Taxation of individuals: income and net wealth
A proposal to modify the household tax regime to mitigate an increase in the tax rate for married couples’ aggregate income, and to change the tax treatment of deemed rental income from real estate owned for personal use, was rejected by public vote on 16 May 2004. However, those issues remain in the pipeline for modifications in 2005.
Income – employee stock options
The taxation of stock options has been under review for a few years. The current Swiss legislation does not cover it; rather, it is addressed in a federal circular, ‘Letter five’ of 30 April 1997. In practice, however, the tax treatment of stock options is carried out through the negotiation of tax rulings with the various cantonal tax authorities, often leading to disparities between cantons and increasing the workload of the authorities.
The principle applicable to the taxation of stock options since 1997 was of taxation at grant, except for some specific stock options plans that render the evaluation of stock options at the time of grant difficult. In May 2003, the Federal Tax Administration sent a circular letter to the cantonal tax administrations, recommending taxation at vesting. That new practice was followed by most of the cantons, except for some French-speaking ones.
To further a consultation procedure that ended on 30 June 2003, the Federal Council issued a bill for new legislation that is intended to apply at both the federal and cantonal levels. The draft legislation provides for taxation at grant for quoted unrestricted stock options. Stock options that are not quoted or restricted are taxed at the time of exercise.
Furthermore, an employee who has received unquoted or restricted stock options and who has been resident and employed in several countries (including Switzerland) between the time of grant and the time of exercise will be subject to a pro rata tax in Switzerland on the income generated during the time spent in Switzerland.
The proposed legislation will probably be under consultation until the end of 2005, and even then the measures likely would not come into effect before 2007, as they would require that most cantons adapt their internal legislation.
Estates and gifts
In accordance with recent case law of the European Court of Justice, Switzerland will modify its income tax law to repeal heirs’ responsibility for penalties for tax evasion committed by the deceased.
In addition, a number of Canton revised their inheritance laws.
International Taxation (Treaties)
Bilateral II: The European Savings Tax Directive
On 26 October 2004, Switzerland and the EU reached agreement on the application of measures equivalent to the EU savings tax directive. If the agreement is ratified by the Swiss parliament, and no referendum is requested, Switzerland is expected, from 1 July 2005, to levy a withholding tax on interest payments made to EU residents instead of exchanging taxpayer information. The agreement also provides that Swiss companies may benefit from tax exemptions on dividends, interest and royalties, as provided by the EU parent-subsidiary and interest and royalties directives.
The Federal Tax Administration issued a draft circular last year that was open to consultation by interested parties until the end of December 2004.
The Hague Convention on Recognition of Trusts
It appears that Switzerland will sign the Hague Convention on the Recognition of Trusts during the course of 2005. In addition to signing this treaty, it appears highly likely that a more detailed domestic law on the taxation of trust organised under foreign law and administered from Switzerland will be enacted during the course of 2005.
Mario Kumschick, Marnin Michaels , Jeffrey Morse and Philip Marcovici , Baker & McKenzie, Zurich; Alexandra Storckmeijer, Baker & McKenzie, Geneva