Anyone who holds shares in Switzerland benefits from advantageous tax laws as an investor. Whereas in other countries you often have to pay tax on your potential price gains from shares, things work slightly differently here in Switzerland. This is particularly the case as there are various factors that must apply in Switzerland for your shares to be included in your tax planning.
Paying tax on shares in Switzerland
Maybe you’ve recently been a little more active on the stock market or traded securities such as shares on online trading platforms. So far so good! But how exactly does paying tax on shares work in Switzerland and what advantages can investors benefit from in the country? Let us explain.
Price gains vs dividends
In simple terms, the rule of thumb is that you do not pay tax on price gains – but you do pay tax on dividends. This is because dividends are considered to be income while price gains are not. In our article “Interest, dividends, return – what are they?”, you can read more about what makes up a dividend and what it means.
Dividends are subject to tax
According to Swiss law, you must add your gross dividends – i.e. dividends before the withholding tax is deducted – to your taxable income. For this reason, dividends are subject to income tax.
There is also the 35 percent withholding tax, which the company distributing the dividends deducts from your gross dividends and then pays to the Federal Tax Administration. For residents, however, this withholding tax is simply a safeguard: they get the money back when taxes are collected, provided certain criteria are fulfilled, such as correctly declaring income on their tax return.
Only 65 percent of your dividends are paid out to you as the company deducts 35 percent directly.
Does that sound a little complicated? Imagine you have 100 Swiss shares and receive a dividend of CHF 2 per share. The total of your gross dividends is therefore CHF 200. This exact figure of CHF 200 must be added to your taxable income. The withholding tax of CHF 70 (35 percent), which the company deducted from you upon distribution of the dividends, is then returned to you as part of your next tax bill after you correctly complete your tax return.
Wow, share prices doubled and no taxes
In Swiss law, price gains are exempt from tax. This can have a significant positive effect on your finances.
An example demonstrates the scope of tax-free price gains. On 23 December 2016, Mr Ramírez purchased four shares at the price of CHF 30 each. Because Mr Ramírez followed a buy and hold strategy, he held the shares for several years up until 23 December 2021, when he sold the four shares at the price of CHF 170 each. This is a price increase of around 567 percent and Mr Ramírez benefited from a price gain of CHF 560 on the four shares. Since this is a price gain, Mr Ramírez does not have to pay any tax on it.
Sounds great, right? Unfortunately, it’s not as simple as it sounds.
Private vs professional: what’s the difference?
Price gains are tax-free and dividends are tax liable – this is true for private investors. But here is the catch. If you are classified as a professional trader, your price gains are no longer tax-free in Switzerland.
What is important if I want to avoid being classed as a professional trader?
You are a private investor if you invest in shares with money that you earn from another source – your primary occupation. Since you do not live on your investments, you are not a professional investor.
The following criteria must all be met for the relevant tax authorities to presume you are managing your assets as a private investor:
- How long you hold your shares: in principle, as a private investor, you should hold your shares for a minimum of six months before you sell them. This also applies to other securities.
- The level of your capital gains: your capital gains should not exceed 50 percent of your net income.
- The level of your transaction volumes: the volume of transactions that you carry out each year should not exceed five times the portfolio value. Let’s assume your portfolio is worth CHF 1,000. In this case, your transaction volumes for buying and selling your shares should not exceed the CHF 5,000 mark.
- What capital you use to invest: as a private investor, you should generally trade with your own money – and not with credit.
- Use of derivatives: you should not use derivatives. The use of derivatives indicates to the tax authorities that you are investing professionally. Options for hedging your shares are an exception.
If these five criteria are not all met at the same time, the tax authorities cannot definitively rule out that you are trading securities commercially. Such cases are investigated and assessed based on individual circumstances. However, the assessment may vary depending on the tax office. Please also note that these five criteria apply not only to shares but also to bonds, funds, futures, options, swaps, CFDs and other financial instruments.
If you are classed as a professional investor, you must pay tax on your price gains as income from self-employment, and the excess part of your income may fall within a higher tax bracket.
However, professional investors can also include price losses in their tax return, whereas private investors cannot.
I am a private investor – but how exactly does the tax return work again?
If you meet all the criteria for a private investor, you only need to pay tax on your dividends and not on your price gains.
What is the best way to do this on the tax return? The following short checklist gives you an overview:
- Specify all share packages in the list of securities: enter all your shares in the list of securities with the relevant security number or ISIN number – including shares that do not have a quoted price and those traded outside of the stock exchange. The relevant market prices as of 31 December will then appear automatically. These market prices are considered part of your assets. The dates of purchase and sale must also be entered. If you hold many shares, this process may take a long time. For this reason, the majority of banks, including PostFinance, offer their customers tax statements that provide a detailed overview and help to simplify this process. These tax statements are subject to a fee. You should also include any shares that you have sold throughout the year.
- Specify your income: enter all your income from shares, other securities and your bank accounts under gross income in the list of securities on your tax return. You should also include any income from shares that you have resold throughout the year here. In the case of shares for which you have paid withholding tax, your canton will refund you the 35 percent by deducting the respective amount from your cantonal tax bill.
This information does not just apply to Swiss shares – the same things should be taken into account for foreign shares on your tax return too. However, dividends, interest and licence fees from foreign sources are taxed both in Switzerland and – in some cases – by an additional tax at source in the country of origin. As a result, there is the risk of international double taxation. Depending on the double taxation agreement with the country of origin for the shares, this can be avoided by applying for the foreign tax at source to be offset against your Swiss taxes. You can find more information about this from your relevant tax authority.