Anyone who is liable to pay taxes in Switzerland and has to file a tax return at the end of the tax period may ask themselves how the taxes have to be paid. Since, unlike in other countries, income tax in Switzerland is not withheld by the employer and paid to the tax authorities, each employee is responsible for paying his or her own taxes. In this article, you will learn what options are available for paying taxes in Switzerland and what needs to be taken into account.
How are taxes paid in Switzerland?
In Switzerland, taxes are levied at three different levels: Federal, Cantonal and Municipal. This fact makes the Swiss tax system so complex and often causes confusion for newcomers.
The direct federal tax is levied on the income of natural persons. Instead of the federal government, the canton in which the taxpayer resides collects the federal tax and pays it to the federal government.
The direct federal tax must be paid in one amount after receipt of the final invoice by the end of March of the following year at the latest. The amount of the tax levy to the federal government is derived from the levy at cantonal and municipal level.
The respective canton of residence of the taxpayer levies the cantonal tax. This can vary considerably from canton to canton as far as the tax rate is concerned.
Cantons are very free in the way they levy taxes and can, in principle, levy all taxes to which the federal government has no exclusive claim. Therefore, the individual cantonal tax laws are highly different from each other.
In contrast to the federal government, the cantons levy not only income tax but also wealth tax.
Municipalities may also levy taxes, both on income and on assets. However, they must comply with the legislation of the respective canton regarding the amount of the tax rate.
« At the end of the tax period, the taxpayer fills out his tax return, the tax authority then determines the actual tax burden in the past year and prepares a final invoice by offsetting the taxes already provisionally paid against the total tax burden.»
Paying taxes by type of assessment
Generally, two processes are distinguished that are crucial to the way taxes are paid.
Subsequent ordinary assessment in the case of taxation at source
Anyone who pays withholding tax and has to submit a tax return at the end of the tax period will subsequently receive the tax assessment in the form of a final invoice. Depending on the tax burden determined, a refund is then made for excess taxes paid or the taxpayer must make an additional payment.
Ordinary assessment with provisional invoice
Anyone who does not pay withholding tax, i.e. is subject to regular assessment, receives provisional invoices for cantonal and municipal tax from the tax authorities during the current tax year. The taxpayer then pays a provisional tax on the due dates specified.
At the end of the tax period, the taxpayer fills out his tax return, the tax authority then determines the actual tax burden in the past year and prepares a final invoice by offsetting the taxes already provisionally paid against the total tax burden.
Provisional tax at a glance
At the beginning of the year, the taxpayer receives an invoice for the provisional cantonal and communal tax to be paid. The installments are always based on the income or assets of the previous year. At the end of the tax year, the final invoice is prepared and the actual tax burden during the year is determined.
The tax year begins on January 1 and ends on December 31. At the beginning of the following year, the taxpayer receives the list of the annual advance payment. Taxpayers receive the final invoice as soon as the assessment has been issued by the tax office. In certain cantons, this takes at least several months.
Provisional invoices do not have to be paid
The taxpayer is free to pay the provisional invoices or to pay the actual tax burden only after receiving the final invoice. In most cantons, a so-called compensatory interest is charged if the provisional invoices are not paid. For each month of delay, the compensatory interest rate applicable in the respective canton is added to the total tax burden.
The compensatory interest rate can be positive or negative. Example: The provisional tax burden amounts to CHF 10,000 and is paid on time by the end of September. However, the final invoice then only shows CHF 8,000 as the actual tax burden. Then a refund of CHF 2,000 plus compensatory interest is made for the period from September to the date of the assessment preparation.
The same applies to negative interest, i.e. if the tax burden is higher than that shown in the provisional invoices, or if the provisional invoices are not paid at all. Then interest is charged to the taxpayer.
Examples of compensatory interest by canton
Each canton can set the compensatory interest rate itself. Here are some interest rates (as of 2021) from various cantons:
BE (Bern): 0.5%
SH (Schaffhausen): 0.1%
SZ: (Schwyz): 0.5%
ZG (Zug): 0.0%
Based on the examples, one can see that the compensatory interest rates in the cantons are generally very low. For many taxpayers – especially those with high incomes or who invest their money – it is therefore not necessarily worthwhile to pay the provisional bills, as during this time they can achieve a higher return on the capital market with their saved income. It may be worthwhile to simply wait for the final bill and then pay it on time. The prerequisite for this is that one lives in a canton that applies compensatory interest and achieves a return on the available capital that exceeds the compensatory interest.
Deadline for payment of the final invoice
Provisional invoices do not have to be paid, but the final invoice must be paid in any case. If you do not pay it on time, you will also be charged interest on arrears, which is high compared to the compensatory interest. What happens if you pay late?
First of all, you should not let it get that far and pay too late. If it is foreseeable in advance that you will not be able to make the final payment or only make an incomplete payment due to financial difficulties, you should inform the tax authorities in good time. In many cases, the deadline can be extended upon request or additional installments can be agreed upon so that the amounts to be paid in each case are lower.
However, there is not much room for maneuver when it comes to the extension, because it must always be ensured that the taxes for a tax period have been paid in full before the advance payments for the next tax year begin. This is to prevent tax debts from building up over time.
If the tax installments are not paid on time, interest on arrears is charged. In case of further delay, the tax authority may also initiate legal proceedings to collect the taxes, which is usually accompanied by seizure of the income.
Interest for late payment
How is the default interest calculated?
The respective canton decides when interest on arrears becomes due. Some cantons already charge interest on arrears if the provisional advance tax payments are not paid on time; some others only demand interest on arrears if the final invoice is not paid on time.
The interest rates are set annually by the cantons. Depending on the canton, interest on arrears ranges from 0% to 6%, with an average of approximately 4%. Below are some examples by canton of interest on late payment of cantonal and municipal taxes:
BE (Bern): 3.0%
SH (Schaffhausen): 5.0%
SZ: (Schwyz): 3.5%
ZG (Zug): 4.0%
The default interest rate is always an annual interest rate. You should always keep this in mind and always recalculate it yourself if you are in default.
Example: The outstanding debt on the part of the tax authorities amounts to CHF 1000.00 and the default interest rate is 5% per year. For the complete year, the interest on arrears is CHF 50.00. However, if you pay only one month late, you only pay the interest on arrears for this one month, i.e. CHF 4.17.
Is it possible to pay the final bill in installments?
As a rule, it is possible for cantonal and municipal taxes to be paid in installments after receipt of the final invoice. The amount of the installments and when they are due is determined by the tax authority. If a taxpayer has payment difficulties, an explicit request can also be made to the tax authority for payment by installments or for a deferral of payment.
How does the collection of back taxes work?
If the taxpayer does not pay the demanded taxes even after a reminder, the tax authority may initiate enforcement proceedings, which is also called debt collection.
The taxpayer receives a payment order and has the right to raise a legal objection against the debt collection, which initially interrupts it. In the subsequent legal proceedings, the taxpayer can only avert the debt collection if he can justify that the tax claim has already been paid, waived or deferred, or is already time-barred.
If the legal proposal is invalidated, the debt collection procedure is continued. In this case, an attachment is immediately made, either on the income or other types of income of the taxpayer.
Do you have further questions about taxation in Switzerland? Contact us for a non-binding quote. We will contact you promptly and discuss your individual situation.