When opting for a legal form to conduct business activities in Switzerland, it’s important to choose wisely, because the taxation varies significantly. Especially for small to medium-sized businesses, it may be a good option to conduct activities under partnerships or even as a sole proprietorship, in the case of entrepreneurs who work as self-employed or are doing mostly freelance work.
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.
Sole proprietorships, general and limited partnerships are not taxable as companies, as they are not 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.
For sole proprietors, the income consists of all remuneration obtained from the company (profit, salary, interest) and other income. Like natural persons, they have to pay tax on this total income to the federal government, the canton, and the municipality. On the other hand, the cost price and any losses from the business can be offset against the income.
The paid taxes can’t be deducted from taxable profits by sole proprietors or partnerships either at the federal level or in the cantons. On the other hand, this is possible for corporations. So, there are some advantages and disadvantages which is why it is strongly recommended to create and adopt a tax optimization strategy with the help of tax planning experts.
The private and business assets of sole proprietors and partners are subject only to cantonal and municipal taxes, but not to direct federal taxes. This also applies to collective and limited partnerships, in which each shareholder personally taxes their share of the income and assets.
Depreciation and provisions
Business expenses can be deducted from revenue. However, investments in cars, equipment, and real estate are not fully deductible in the first year or in the purchase year. They may only be charged to the expenses as depreciation over several years. Depreciation rates vary from 3% to 45% annually.
Sole proprietors or business partners who buy vehicles or computers instead of leases can charge the entire costs or the annual leasing fees for the corresponding fiscal year.
Provisions can be made for any risks (for example, defaulting debtors, imminent litigation costs, due compensation payments, etc.):
- 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.
Regarding the losses, at the federal and cantonal level, business-related losses can be deducted from 7 previous assessment periods.
Differentiation in regards to private expenses
It is important for self-employed persons who continue to pay income taxes as individuals to be aware of the following: private expenses and business expenses must be kept separate. In principle, the self-employed person may deduct everything that is justified by business reasons. All deductible costs must be demonstrated by supporting documents.
The correct demarcation of private and business expenses is also necessary in regard to other expenses as well, such as:
- Business trips, which are accepted as expenses for tax purposes. Travel with exclusively private character is not deductible.
- 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, but not for a classic suit and tie, because these clothing items can also be worn for 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.
Lastly, even if a person works as self-employed in Switzerland, it is important to note that excessive salaries are not accepted by the tax authorities. They are regarded as hidden profit distributions and are offset as additional company profits.
In order to avoid such difficulties, wages should be within the industry standard and reasonably related to the financial strength of the company.