Lump-sum taxation (expenditure-based taxation)

Among the instruments that make Switzerland attractive to certain new residents is expenditure-based taxation, often called the tax lump sum (or “forfait”). It is a special regime that does not tax actual income, but rather an amount calculated on the basis of the taxpayer’s standard of living. It is reserved for a small number of people and hedged about with precise conditions: understanding how it works helps to separate fact from received wisdom.

What the tax lump sum is

Expenditure-based taxation is a method of calculating tax provided for under Swiss law as an alternative to ordinary taxation of income and wealth. Instead of declaring worldwide income, the taxpayer is taxed on a base tied to the expenses needed to sustain their own and their family’s standard of living. It is a regime designed for wealthy individuals who choose to reside in Switzerland without carrying on a gainful activity there.

Who can access it

The conditions are cumulative and strict. In principle, the lump sum may be requested by someone who:

• does not hold Swiss citizenship;
• takes up residence in Switzerland for the first time or after an absence of at least ten years;
• does not carry on any gainful activity in Switzerland.

This is the decisive point: the regime is compatible with managing one’s own assets, but not with a job or professional activity carried out on Swiss territory. Anyone who works in Switzerland falls under ordinary taxation.

How the taxable base is determined

The base is not arbitrary: it is based on the annual expenditure of the taxpayer and their family (housing, staff, travel, standard of living in general). Federal law lays down certain minimum parameters: the base must correspond to at least a multiple of the rental value or the rent of the home, and in any case may not fall below a statutory minimum threshold, which is updated periodically.

To this is added the control calculation: the tax computed on expenditure may not be lower than the amount that would result from applying ordinary rates to certain Swiss-source income (for example, real estate and capital located in Switzerland). In other words, the lump sum does not reduce taxation on domestic income to zero.

Cantonal differences

As with many aspects of the Swiss tax system, the regime is governed at federal level but applied by the cantons, with differing room for manoeuvre and attitudes:

• some cantons offer the lump sum and use it as a factor of attractiveness;
• other cantons have abolished it for cantonal and communal taxes, following popular votes;
• the minimum amounts and calculation practices can vary from one canton to another.

For this reason the choice of place of residence has a substantial impact on the outcome and must be assessed case by case.

Advantages and limits

The lump sum offers predictability and simplification: the tax is set on an agreed base, without having to declare income and wealth worldwide every year. It is a feature valued by those with complex, international assets.

The limits must, however, be borne in mind:

• it is not available to those who work in Switzerland;
• it requires a high standard of living and considerable economic capacity to be worthwhile;
• it interacts with the double taxation treaties, which in some cases may bar access to certain benefits on foreign income;
• it may be subject to review and reassessment by the tax authorities.

A regime to be set up methodically

Expenditure-based taxation is not a shortcut, but a technical regime that requires advance negotiation with the cantonal tax authority (the so-called agreement or ruling) and a consistent asset structure. Mistakes in the set-up — for example a disguised gainful activity or an expenditure base out of step with the real standard of living — can lead to loss of the regime and to tax adjustments.

How we work at SIH ONE

We assist individuals and families considering a move to Switzerland with the feasibility analysis of the tax lump sum: checking the requirements, estimating the expenditure base, comparing cantons and coordinating with matters of residence, residence permit and international assets, always in compliance with the applicable rules.

Are you considering Switzerland as your new home and want to understand whether expenditure-based taxation is right for you? Discover our tax services and build your decision on solid foundations.