Switzerland has one of the most favorable tax regimes for both local and foreign investors. When choosing a legal entity for conducting business in Switzerland, it’s very important to do your due diligence because the taxation varies significantly from canton to canton. 
 
Furthermore, some types of companies are not taxed in Switzerland under the same guidelines as those used for corporations. These include limited or general partnerships as well as sole proprietorships. In Switzerland, sole proprietorships, general and limited partnerships are not taxable as companies, because they are not considered as legal entities. Each sole proprietor of collective and limited partnerships tax their private and business income as well as private and business assets as a whole.
 
Overview of tax obligations
By definition, income for sole proprietors comprises of all remuneration originating from the business i.e. profit, salary, interest as well as income from elsewhere. As with natural persons, sole proprietorships are liable to tax on their total income to the federal government, the canton, and the municipality. The cost price and incurred losses from business activities can be offset against the received income.
 
Sole proprietors and partners are liable to taxation to cantons and municipalities only. They do not pay any direct federal taxes. Collective and limited partnerships also have similar tax obligations as each shareholder pays taxes their share of the income and assets.
 
The downside for sole proprietorship and partnerships when it comes to taxation is that taxes paid can’t be deducted from taxable profits on the required federal and cantons taxes. Corporations can perform such deductions to their benefit. In order to employ a beneficial tax optimization employing the help of tax planning experts will be a necessity.

Depreciation and provisions

Business expenses can be deducted from revenue. However, investments in cars, equipment, and real Business expenses are deductible from revenue received under certain conditions. Capital investments like cars, equipment, and real estate cannot be deducted in full in the first year or in the purchase year. Such expense can therefore only be charged on depreciation over several years. Depreciation rates vary from 3% to 45% annually. Costs associated with the purchase of motor vehicles and computers are chargeable in the corresponding fiscal year in their entirety. This also applies to the annual leasing fees.

Provisions can be made for associated business risks such as imminent litigation costs and defaulting debtors in the following manner:

  • Highly vulnerable claims may be fully deferred;

  • All other domestic claims are subject to a flat-rate value adjustment of 5%;

  • On foreign claims the flat-rate value goes up to 10%;

  • Individual cantons even allow the 10% deduction in practice on the total amount of outstanding invoices.

Losses incurred from business activities are deductible from 7 previous assessment periods at both federal and cantonal levels.

Differentiation in regards to private expenses

Self-employed persons can get deductions on business-related expenses provided they can support their claims via appropriate documentation. When paying taxes as a self-employed individual it is therefore important to make a clear demarcation between private expenses and business expenses for this purpose. 

The correct demarcation of private and business expenses must also be applied to the following expenses:

  • Business trips, which are accepted as expenses for tax purposes. Travel for personal purposes cannot be deducted.

  • Company cars, which are also used privately.

  • Rental units, if the owner also lives in the commercial property. Rental costs, which are not in line with the market, are calculated by the tax authorities.

  • Hotel, restaurant and travel expenses: purpose and the names of invited business partners are to be proven.

  • Professional clothes: it is possible to claim clothes used exclusively for work for tax purposes, such as uniform or special attire. Items such as classic suits and ties are exempted on the basis that they can be for use at private events.

  • Further education: in-depth specialist courses are business-related expenses, as well as technical literature. However, classes or workshops taken upon as hobbies are not considered business expenses and can’t be deducted.

  • Premiums and fees: insurance premiums, telephone tuition, license fees for radio and television, lawyer's fees, wages for temporary staff, etc. are to be broken down into private and business expenses as well.

Treatment of wages and salaries

Wages and salaries for the self-employed in Switzerland are expected by authorities to remain reasonably within industry standards and also reflective of the business’s financial strength. Remunerations calculated outside of these guidelines risk treatment as hidden profit distributions by the authorities and can be offset as additional company profits. Therefore, xcessive salaries should be avoided to this effect.
 
Professional Assistance
For more details and assistance regarding taxation in Switzerland, you can reach out to our expert consultants. Our highly experienced and well-informed team is ready to answer all your questions and give you all the help you might need. Get in touch!
 

 

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