How are dividends taxed in Switzerland?
Originally published at 08.11.2022 Reading time: 4 minute(s)
Not all dividends are the same: Different tax regulations apply, depending on which pot they are paid out of.
Tips from tax experts for owners of dividend shares
Dividends can be a welcome source of income. But beware: You should declare dividends as income together with your salary. However, there are exceptions to this rule.
We list the most common rules and explain what applies to shareholders with Swiss dividend shares in their portfolio.
Recently, dividend shares have regained popularity. For one reason, because they generate plannable income. For another, the current difficult market environment has led to dwindling yields. Many investors are thinking: “So why not at least participate in a company’s success via dividends”?
- Regular taxable dividends
- Privileged taxable dividends (exception 1)
- Tax-free dividends (exception 2)
All dividends from stock exchange-listed companies fall into one of these three categories. An exception is dividends that you pay yourself from your family-owned company (more on that in our focus article for entrepreneurs).
How are dividends taxed in Switzerland?
In general, in Switzerland, as Swiss withholding tax of 35 percent is levied on Swiss dividends. For shareholders who are resident in Switzerland and subject to tax, this is a form of “security tax”. In other words, in order to prevent tax evasion, this is deducted directly upon payment of the Swiss dividend amount and can be reclaimed in full, if dividends have been declared correctly. That also applies to shareholders from abroad.
Anyone who is required to pay taxes in Switzerland may reclaim the Swiss withholding tax in full, so long as the dividend amounts have been declared in the Swiss tax declaration. As a result, income from dividends is added to normal income and taxed in accordance with the usual process applicable in the individual cantons.
“If you declare your Swiss dividend income correctly in Switzerland, you pay taxes on them together with your normal gross income (e.g., at a rate of 25%) and get back the 35% Swiss withholding tax”.
A variation of Swiss security tax also applies to dividends on USA shares. This normally amounts to 15 percent and is known as “Tax retention USA”. It is automatically deducted by Swiss banks on dividends from the USA if a taxable person is resident in Switzerland. As for Swiss withholding taxes, this can also be reclaimed from the Swiss tax authorities.
What are dividends with tax privileges?
Shareholders with qualified participations benefit from partial taxation. Dividends on these participations are taxable at a rate of 70 percent at federal level and on a cantonal level, at 50 to 80 percent, depending on canton. The condition is that, at the time of the dividend payout, the shareholder holds at least ten percent of the nominal or share capital of a corporation or cooperative.
Thus, partial taxation for stock exchange-listed participations is more or less irrelevant. What is more relevant, however, is privileged taxation on participations in family-owned companies (SME).
A further privilege is available for investors who expand their holding in a corporation. You hold shares in the business assets of a corporation and can claim a participation deduction starting at an open market value of CHF 1 mn. Thus, the dividends are not taxed at a company level. However, this type of instrument is mainly only for investors who tend to hold their share packages over decades, or generations.
2 Article 20, paragraph 4 in the Federal Law on Federal Direct Tax, see also Steuermäppchen 2019 zur Reduktion der wirtschaftlichen Doppelbelastung (PDF in German).
3 In this context, the following is also applicable: Reporting requirements to Swiss Financial Market Supervisory Authority FINMA: “Holders of qualified participation in […] must assure proper business conduct”.
4 Further information on this topic in this Merkblatt der Zürcher Steuerverwaltung (in German).
Are there any tax-free dividends on Swiss shares?
Whether you can get your dividends tax-free mainly depends on the company (more on this: How companies decide on their capital distribution policy).
Dividends are usually paid out of retained profit. If, however, a company has reserves from capital contributions (also known as premium or agio reserves), it may use these for dividend payouts. Dividends paid out of reserves from designated and reported capital contributions are tax-free for private investors.
However, in 2020, lawmakers threw a spanner into the tax-free dividends’ works. This new rule is true only for listed companies. The rule says that this type of dividend may not be higher than dividends paid out of retained profit. In other words: If dividends from listed companies are paid out of capital contributions, dividends amounting to the same amount must always also be paid out of retained profit.
This means that a maximum of half total dividends paid by stock exchange-listed companies to private investors may be tax-free.
5 One exception to this rule is the (rare) situation in which the agio reserves originate from a merger with a foreign company (see article 5, paragraph 1quater in the Federal Law on Withholding Tax). An example is Holcim Ltd which states in its Annual report 2021: “The dividend will be fully paid out of the foreign capital reserves from tax capital contributions” (page 75). Note: quoting this publicly available information is not intended as an investment recommendation or an incitement to tax consultancy.
Good to know
Not all companies use dividends as a means of distributing capital to shareholders. Share buy-backs are also popular. Particularly in the USA, share buy-back yields are often higher than dividend yields. As a private investor, you should never sell your shares or participations back directly to the company itself, even if, at first glance, their offer appears attractive. Otherwise, you risk paying tax as the difference between nominal and sale value may be regarded as being a liquidation dividend. It is better to choose selling on the stock exchange.
US SHARES • DOMICILE SWITZERLAND
How much can I reclaim from the US withholding tax?
Swiss investors with US dividend shares in their portfolio initially receive only a net total of 70 percent of their dividend from the bank. 15 percent is normally paid by the bank to the US tax authorities IRS. A further 15 percent is “parked” as a kind of Swiss security tax with the Federal Tax Authorities (FTA). In this case, there is no additional witholding tax.
The current double-taxation agreement (DTA) between Switzerland and the USA enables you to offset the US witholding tax against your taxation in Switzerland. You can reclaim the Swiss security tax, the so-called “supplementary withholding tax USA,” by means of the DA-1 form—this is a similar principle as for the Swiss withholding tax.
This also applies to Swiss-domiciled entities. Tax-exempt institutions such as, for example, charitable foundations, can be released from the tax retention USA upon request.
Calculation: Reclaiming withholding tax on US dividends
PAYOUT/ TAXES AMOUNT
RECLAIM IN % Dividend payout from a US stock company (gross) 1,000 US withholding tax on gross payout* –150 –15% Supplementary withholding tax USA*
*Retained by the bank and paid to
US, or Swiss tax authorities
–150 –15% Net yield before reclaim / tax credit 700 +150 US withholding tax credit in accordance with DTA +15% +150 Reclaim from Swiss FTA +15% Net yield after reclaim 1,000 Income tax Switzerland –300 Assumption—depends on canton up to maximum 45% –30% Net yield after taxes 700
In this example: Dividend payout from US companies to shareholders domiciled in Switzerland. A similar principle applies for other countries with double taxation agreements, whereby the actual figures may vary from country to country.
Tax advice in context
If you are not familiar with the jungle of tax regulations, it is easy to fall into a tax trap. After all, not every taxpayer is able to keep abreast of possible “knowledge advantages” by being in direct contact with the tax authorities. Our experienced tax experts are able to negotiate Swiss tax issues of all kinds on an equal footing with the authorities and, where necessary, obtain binding tax rulings on your behalf.
Contact us, without obligation, to analyze your tax situation with our experts.