Taxation in Geneva
Geneva, like any other city or region, has tax rules and laws that determine how citizens and companies pay their taxes. The canton of Geneva recently introduced a new tax law that was passed by the Grand Council in 2019 and came into force on January 1, 2020.
The aim of this new tax law is to simplify the tax system for taxpayers and make taxation fairer. In particular, it introduces a new progressive tax scale for individuals and a new tax rate for companies. It also includes measures to step up the fight against tax fraud and to encourage companies to invest in the canton.
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Compensation for unfair dismissal is tax-free
Compensation paid by an employer to an employee following unfair dismissal is tax-exempt. The compensation is essentially compensation for pain and suffering, and is therefore fully tax-exempt.
An employee of a Vaud transport company was dismissed in 2016 and released from her obligation to work until the end of the notice period. She subsequently brought an action for unfair dismissal against her employer. At the conciliation hearing, the latter agreed to pay CHF 25,000. In 2020, the Vaud cantonal tax authorities ruled that this allowance was taxable as income. In 2021, the Vaud Cantonal Court ruled that the CHF 25,000 did not constitute taxable income.
The Federal Court dismisses the appeal lodged by the cantonal tax authorities. Under the Swiss Code of Obligations (CO), in the event of wrongful termination, the employer must pay compensation of up to six months’ salary (article 336a CO). In this case, the Administrative Court could legitimately assume that the compensation had been paid by the employer in recognition of unfair dismissal. According to the Swiss Federal Direct Tax Act, payments for moral damages are tax-exempt income. The Federal Court concludes that, from a tax perspective, the compensation paid under article 336a CO must be considered in its entirety as tax-exempt compensation for non-material damage.
The purpose of the indemnity is to compensate the employee for the harm he has suffered as a result of his unfair dismissal. In this respect, it is irrelevant that the payment also serves to punish the employer’s conduct.
Tax paid by foreigners is deducted at source
As a foreigner living in Switzerland with a B permit (long-term residence) or L permit (less than one year’s residence), you will be subject to withholding tax.
This means that your tax will be deducted from your Swiss salary every month.
This system is particularly practical, but requires regular communication with your employer, particularly in the event of a new personal situation.
The arrival of a child, for example, could change the scale to which you are subject.
All foreigners pay tax at source, but not all are subject to the same income tax scales.
In all cantons, there is a salary limit which determines the type of scale to which you will be subject:
- The limit is CHF 120,000 per year. Below this level, you are taxed at source.
- Above this level, you are subject to the ordinary tax scale, which takes into account municipal taxation.
- As a result, there are sometimes significant differences between communes.
- Depending on your salary, this can represent a saving of several thousand Swiss francs a year.
On the other hand, withholding tax does not take this communal tax into account.
Nevertheless, it is possible to apply for a rectification to recover part of this source tax.
Reducing taxes with 2nd and 3rd pillars
You can reduce your tax bill by buying into a 2nd pillar pension fund in Switzerland.
The money paid into the 2nd pillar account is deducted from the taxpayer’s taxable income.
For foreign workers, it is possible to pay into this 2nd pillar, regardless of the scale to which you are subject.
You can also reduce your tax bill by investing in a supplementary 3rd pillar fund.
Investing in a small business
Every year in Switzerland, several hundred SMEs change hands or are passed on to the next generation.
Retirement age is one of the main reasons for these changes in ownership.
Of course, it’s not always easy to navigate through the accounts and business plans of SMEs which, at first glance, appear to be very attractive, but which may also conceal various problems, such as obsolescence of their products, end-of-life or outdated machinery and equipment, dissatisfied customers, or very amitious and unattainable business plans.
It is therefore essential to call in an expert to avoid losing up to several million francs.