How are dividends taxed in Switzerland?

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”?

For individuals, income from dividends can be divided into three categories:

1. Regular taxable dividends
2. Privileged taxable dividends (exception 1)
3. 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).

1.

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.^[1]

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.

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.

2.

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.^[2]

Thus, partial taxation for stock exchange-listed participations is more or less irrelevant.^[3] 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.^[4] 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.

3.

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.^[5] 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.

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.^[6] It is better to choose selling on the stock exchange.

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