Practical tax topic: Transferring your place of residence to Switzerland

Switzerland has been a favourite country of residence for the wealthy for many years. There are many reasons for this, including its political stability and central location in Europe. Current geopolitical developments are also making the Alpine country even more attractive. Last but not least, the tax advantages offered by Switzerland are an additional factor. These include, in particular, the low income and wealth tax rates.

A move from Germany to Switzerland should be carefully planned, particularly with regard to the termination of unlimited tax liability and the corresponding provisions on exit taxation in Germany.

This includes, on the one hand, compliance with national German legal provisions and, on the other hand, various aspects of the double taxation agreement between Switzerland and Germany. Only if these regulations are observed is a move also advisable from a tax perspective in order to avoid unwanted financial consequences.

Individuals resident in Switzerland are generally taxed on the basis of their worldwide income and assets. Under certain conditions, foreign nationals can benefit from the attractive lump-sum taxation, whereby the provisions set out in the German-Swiss double taxation agreement must also be taken into account here. Particularly in these immigration cases, the persons concerned often still have (company) assets in their countries of origin, so that the problem of valuing foreign companies for tax purposes in Switzerland arises. This valuation is particularly important for the wealth tax levied in Switzerland.

The wealth tax burden in Switzerland is between around 0.1 and 1 per cent, depending on the canton/municipality of residence. The calculated wealth tax value or an optimised tax valuation of privately held securities and participations can therefore have a significant influence on the wealth or total tax burden of a shareholder.

The framework conditions for the valuation of such participations for Swiss wealth tax purposes are set out in Circular 28 of the Federal Tax Administration (‘KS 28’). This tax administrative instruction provides for various valuation methods that significantly influence the result of the valuation and thus the wealth tax burden of shareholders.

The assets of natural persons are to be valued at market value for tax purposes. While the market value of listed shares corresponds to the stock exchange price, unlisted shares are generally valued in accordance with the provisions of KS 28. The purpose of this is to achieve a standardised wealth tax valuation in Switzerland for domestic and foreign securities that are not traded on any stock exchange or are not regularly traded over the counter.

The applicable valuation methods differ depending on the business activity of the company. Pure holding, asset management and financing companies are valued at net asset value.

In the case of commercial, industrial and service companies, the enterprise value results from the double weighting of the capitalised earnings value and the single weighting of the net asset value. The net asset value of a company basically corresponds to its equity for tax purposes. Hidden reserves, for example on securities, investments and real estate, are added to the net asset value after deduction of deferred taxes.

In the case of company valuations in which the capitalised earnings value of a company is to be used, the future prospects of the company's success are taken into account based on past experience. There are basically two models to choose from, which take into account either the current tax year and one prior-year period (model 1) or the current tax year and two (model 2) prior-year periods.

As is usual with an international change of residence, the tax implications in both the country of departure and the country of arrival should be carefully examined in order to avoid any cost traps. The complexity of the German exit tax rules increases the need for planning in Germany. It is therefore advisable to seek comprehensive advice.