the purchase amount into the 2nd pillar opens up two possible tax advantages for the employee. On the one hand, the purchase into the pension fund can be deducted from income tax and on the other hand, the assets paid into the pension fund are no longer subject to wealth tax. It should be noted, however, that the tax authorities only recognise the purchase for tax purposes if no capital is withdrawn from the occupational pension fund, voluntarily or involuntarily, in the following three years. In the event of a withdrawal within three years, the purchase will be assessed as no longer serving the purpose of the pension plan or as tax avoidance and will be subject to subsequent taxation. It should also be noted that such management insurance policies are only recognised if they are not set up exclusively for the owners of the company - rather, they must be open to all management employees.

In addition to occupational pension provision, all employed persons can make tax-deductible contributions of currently up to CHF 6,883 per year to the tied private pension plan (pillar 3a). Self-employed persons who are not insured under Pillar 2 or are not insured with a pension fund can currently pay up to CHF 34,416 (2) per year into Pillar 3a. The assets in the tied private pension plan are also not subject to wealth tax.

In the case of pension savings, however, it should be borne in mind that the pension funds, insurance companies and banks that manage such pension assets may only invest these assets in low-risk investments. With these investments, both the risk of loss and the investment risk are lower. So if you are prepared to take higher risks, it may make more sense to invest a larger proportion of your assets yourself and achieve a higher return in the long term. The shorter the time between the payment into the pension fund and its withdrawal, the greater the "return" achieved by the payment from the tax savings effect. It should also be noted that the assets paid into the 2nd or 3rd pillar are no longer freely available. Before retirement (2nd pillar) or up to five years before reaching AHV age (pillar 3a), the assets can only be withdrawn in cases prescribed by law, such as for the purchase of self-occupied residential property or as start-up capital for building up self-employment.

Both the withdrawal of benefits from the 2nd pillar and the withdrawal from the 3rd pillar are subject to taxation. However, this capital withdrawal is taxed separately from the other income, so that a capital withdrawal does not increase the tax rate at which the other income is taxed (no influence on progression). In addition, the capital withdrawal is taxed at a relatively low tax rate, the so-called provision rate. In the case of direct federal tax, for example, this is only one fifth of the ordinary rate. In the case of cantonal and communal taxes, capital withdrawals are also taxed separately from other income and at a lower pension rate. However, the pension rate is calculated differently depending on the canton, so it may well be worth considering a change of residence before making a capital withdrawal.

Investment in securities or objects without market value

When valuing other taxable assets that go beyond household effects or personal effects, such as very valuable collections of paintings, jewellery or art, etc., we believe that an objective but cautious valuation should be sought. Even if certain market values are available, e.g. sales prices of similar items at auctions, these cannot be adopted unseen. In any case, the objects must be valued on the basis of the sum insured or by means of a valuation report. The valuation must always take into account the unpredictability of the art market and will therefore regularly lead to rather lower values. If items are declared in the tax return at the insured value or at the value of the valuation report, this value is generally to be accepted by the tax authorities. A higher value would have to be proven by the tax authorities.

Finally, holders of unlisted securities may try to obtain a lower valuation of these securities instead of the usual practitioner's value. In special cases, e.g. if the goodwill is dependent on a single person or if more appropriate valuation methods are applicable, the valuation method can be adjusted in discussion with the tax authorities. If minority interests in unlisted securities do not yield a dividend yield or yield only a low dividend yield, care must be taken to ensure that the 30% valuation discount prescribed by the cantonal valuation guidelines is granted. For blocked employee shareholdings, including those listed on the stock exchange, a discount of 6% per blocking year (max. 10 years) is also granted.

Lump sum taxation

Although few readers are likely to meet the requirements, we would like to mention the lump-sum taxation as a possibility for reducing wealth tax. Individuals who do not have Swiss citizenship, who are not gainfully employed in Switzerland and who are subject to unlimited tax liability in Switzerland for the first time or after a ten-year interruption (domicile) can still pay their income and wealth tax in certain cantons on the basis of expenditure (also known as lump-sum taxation). In the case of married persons, both must meet the requirements. If these conditions are met, the wealth tax and the income tax are calculated on the basis of expenditure. In most cantons, the lump-sum taxable wealth is twenty times the assessed taxable income. Since the minimum taxable income forexpenditure-based taxation is at least CHF 400,000, assets of at least CHF 8 million will be taxed in these cantons. In the cantons of Appenzell Ausserrhoden, Basel-Landschaft, Basel-Stadt, Schaffhausen and Zurich, expenditure-based taxation is not possible.

Conclusion

If a change of domicile is out of the question, other measures to reduce wealth tax come into focus. These include investing in real estate or in units in collective investment schemes with direct real estate ownership, saving for retirement or investing in securities or items with no market value. However, in addition to optimising the wealth and income tax situation, other aspects such as the return on the investment or the availability of the assets and the risk of the individual investments must not be ignored. In any case, the above-mentioned four measures can significantly reduce wealth taxes, in our experience by more than 50% in some cases. We will be happy to advise you on the tax optimisation of your assets, as well as on obtaining advance tax rulings on the valuation of assets or expenditure-based taxation.

Author

Adrian Briner

Swiss Certified Public Accountant, Swiss Certified Tax Expert

Counsel

+41 58 211 32 18
[emailprotected]

Wealth tax and how it can be reduced - Part 2 (2024)