This video and accompanying blog post cover the top tax considerations US citizens and green card holders should consider when moving and living in Switzerland. Living in Switzerland can be exciting, but it also creates a unique set of tax challenges that US expats need to be aware of,
If you haven’t viewed the introductory video to our financial education library, please take three quick minutes to watch it before you get started with the tax one. It will help you understand the purpose and scope of our US-Swiss financial education library and how to best navigate the content. You can find our introductory video here.
We hope you find our library informative!
1. Hello citizenship-based taxation: the USA continues to tax you, even while you live abroad.
This means You will need to continue to file US tax returns annually: most countries impose income tax based on residency: you are subject to income tax when you live there. If you leave the country, you are no longer taxed as a resident. The USA is unique in the world in that it continues to tax its citizens and green card holders as US tax residents, which means it will tax them on their worldwide income, even when they live overseas. What does this mean to you as a US citizen or green card holder? You’ll need to keep filing US tax returns (Form 1040) during your years of Swiss residency to report your income from all sources to the IRS annually.
You will also need to file Swiss tax returns annually: Switzerland, like most countries, imposes income tax on the worldwide income (with some exceptions) of their tax residents. At some point after moving to Switzerland, you will become a Swiss tax resident, and you will be required to file Swiss tax returns. From that point on, you will have two tax filing obligations every year: one to the USA and another one to Switzerland.
Does this mean that you will be double-taxed? Not necessarily! Domestic US tax rules provide remedies like the foreign earned income exclusion and foreign tax credits aimed at mitigating double taxation when the same income is taxed both by Switzerland and the USA. The US-Swiss double taxation agreement provides additional remedies to reduce the risk of double taxation. More on this later!
2. Wait, what is this Swiss wealth tax?: Switzerland imposes an annual tax on the wealth of its residents.
Unlike the USA, which taxes the gains on investments, Switzerland taxes the value of investments: every year, Swiss residents must add up the value of their worldwide assets and their worldwide debts to determine the value of their net worth and pay a wealth tax to their canton. This tax is a percentage of the value of their net worth or wealth, and this percentage can be flat or progressive, depending on the canton. Some cantons have higher wealth tax than others.
All are assets taxed? The value of retirement accounts is generally exempted from wealth tax. Real estate located outside Switzerland held directly (not through LLCs or corporations) is generally not taxed, but its value is taken into consideration to determine the applicable wealth tax rate that applies to taxable wealth. Most cantons have progressive wealth tax rates: the greater the wealth, the higher the tax rate. There is also a de minimis excluded amount that is not taxed, which also varies by canton. Swiss residents with wealth below this threshold do not pay wealth tax.
How are US assets taxed: the value of each asset is determined on December 31st of each year, such as the balance of US investment and bank accounts, the value of US closely held businesses (such as book-value) etc. With regards to US real estate, its value is considered to determine the wealth tax rate but the value of the property itself is not taxed. Typically, most retirement accounts like 401ks, 403(b), and most IRAs are excluded, although many cantons tax Roth IRAs.
What is special about the Swiss wealth tax? Since the wealth tax is determined as a percentage of wealth and not as a percentage of income, it is not an income tax. It’s most similar to a property tax. Since the wealth tax is not an income tax, it cannot be used as a foreign tax credit to offset US income tax.
3. The joy of FBAR and FATCA reporting: US taxpayers are required to report their specified foreign financial assets annually.
If you move to Switzerland, you will need to open Swiss accounts: bank accounts for day-to-day living needs and retirement accounts such as mandatory Pillar 2 occupational pensions. The US considers your Swiss accounts foreign financial accounts subject to reporting under FATCA and in most cases also on the FBAR.
FBAR: Foreign Bank Account Report & FATCA: Foreign Account Tax Compliance Act. The FBAR is an anti-money laundering form and Form 8938 (FATCA) is an anti-tax evasion form.
The FBAR has a $10,000 filing threshold, and Form 8938 has higher thresholds that start at $50,000 but can be as high as $600,000, depending on the filing status of the taxpayer. What does this mean in practice? If the aggregate value of your foreign financial accounts at any time during the year exceeds the filing threshold, you are required to file these forms.
Most US citizens moving to Switzerland will have an FBAR filing requirement right away, because the filing threshold is relatively low: $10,000 in the aggregate. Not per account. In the aggregate.
As the years go by, many US citizens living in Switzerland eventually meet the threshold for Form 8938, as the balance of their Swiss pensions grows. Swiss pensions such as Pillar 2s are specified foreign financial assets subject to Form 8938 reporting.
Why is it important to be aware of these filing requirements? Because failure to file these forms can carry severe penalties: up to 50% of the value of the undisclosed accounts in the case of the FBAR, and a minimum $10,000 failure to file penalty for Form 8938.
Gathering all your foreign account information every year can be quite annoying, but it is important you do so to be in compliance and to avoid potentially large penalties.
4. Choose your tax-pros carefully:
Since the USA taxes on worldwide income and requires reporting of foreign assets, the US tax returns of Americans living in Switzerland can become complex rather quickly. Swiss income and assets need to be classified under US tax rules and their value converted to USD. Your local US tax professional is likely used to working with local, domestic clients and may not be versed on international tax elements, such as determining eligibility for the foreign earned income exclusion or the foreign tax credit, two US tax provisions designed to prevent double taxation of foreign income. Your current tax pro may no longer feel comfortable working with you, or if they do, they may need assistance from an international tax specialist. If you would like to continue working with your regular US tax advisor, ask them about their experience and competence in preparing international forms and reporting foreign income and assets. The penalties for mistakes can be severe, so it’s important to have qualified professionals on your side.
Regarding the Swiss tax pro: for similar reasons, not every Swiss tax professional will have the experience and competence to prepare tax returns for US citizens living in Switzerland. If they are not experienced reporting US financial accounts, US real estate holdings, US business interests, or other sources of US income, they may prepare incomplete or erroneous Swiss tax returns, potentially exposing you to penalties, interest, and additional tax assessments by your local Swiss tax authority.
If you are used to preparing your own tax returns: understand that by virtue of moving to Switzerland, your US tax situation has gotten significantly more complex. Preparing a complete and accurate US tax return as a US expat is not impossible but it is hard. Do your homework!
In addition to publication 17, study IRS publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad. If you are using tax software, make sure it supports the international forms you need. Not all retail tax preparation software will.
If you complete IRS forms manually, understand that the likelihood of errors is significant. Tax software exists for a reason! Follow the instructions on each form carefully, review your calculations, and make sure to include every form you need.
If you feel confident to prepare your Swiss tax return: similar considerations apply:
Make sure you understand all the relevant rules. Keep in mind that freely available Swiss tax software may not support reporting US income and assets. If you complete the forms manually, proceed with extreme care and review your calculations.
5. Understand the rules of your first year of Swiss residency: Your first year living in Switzerland you are likely to be a part-year Swiss resident. What are the implications?
On the Swiss side: depending on your type of Swiss visa, you will have Swiss tax withheld from your wages. This is referred to as “withholding at source”. Who is subject to withholding at source? Permit L and Permit B holders are subject to withholding at source on their Swiss wages. Permit C holders and dual US-Swiss citizens are typically not subject to withholding at source. Regardless of whether there is withholding at source, Swiss tax residents are required to file tax returns if their income is above a certain threshold, if they own foreign assets that need to be considered for Swiss wealth tax purposes, or if they receive foreign income that needs to be considered for Swiss income tax purposes.
Many US citizens who move temporarily to Switzerland meet one of the three conditions that result in the requirement to file a Swiss tax return from the get-go, even if they were residents of Switzerland for just part of the year. Do not assume that because you are subject to withholding at the source that you are exempted from having to file a Swiss tax return.
On the US side: one US tax rule that many US citizens who move abroad are typically eager to take advantage of is the foreign earned income exclusion. This rule allows US taxpayers who earn foreign compensation to exclude from US income tax their foreign compensation up to a certain limit: just north of $100,000, which gets adjusted for inflation annually. Meeting the criteria to claim the foreign earned income exclusion can be hard the first year of Swiss residency, particularly if the move doesn’t happen early during the year.
Consult your US tax advisor or research Publication 54 for the requirements to claim this exclusion (the physical presence test in particular), understand when you will be able to first claim it and whether you should claim it at all. Sometimes, using the foreign tax credit instead of the foreign earned income exclusion can lead to a better US tax outcome.
6.Understand your employer-provided tax support benefits:
If you are relocating to Switzerland by your current US employer under an expat assignment, you may receive US tax support as part of your expat benefit package. Not all expat tax benefit packages are created equal, and it is important to understand what your employer will and will not cover.
Tax preparation: sometimes tax benefits are limited to covering the cost of preparation of your US and Swiss tax return during your first year of Swiss residency. Usually, the tax preparation provider is selected by the employer. You are told: “Tax firm X will prepare your tax return”. Please be aware that in those cases, your employer, and not you, are the client of the tax firm. Tax firm X is likely to have been engaged on a limited basis that prevents them to assist you with tax issues that aren’t directly related to your foreign assignment but that still matter greatly for your tax situation. Examples include your spouse’s income, or income from US properties or investments. This firm may take tax positions on your tax return that are beneficial to your employer but not necessarily in your best interest. Keep in mind who is paying their fee! Understanding the limitations of the tax service you will receive allows you to make appropriate arrangements and avoid disappointments with the outcomes.
Tax planning: sometimes the tax benefits include a tax planning call prior to the Swiss relocation to explain the relocation. This type of benefit is less common than the first one, and it can be quite limited in scope. In both cases, the cost of these benefits constitutes taxable Swiss compensation, which means that unless these benefits are grossed up for taxes, you will owe Swiss income tax on their value.
Tax equalization: this type of benefit is generally limited to top executives, and it is less common than the others due to its cost to the US employer. The purpose of this benefit is to avoid any potential tax disadvantages to the US executive as a result of the Swiss relocation. Despite the foreign earned income exclusion, foreign tax credits and benefits available through tax treaties, US tax rules can sometimes result in higher overall taxes for the US expat. Tax equalization aims to eliminate this disadvantage. Many US expatriates assume that this is the level of benefit that their employer will provide when they relocate to Switzerland, but this is rarely the case.
7. Some tax treaty benefits are not available to US citizens: There are three different tax treaties between the USA and Switzerland, and each provides different benefits:
Income tax treaty: the purpose of the income tax treaty is to avoid double taxation when both the USA and Switzerland tax the same income. The treaty provides rules to determine which country has the exclusive or first right of taxation and provides double taxation remedies such as reduced tax withholding rates and tax credits. Some US-Swiss income tax treaty benefits are not available to US citizens or green card holders due to a clause in the treaty known as the “saving clause”. If you believe that you are entitled to a specific benefit under the US-Swiss income tax treaty, you should always verify if the saving clause prevents you from claiming it.
Estate tax treaty: this treaty provides benefits aimed at avoiding double taxation when an inheritance is taxed both by Switzerland and the USA. If you are moving to Switzerland temporarily, it is unlikely that this treaty will be of much relevance to you, unless you end up staying in Switzerland indefinitely or you marry a Swiss citizen who is not a US citizen. Remedies provided by this treaty include providing tax exemptions and tax credits that would not otherwise be available.
Social Security treaty or Totalization Agreement: this treaty covers social security taxes and has two main goals: to avoid double social security taxation of wages and to allow the aggregation of social security taxes paid in both the USA and Switzerland to increase eligibility for social security benefits at retirement. If you are a US executive on a temporary foreign assignment, this treaty could potentially allow you to continue to be covered by US social security and to continue to participate in your US employer’s 401k for the first five years of Swiss residency.
8. Your Swiss employer retirement benefits are not US qualified:
Switzerland has mandatory occupational (employer) pensions known as Pillar 2s. They are like 401ks in the USA, but unlike 401ks, Pillar 2s are not US qualified. What does this mean?
If you are employed in the USA, you are likely familiar with 401ks or 403b plans. These plans are common types of qualified employer-sponsored retirement plans that US employers offer to their employees. The employee puts money in and the employer puts money in. They are qualified because they meet certain requirements under US tax laws that grant them tax benefits. These tax benefits include tax-deductible contributions and tax-deferred growth. You get a US tax deduction when you put money in, employer contributions are not taxable, and you don’t pay tax on them until you take 401K distributions at retirement.
Switzerland has its own employer-sponsored occupational pension plans referred to as Pillar 2 plans. Pillar 2 plans meet Swiss legal requirements and receive tax benefits in Switzerland. Swiss employer contributions are not taxed by Switzerland until distributed, employee contributions are deductible on the Swiss employee’s personal Swiss return and the earnings in the account are not taxed until distributed.
But, Swiss Pillar 2 meet Swiss legal requirements, not US legal requirements. Therefore, they are not US qualified and do not enjoy US tax benefits. For a US citizen or green card holder participant, this means that contributions to Pillar 2s are not deductible on the US tax return, employer contributions are taxed as compensation and the interest earned by the Pillar 2 account may be taxable every year, BEFORE any retirement distributions can be taken.
This can be a problem for US citizens who participate in Pillar 2s: it can result in higher US taxes when the contributions are made, and may result in double taxation when distributions are taken. Keeping track of the US employee’s cost in the plan can reduce the risk of double taxation. This requires discipline and excellent recordkeeping.
As we mentioned in point 3, remember that Pillar 2s are reportable on Form 8938 and likely on the FBAR form, so don’t forget to report them!
9. Expect a formal Swiss tax assessment: Unlike the IRS which audits very few US tax returns, the Swiss tax authorities review every tax return that is submitted to them.
As part of their review, they may ask questions or request additional documentation, particularly when the Swiss tax return includes US assets and/or income that they may not be familiar with.
Eventually, they will issue a final tax assessment based either on the originally submitted Swiss tax return or after making changes to the income or deductions originally reported to reflect what they determine are the correct amounts allowed. This tax assessment is the final and legal Swiss tax liability. It’s not unusual to have to wait 18 to 24 months for the final Swiss tax assessment.
Another difference between the Swiss tax authorities and the IRS is that you can generally call your Swiss tax office to ask questions if you need clarification about how to report something on your Swiss tax return. In the USA, meanwhile, the IRS is not equipped to provide tax advice to taxpayers over the phone. Tax information is instead provided via the IRS website and the different publications that the IRS puts out annually to assist US taxpayers with their tax obligations.
10. Beware of Swiss-centric tax planning advice!
If you retain the services of a Swiss tax professional, you are likely to receive tax planning recommendations aimed at helping you reduce your Swiss tax liability. This advice, as well-intentioned as it may be, may not be suitable for US citizens or green card holders living in Switzerland. Instead, they may potentially be damaging and costly due to their consequences on the US tax return. Since Swiss and US income tax rules are different, planning ideas that reduce Swiss income tax can increase US income tax by more than the Swiss tax savings, leaving the US citizen worse off than before. They can also increase the US reporting complexity, causing even more headaches and additional expenses.
Examples of common Swiss planning techniques that can backfire when used by US citizens include but are not limited to:
Making Pillar 3 contributions: Pillar 3s are Swiss individual retirement accounts, similar to IRAs in the USA. The contributions to these accounts are not deductible on the US tax return, Pillar 3s may be also full of PFICs and subject to US foreign trust reporting. PFICs, or Passive Foreign Investment Companies, are a set of US tax rules that apply to foreign pooled investment vehicles, including Swiss mutual funds and ETFs. They impose onerous reporting and punitive tax rates on foreign funds. Foreign trust reporting rules may apply on top of the PFIC rules, adding to the complexity and cost of reporting a Pillar 3 on a US tax return.
Making significant primary home improvements: for Swiss residents who own their Swiss homes, renovations and repairs are Swiss income tax-deductible. But the cost of primary home renovations and repairs is not deductible for US tax purposes. If a US citizen spends significant money making improvements to their Swiss home, they will reduce their Swiss tax, but their US tax will remain the same, potentially resulting in no tax savings overall.
Making Pillar 2 buy-backs or buy-ins: Switzerland allows making voluntary contributions to Pillar 2 employer pensions when the participant hasn’t worked their entire career in Switzerland. These contributions reduce Swiss income tax, but as we have already discussed, they do not reduce US income tax. US citizens who make significant Pillar 2 buy-ins may end up owing a lot of US income tax and not having cash available to pay this US tax because their money is now locked in a Swiss pension account!
These three examples show how tricky things can get when applying Swiss tax reduction techniques that do not provide a US tax benefit. The overall US+Swiss tax burden doesn’t change, but cash is now locked in a Pillar 3, primary home or Pillar 2 account and no longer available to the US citizen for other purposes.
We hope you found these ten Swiss tax considerations informative, and that they help you make good decisions as you plan your relocation to Switzerland. Congratulations on your Swiss opportunity and best of luck with your relocation!
Reach out to info@swissamericanwealth.com with any questions.
Marina Hernandez is an Investment Advisor Representative with Dynamic Wealth Advisors dba Swiss American Wealth Advisors. All investment advisory services are offered through Dynamic Wealth Advisors. Marina Hernandez also offers tax preparation services under MHTax. This is considered an outside business activity from Dynamic Wealth Advisors and is separate from Ms. Hernandez’s activities as an investment advisor representative of Dynamic Wealth Advisors.
