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Created on 01.11.2018

How to pay tax on returns on investment

If you have securities either in Switzerland or abroad, then you will normally have to pay income tax on them in Switzerland. This means the returns you make from these investments must be taxed. You do, however, have to bear in mind certain differences depending on the investment tool and the type of return.

Tax law distinguishes between capital earnings and capital gains. Capital earnings comprise interest and dividends generated with bonds, shares and funds. Investors must treat these as taxable income. Exchange gains made with these securities, however, are not taxed.

The general rule regarding tax for all investors is this: the lowest possible taxable income combined with the highest possible tax-exempt price increases is the ideal scenario. This is because price increases are capital gains, and are not taxed. Even repayments from capital reserves and par value reductions in shares count as capital gains.

Accumulating funds are the exception

If a person has funds that pay dividends and interest income out to investors, they must pay income tax on them. Accumulating funds, however, are an exception. They do not yield any capital earnings seeing as any income from the fund is reinvested back into the fund. They are, however, subject to income tax. Tax must be paid on a portion of the reinvested income. The The link will open in a new window Federal Tax Administration’s table of tax values indicates the size of this taxable portion of income.

Withholding tax: more transparency on taxable assets

Generally speaking, withholding tax of 35% must be paid on all investments. This is tax deducted at source, for instance on interest and dividends, that is levied by the Confederation. Its ultimate aim is to prevent tax evasion, and to ensure income and returns on assets are transparent. By declaring returns on assets accurately in their tax return, investors can obtain a withholding tax refund by offsetting them against cantonal or municipal taxes. In other words, this tax is not final.

International securities: bear in mind tax deducted at source

Securities abroad are the exception seeing as returns from these securities, e.g. dividends, are subject to the tax deducted at source of the country of origin. The tax deducted at source you pay varies from country to country, sometimes significantly. In the USA, for example, it is 30%, whereas in Germany, it is 26.375%. In other countries, on the other hand, such as the UK and Australia, tax deducted at source is not payable at all. Dividends in Switzerland are also subject to income tax at the same time. As such, if you obtain dividends from US shares as an investor, then you will pay US tax deducted at source and Swiss income tax. Because of the double taxation agreement Switzerland has with a number of countries, investors can avoid dual taxation. Some tax deducted at source can be deducted when paying out international dividends, and it may be counted towards Swiss income tax. This totals approximately 15%. The remainder can be claimed back in the investment country of origin, though this may be a complicated process depending on the country, and is only partly worthwhile due to the costs and effort involved. Seeing as tax deducted at source can also be reimbursed retroactively, it can in fact be collected for several years and then be claimed back afterwards in order to save yourself effort.

As such, if you own assets and make returns on them, you must pay taxes on them. Even if there is potential for optimizing the amount of tax you pay when choosing shares, funds and bonds, it is important to declare these accurately in your tax return and to make sure you do not pay tax twice on international investments.

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