TAX-EXEMPTED DIVIDENDS

In the land of William Tell, small miracles sometimes happen, like the new federal legislation that came into force in 2011 as part of the second corporate tax reform.

This change in taxation benefits shareholders of companies listed on the Swiss stock exchange who make capital repayments. Thus, since 1 January 2011, the repayment of contributions, bank charges and additional payments made during the founding or a capital increase has been treated for tax purposes in the same way as the repayment of share capital.

This gibberish simply means that distributions from reserves resulting from capital contributions are not subject to income tax for a Swiss private investor, unlike ordinary dividends (which are distributed from the company's profits).

In more detail, such distributions are not subject neither to withholding tax, nor to direct federal tax, nor to cantonal income tax! These dividends don't even have to be declared on your tax return... since, for tax purposes, they are not dividends!

Currently, around 50 to 60 of the 300 companies listed on the Swiss stock exchange make tax-free distributions.

The reduction of share capital (respectively the repayment of capital reserves) is a perfectly legal way to avoid taxes. I will come back to the phenomenal scope of this tax advantage.

But let us summarize three main points at this stage:

1. Regardless of the type of dividend distributed, shares are subject to wealth tax (the calculation is based on the market value, determined by the stock market price on 31.12). Fortunately, this tax is relatively low in Switzerland.
2. In the case of tax-exempt dividends, there is no need to wait a year to obtain a refund. withholding taxThe equation is simplified: gross dividend (before deduction of withholding tax) = net dividend (after deduction of withholding tax).
3. Ordinary dividends are income from movable assets and are therefore added to taxable income (in other words, they are added to your salary). On the contrary, tax-exempt “dividends” are not subject to income tax.

 

NUMERICAL ILLUSTRATION

Taking as an example an average tax rate of 20%, this means in concrete terms that (only from a tax point of view and all things being equal): a tax-free dividend lower than another ordinary dividend by 20% provides an equivalent net income!

Example: By having in your portfolio a stock that distributes a tax-exempt dividend of 3.2%, you obtain the same net return (the same annuity) as by owning a stock that distributes an ordinary dividend of 4%!

This numerical example may seem exaggerated to you. In fact, it is quite the opposite: it is extremely conservative. And I will try to explain why, this time using real numbers.

NB: This is a simplified example for purely illustrative purposes, which I have deliberately not complicated by including variables such as family situation, tax deductions, etc. You can determine your gross figures for example on: https://neuvoo.ch/calculatrice-impot-net/Bern,Bern-96000?salary=100000®ion=Bern&city=Bern.

Mr. Dupont lives in Bern and earns an annual salary of 100,000 francs.
On this salary, he pays a total of 23,237.90 francs in taxes, which corresponds to a average tax rate of 23.24%.

In this real example we see that we are already beyond the 20% brushed in our first example.

And yet, this figure still largely underestimates Mr. Dupont's fiscal reality!

For what?

The answer lies in two very crude terms born from the perverse imagination of the tax authorities...

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