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Minimising Swiss income tax: it is human nature to consider tax saving opportunities when it is too late and the tax form has landed with a thud on the doormat. So come on fellow procrastinators, there has never been a better time than now to start planning for the current tax year!

The Swiss tax system is incredibly complex especially because the country has 26 cantons and over 2,500 communities The Federal tax rate is the same for everyone, but cantonal and community tax rates differ greatly All income earned from employment and self-employment worldwide is taxable in Switzerland, including movable and immovable property and retirement incomes. Most income is aggregated and taxed, including that of married couples (but not couples who are separated or divorced). The provided rental value of owner-occupied dwellings is also taxable. However, capital gains on private movable properly (e.g. capital gains on shares) are tax free, unless the taxpayer is trading regularly,

Location, location, location

If you are looking to move within Switzerland, it is advisable that you check the differences in cantonal and community taxes when considering various areas. For example, eastern Switzerland generally has lower taxes than the west of the country Even a few kilometres can make a huge difference to your tax bill. Popular tax havens include Zug in Canton Zug and Wollerau in Canton Schwyz. However, even in some cheaper Cantons, the difference between the cheapest and the most expensive municipality can vary as much as 30 per cent.

Making pension schemes work for you

A simple way to save money regardless of your location is to invest in pillars two and three of Switzerland's three-pillar pension system. (For more details about this system, please see our November article entitled Switzerland's magical pillars).

Pillar 2 (company pension): Ask your employer if you can make a voluntary contribution to your company's pension fund. The contributions are tax deductible from your income tax and have the objective of ensuring you have sufficient capital at retirement. You can pay either in a lump sum or in instalments over a number of years Tax is not charged off the accrued interest on a pillar 2 account Instead, taxes are levied at a preferential tax rate when money is withdrawn. Pension fund savings can only be withdrawn under certain circumstances. These include deregistration when leaving Switzerland permanently, buying a primary residence in Switzerland (not a vacation home), giving up your employee status to become self-employed, and retirement or death (a disability pension is also paid)

Pillar 3a (personal account): If you can afford to, it is advisable that you open a pillar 3a bank account. The limited contributions are fully deductible from income tax and no tax is levied on the interest, which is generally higher than for a savings account. Wealth tax is also not applicable, and assets in a pillar 3a account are taxable at a reduced rate once withdrawn. Like the pillar 2 pension fund, the 3a account is blocked and can only be used under certain conditions. (Please see November's Swiss News for further details.)

Insurance companies also offer pillar 3a policies. However, they are only appropriate in the long term because early redemption charges are usually substantial It is worthwhile paying into more than one pillar 3a account. This spreads the capital paid out at retirement over different tax periods and reduces the tax burden. Money cannot be withdrawn until five years before the official retirement age (65 for men and 64 for women), unless certain conditions are satisfied.

Doing good

Donations to approved charities can be offset against income tax. However, in most cantons, the maximum deductible amount may not exceed 20 per cent of your salary Payment receipts must be submitted If you are supporting a parent or relative because they are living in poverty (usually abroad), the amount given is tax deductible in most cases Proof of their situation and receipts must be provided and the tax inspector will make a decision, which can be challenged if negative

Home improvement

Generally, value maintaining renovation, energy-saving alteration and upkeep costs are deductible from income tax. You can either deduct the actual costs or a flat deduction in your tax return. Where practical, major renovation work is best spread over a few years to reduce the tax progression. It is advisable to discuss alterations with your tax advisor because certain rules may apply, depending on which canton you live in.

Brien Donnellon is the owner of KEY INVESTMENT, a financial services company providing unbiased financial and regulated by the Swiss Federal Banking Commission.

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Title Annotation:business: finance column
Author:Donnellon, Brien
Publication:Swiss News
Date:Dec 1, 2011
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