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22 October 2024 Moving to Switzerland– Taxes and social security (Part two)

Click here to read the first part of this blog.

What do I have to consider as U.S. citizen?

Are you a U.S. citizen who has decided to move to Switzerland? In this case, you should carefully consider the differences between the tax system of the United States of America and Switzerland. This is part two of an article giving you a first overview of the taxation including social security obligations of individuals in Switzerland.

As explained in part one, there are potential frictions between the U.S. and the Swiss tax systems. Even though there is a double tax treaty in place between Switzerland and the United States, there remain significant differences between the tax systems. The following adjustments should generally be made on a U.S. tax return while resident in Switzerland (the list is not exhaustive and serves just as an initial overview).[1]

Differences in taxation of employment income:

  • Employee Swiss social security contributions, i.e., 1st pillar, 2nd and 3rd pillar (U.S.: non-deductible / CH: deductible);
  • Employer Swiss social security contribution, i.e., 1st and 2nd pillar (U.S.: taxable / CH: non-taxable);
  • Growth of recognized Swiss pension plan assets, i.e., 2nd and 3rd pillar (U.S.: taxable / CH: non-taxable);
  • Withdrawal of Swiss pension (U.S.: non-taxable if distribution is below U.S. tax basis / CH: taxable);
  • Representation allowances (U.S.: taxable / CH: non-taxable);
  • Potential different timing on inclusion of income resulting from exercises of stock options & restricted units between U.S. and Switzerland.

Differences / similarities in taxation of investment income:

  • Capital gains (U.S.: taxable at preferential rate / CH: in general, non-taxable);
  • Dividend payments from qualified investments in which one holds at least 10 % of the respective equity (U.S.: taxable at preferential rate / CH: taxable at preferential rate);
  • Dividend payments from portfolio investments (U.S.: taxable at preferential rate / CH: taxable at ordinary rate);
  • U.S. tax exempt interest (U.S.: non-taxable / CH: taxable).

Other differences:

  • In Switzerland, notional rental income is taxed even if a house/apartment is privately owned and used;
  • Repair and maintenance work in connection with a privately owned house or apartment is deductible from the taxable income in Switzerland, but not in the U.S.;
  • Only donations to recognized Swiss charitable entities are deductible from the taxable Income in Switzerland (limit: 20 % of the net taxable income before social deductions);
  • Direct donations to Swiss organizations are generally not tax-deductible in the U.S., unless they are channeled through a recognized U.S. organization;
  • There may be additional tax and social security issues with respect to employment income earned outside Switzerland, which would have to be examined on a case-by-case basis.

Other factors to consider:

  • It is important to allocate Swiss taxes for the purposes of foreign tax credit resourcing under the Swiss-U.S. double taxation treaty (tax credit is limited to U.S. tax imposed on foreign source income);
  • A foreign tax credit is only possible if an equivalent tax exists under the U.S. tax regime. E.g., foreign tax credit can be claimed for any Swiss income tax that has been paid but not for any Swiss wealth and church tax;
  • No foreign tax credit on U.S. net investment income tax based on Modified Adjusted Gross Income (MAGI; tax rate around 3.8%);
  • Swiss property taxes and wealth taxes can be claimed as itemized deductions, but this has also an impact on the amount of the foreign tax credit;
  • With respect to the U.S. taxes to be paid, a foreign earned income exclusion of up to USD 126'500 per year (2024) and a foreign housing exclusion of up to USD 37'950 per year (2024) may be applicable. Due to higher housing costs, the IRS grants a higher foreign housing exclusion amount if you live in Berne, Geneva, or Zurich. Note that it is not possible to obtain a foreign tax credit for taxes on the excluded income;

Social Security consequences of a relocation

The change of a tax residency from the United States to Switzerland may also have an impact on your social security situation.

Social security treaty between Switzerland and the United States

Switzerland has concluded several bilateral social security treaties with EU and EFTA/EEA-membership countries as well as with other countries such as the U.S. and China. The treaty with the U.S. gives the right to levy social security to the country where the employment takes place. This means that if you are a U.S. employee working exclusively in Switzerland you are, in principle, subject to Swiss social security legislation and must therefore contribute to the compulsory Swiss social security schemes. Individuals who are gainfully employed in both Switzerland and the US are subject to the compulsory social security schemes in both countries. However, the social security system of each country will consider only the income earned on its territory. Income from self-employment is subject to social security in the country of residence, regardless in which country the individual works.

For each of your incomes, the social security implications of a relocation must be considered individually. For example, Switzerland and the U.S. do not qualify board activities in the same way. Whereas the U.S. qualifies acting on the board of directors as a self-employed activity, Switzerland considers this as paid employment. The consequence is that by relocating to Switzerland, a compensation related to a board membership of a U.S. company becomes subject to Swiss social security. For further details on the Swiss social security system and the social security treaty between Switzerland and the U.S. please see: Information about the social security agreements (admin.ch)).

Individuals who are subject to compulsory insurance in Switzerland must contribute to the old-age, survivors’, and disability insurance schemes (OASI). Employees are also subject to the compulsory unemployment insurance and accident insurance schemes. Health insurance is compulsory for all individuals resident in Switzerland and has to be entered into and dealt with by each individual (not by the employer)

Old-age, survivors’, and disability insurance schemes (OASI)

The payment of social security contributions is equally split between employees and employers. The employee part is directly deducted from the employment income. The 2024 OASI on employment income is 5.3 %. This is lower than the social security tax rate in the U.S. of 6.2%, but unlike in the U.S., there is no cap on the employment income subject to OASI. In 2024 the Swiss social security contributions for resident self-employed individuals are a maximum of 10% of the taxable income (again no cap). Unemployed individuals under the age of 65 (statutory retirement age) pay OASI contributions based on their net wealth (2024: between CHF 514 and CHF 25'700).[2]

Unemployment and accident insurance

It is also compulsory that each employee is insured against a loss of work. The Unemployment Insurance is paid by employer and employee, with the deductions from the employment income being 1.1% on the first CHF 148'800 of wages paid (2024). Whereas occupational accident insurance is paid by the employer, non-occupational accident insurance is paid by the employee (1-2% of the employment income). For individuals who work on a self-employed basis or are unemployed there is no obligation to insure against occupational or non-occupational accidence, but voluntary insurance is possible.

Health insurance

Health insurance, the basic insurance which covers essential medical treatments, is compulsory in Switzerland. The social security treaty does not apply to health insurance. As a general rule, anyone taking up residence in Switzerland must take out health insurance cover with an authorized Swiss insurer within three months of arriving on Swiss territory. The cost of the insurance premium depends on the health insurance company you are with. Other factors are your insurance model, which deductible you choose and where you live. Premiums are lower for children and young adults under the age of twenty-five. Low earners or families with a large number of children may be eligible to have their premiums subsidized by their canton of residency.

Occupational pension scheme

The social security treaty does not apply to occupational old-age, survivors’, and disability insurance scheme (Occupational Pension Act; OPA). Swiss legislation states that employees who pay compulsory OASI contributions become liable for compulsory OPA contributions when they meet a number of criteria (minimum qualifying age and salary in particular). The pension contributions are generally paid in equal parts by the employer and the employee. The employer may also decide to cover more than half, but not less. Individuals working on a self-employed basis do not have to pay OPA contributions, but they can decide to make OPA contributions voluntarily. The amount of the contributions depends on the pension plan and the age of the insured individual.

It is important to note that the contributions paid into the occupational pension plan schemes generally belong only to the insured individual. The total amount paid including the investment income generated during the insurance period determines the amount of the monthly payment you will receive or available capital at the time of your retirement. In certain cases, it is possible to withdraw the accumulated capital before retirement, e.g., to acquire a self-occupied property or to start a business (become self-employed). The occupational pension plan is not subject to wealth tax.

Conclusion

There are potential friction points between the U.S. and Swiss taxation systems which have to be considered if you are a U.S. citizen and plan to move to Switzerland. The main potential friction points are in the areas of taxation of the investment income and the application of the foreign tax credit. The foreign tax credit is generally applicable on the Swiss income tax liability, but not on the Swiss wealth and church tax liabilities. This means that as a U.S. citizen moving to Switzerland, you need to pay attention to the wealth tax rate of the particular location you are moving to in Switzerland. It is important to be aware that many tax-saving strategies available to Swiss tax residents may not be effective for U.S. individuals, as they can ultimately result in higher U.S. tax liabilities. This is due to the U.S. worldwide taxation system, which may negate potential savings.

In most cases, a detailed tax simulation, based on a completed Swiss tax return and a completed U.S. tax return, is required to calculate the detailed tax consequences of a relocation to Switzerland.

In addition, if you are also employed outside Switzerland, e.g., as a member of a board or if you receive income from self-employment activities, it may be advisable to consider the social security consequences of a relocation with respect to these earnings as well.

VISCHER will be happy to provide you with a detailed analysis of the Swiss tax and social security consequences of a relocation. To reduce friction points and to provide you with an optimal tax and social security solution, we will work closely with your U.S. tax advisor or with our trusted external U.S. tax advisors.

Author: Adrian Briner


[1] Please note that this article is no substitute for tax advice. Depending on your personal situation the tax consequences may differ.

[2] Transition period for women born between 1960 and 1963: Statutory retirement age between 64 (1960) and 64 and 9 months (1963)

 

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