Written by: TaxDAO
1. Introduction
The Swiss Confederation (English: SwissConfederation), referred to as Switzerland, is located in central Europe and implements a federal system. As one of the richest countries in the world, Switzerland is classified as a highly developed industrial country with a highly diversified economy covering many fields such as finance, pharmaceuticals, precision machinery and tourism. Not only does Switzerland perform well economically, it is also known for its long-term neutrality at the political level. Many international organizations have their headquarters or offices in Switzerland, giving them an important role in global affairs. With its neutral political stance, developed economy, and strict bank secrecy system, Switzerland has become the world's "most prestigious asset custody place" and an international financial and business center. Compared with other countries, Switzerland has a protective and encouraging attitude towards crypto-assets, and its policies closely follow technological development trends. Through timely legislation and supervision, crypto-assets in Switzerland have gradually received roughly the same equal treatment as traditional financial assets. Encouraging the world's capital to flow into Switzerland and enter related industries. According to 2020 report statistics, about 900 blockchain companies have emerged in Switzerland in the past few years, employing a total of about 4,700 employees, which shows that Switzerland is friendly to crypto assets. This article will analyze the cutting-edge dynamics of the tax haven Switzerland's crypto tax system and supervision from four dimensions: Switzerland's characterization of crypto assets, basic tax system, crypto asset tax system, and cryptocurrency regulatory policy, and predict its future development direction to provide investment guidance. Provide cutting-edge information.
2. Switzerland’s characterization of crypto assets
2.1 Classification of Crypto Assets
According to the Initial Token Offering (ICO) Regulatory Framework Query Guidelines issued by the Swiss Financial Market Authority (FINMA) in February 2018, crypto assets can be divided into three categories: payment tokens, utility tokens, and asset tokens.
2.1.1 Payment Token
Payment tokens (such as BTC and ETH), often synonymous with cryptocurrencies, are digital assets used to purchase goods and services, or to transfer money or value. Unlike traditional currencies issued by central institutions, cryptocurrencies do not bring any claims or ownership rights to their issuers. Such tokens only represent the "value of the blockchain itself" and are designed to serve as a means of payment for goods and services, thereby reflecting the virtual value recognized within the blockchain system. Payment tokens are not defined as a type of security.
2.1.2 Utility Token
Utility tokens are tokens that provide users with digital access to applications or services through a blockchain-based infrastructure, such as concert tickets or store coupons. The characteristics of utility tokens depend on the case: if their purpose is limited to granting access to an application or a service, and the token does have this function, it will not be considered a security; if a utility token is issued with an additional or only investment purpose, the Swiss Financial Market Supervisory Authority (FINMA) will regard such tokens as securities (i.e. the same as asset tokens).
2.1.3 Asset Token
Asset tokens represent assets such as debt or equity that are borne by the issuer. For example, asset tokens promise a share of future company earnings or future capital flows. Therefore, in terms of economic function, these tokens are similar to stocks, bonds, or derivatives. Tokens that enable physical assets to be traded on the blockchain also fall into this category. This type of token is considered a security.
2.2 Characterization of Crypto Assets and Their Transactions
According to different functions, the Swiss Financial Market Authority defines payment tokens as "non-securities" payment methods, which are more similar to currency; asset tokens are defined as "securities" close to financial products, and utility tokens are distinguished by whether they have additional investment purposes. It is worth noting that the classification of a certain crypto asset is not clear-cut, and there are also hybrid tokens. At the same time, due to the different nature of the assets, the three types of tokens are classified under different legal jurisdictions under the original financial regulatory framework and are subject to different taxes.
3. Basic tax policy in Switzerland
3.1 Swiss tax system
Switzerland is one of the countries with the lowest tax burden on natural and legal persons in Europe. Direct taxes on natural persons are levied annually on a self-declared basis and are payable in installments in the following year. Just like the country's federal structure, the Swiss tax system is divided into three levels: federal, cantonal and local, each with independent tax powers and types of taxes. The federal government, 26 cantons and local municipalities levy taxes separately, and companies and individuals must pay all three levels of taxes (federal, cantonal and municipal taxes). Federal taxes account for about 30% of the total national tax revenue, the cantons account for 40%, and the municipalities account for 30%. The country's taxation system adopts the territorial principle. As long as it is a joint-stock company, limited liability company, joint stock limited partnership, or cooperative established in accordance with Swiss law or the relevant laws of other countries, its income must pay federal and cantonal/municipal direct taxes as required.
3.2 Income Tax
3.2.1 Corporate income tax - Federal government
The Swiss federal government imposes a flat rate of 8.5% on the after-tax profits of stock corporations and cooperatives. A flat rate of 4.25% applies to associations, foundations, other legal entities and investment trusts. The federal government does not levy capital taxes.
Legal persons domiciled in Switzerland, i.e. Swiss joint stock companies, limited liability companies, general partnerships, cooperatives, associations and foundations, as well as collective capital investments through direct real estate holdings, are subject to tax obligations. Non-resident companies are only taxed on income derived from Switzerland, i.e. income and capital gains contributed by business, permanent establishments or real estate in Switzerland, including income from real estate transactions.
3.2.2 Corporate income tax - cantonal and municipal
Cantonal and municipal taxes are harmonized and most profit determination rules are usually applied accordingly at cantonal and municipal level. For companies paying normal taxes, the combined effective profit income tax rate (for direct federal taxes and cantonal and municipal taxes) ranges between 11.9% and 21.6% in 2020, depending on the cantonal and municipal authorities.
3.2.3 Personal income tax
Individuals who are permanently or temporarily resident in Switzerland are subject to federal and cantonal/communal taxation. An individual has a temporary residence (residence) in Switzerland if he or she: a) stays in Switzerland for at least 30 days and performs a professional activity or b) stays in Switzerland for at least 90 days and does not perform any professional activity. The Swiss tax system does not include partnerships, so the tax authorities tax the partners of a partnership separately.
Swiss residents are taxed on their worldwide income. This is excepted from income from foreign business activities and permanent establishments and immovable property abroad, which are used only to determine the applicable income tax rate (tax exemption under the progressive tax exemption law). Taxable income also includes notional rent from the resident's residential property. Individual tax rates are generally progressive, with the highest rate applicable in the Swiss Confederation being 11.5%. The cantons can set their own tax rates. As a result, the applicable maximum tax burden varies significantly from canton to canton (maximum rates in cantonal capitals range from 10.33% to 27.09%).
3.3 Corporate capital tax
Capital tax is levied annually only by the tax authorities at cantonal/communal level. Capital tax is calculated on the basis of the company's net equity (i.e. share capital, capital reserve, statutory surplus reserve, other surplus reserve, retained earnings). The company's tax base also includes all provisions that do not qualify for tax deductions, all undisclosed other surplus reserves and debt that has the characteristics of an economic interest in accordance with Swiss thin capitalization regulations. Some cantons allow companies to offset capital tax against their cantonal profit income tax. The capital tax rate varies from canton to canton and also depends on the company's tax status. In 2020, it ranges between 0.0010% and 0.51%. Cantons can provide for tax deductions for taxable capital arising from qualifying participations, patents and loans to group companies.
3.4 Personal Wealth Tax
Wealth tax is levied only by cantons/communes in accordance with their own tax laws and rates. The tax is assessed on net worth. Net worth includes real and personal property (such as securities and bank deposits, life insurance (cash) redemption value, cars, shares in undistributed estates, etc.). Assets that do not generate any income are also taxed. Shares in foreign companies and foreign real estate are not subject to wealth tax. However, when calculating the applicable wealth tax, these assets need to be included in the accounts if progressive tax rates are used (progressive retention). Individuals can deduct debts and tax-free amounts from the total amount of their assets. Most cantonal wealth taxes are progressive and each canton has the right to set its own tax rate. Therefore, the maximum tax burden varies greatly from canton to canton, ranging from 0.135% to 0.870%.
3.5 Estate and gift taxes
There is no uniform system for collecting inheritance and gift taxes in Switzerland. Each canton is free to levy them, and the relevant laws vary considerably in almost every respect. All cantons except Schwyz levy inheritance and/or gift taxes on certain property transfers, provided that the deceased or the donor was a resident of the canton or the real estate left or donated is located in the canton. Both taxes are generally progressive and are usually calculated based on the relationship between the deceased or the donor and the beneficiary and/or the amount of the property received by the beneficiary. No canton imposes inheritance or gift taxes on spouses, and most cantons exempt direct heirs from such taxes.
3.6 Withholding Tax
The Swiss Confederation imposes withholding tax at source on a gross basis on dividends distributed by Swiss companies, income from bonds or similar debt instruments issued by Swiss issuers, income from Swiss investment funds and interest paid on deposits by Swiss banking institutions. Gains from activities such as gambling and lotteries, which are not exempt from income tax, are also subject to withholding tax, including insurance premiums. The debtor is usually responsible for paying the tax and must deduct the withholding tax in full, regardless of whether the beneficiary is entitled to a partial or full refund. A refund is only possible if the income is properly declared and the beneficiary is entitled to use the income subject to withholding tax. Withholding tax for corporate taxpayers is reimbursed through a tax refund, while withholding tax for Swiss resident individuals is deducted through the normal tax procedures. For non-resident taxpayers, withholding tax is a final tax liability. However, non-resident taxpayers may be able to obtain a partial or full refund of the tax under an international double taxation treaty or a bilateral agreement between Switzerland and the country where the beneficiary resides.
3.7 Value Added Tax
Although Switzerland is not a member of the European Union, its VAT system is structured in accordance with the Sixth Council Directive on the harmonization of the laws of the Member States on turnover taxes. Swiss VAT is levied only at the federal level as an indirect tax on most goods and services, applicable at all stages of the production and distribution chain. It is a tax payable by the supplier of goods or services (i.e. the tax liability is based on the payment made by the recipient of the goods or services). As of January 1, 2018, the standard rate for all taxable goods and services is 7.7%. A lower rate of 3.7% applies to accommodation services. A lower rate of 2.5% applies to goods and services for basic needs.
The Federal Tax Administration offers a simplified VAT calculation method for small businesses with sales revenues of up to CHF 5,005,000 and tax payable of up to CHF 103,000 per year. These small businesses can choose to calculate VAT at a one-time rate lower than the standard rate and not pay input tax if they waive input tax accounting. This simplified method must be approved by the Federal Tax Administration and maintained for at least one year. Compared to quarterly accounting, the simplified method only requires two VAT returns per year.
4. Switzerland’s Crypto Taxation System
4.1 Overview of Swiss Crypto Taxation
In Switzerland, the tax policy for crypto assets is based on the existing tax law framework. The Swiss Federal Tax Administration (FTA) detailed the tax treatment of cryptocurrency activities in its recently updated working document. As mentioned above, crypto assets can be divided into payment tokens, asset tokens and utility tokens, and the tax treatment varies depending on the nature of different categories of tokens.
4.2 Taxation of Payment Tokens
Payment tokens (i.e. cryptocurrencies) such as BTC and ETH are used for payment purposes, and the issuer has no obligation to provide services or make payments. Cryptocurrencies are the focus of the Swiss Anti-Money Laundering Act (AMLA). Switzerland classifies them as foreign exchange, levies income tax/wealth tax on individuals, and capital gains tax on companies. Individuals or companies should bear different taxes based on different taxable behaviors.
Holding payment tokens is treated as foreign exchange and is considered a movable capital asset, subject to state-level wealth tax. In the case of mining payment tokens, if they meet the self-employment conditions, they are considered self-employment income and are subject to income tax, while mining-related expenses are tax deductible. Staking refers to locking tokens on the proof-of-stake blockchain for a period of time to verify the new token generation process. In the case of staking, the owner of the tokens will not be able to use them during the lock-up period. In return for providing the tokens, they receive compensation from the staking pool, and these gains are subject to income tax. In the case of airdrops, the owner of the cryptocurrency can receive additional units of the cryptocurrency for free without taking any action, and the airdrop income is also subject to income tax.
4.3 Taxation of asset tokens
Financial products or services and financial entities related to asset tokens are subject to the Stock Exchange and Securities Trading Act (SESTA), the Financial Market Infrastructure and Securities and Derivatives Trading Market Conduct Act (FMIA), and the Financial Services Act (FinSA). Asset tokens usually raise funds through initial coin offerings (ICO/ITO). All asset tokens are considered movable assets and are subject to wealth tax. At the same time, the profits received as financial assets are considered income and are subject to income tax, which applies to the following three scenarios. First, debt tokens are considered bonds, and the investment must be repaid and interest must be paid. Interest income is subject to income tax. Second, contract-based asset tokens do not need to repay the investment. Investors receive a certain proportion of the issuer's income, and the income is subject to income tax. Third, asset tokens with participation rights are equivalent to shares or participation certificates, and dividend income is subject to income tax.
4.4 Taxation of Utility Tokens
Utility tokens provide access to blockchain applications or services without the obligation to repay the investment. Utility tokens are usually tradable and subject to wealth tax at market value. Since the issuer does not need to pay investors, there is no income tax impact.
4.5 Token Trading
All types of token transactions are considered regular securities transactions for tax purposes, equivalent to ordinary securities transfers, and are considered private property management. Capital gains from private asset management activities are tax-free, but capital losses are not deductible. If trading activities are considered self-employment, capital gains are subject to income tax, and losses are tax-deductible.
5. Latest developments in Swiss crypto asset regulation
Since the development of cryptocurrencies, Switzerland has been actively promoting the advancement of the regulatory system to adapt financial regulation to the development of blockchain technology and crypto assets. Compared with countries that have enacted separate laws to strictly regulate crypto assets, Switzerland's regulation of crypto assets is based on existing laws and modifies relevant regulations based on the nature of different tokens. In Switzerland, it is legal to provide cryptocurrency exchanges and custody services, which are regulated by the Swiss Federal Tax Administration (SFTA) and the Swiss Financial Market Supervisory Authority (FINMA). As mentioned above, Switzerland classifies cryptocurrencies and virtual currencies as assets or property, and exchanges and virtual currency platforms are considered equivalent to financial institutions. Therefore, the legality of exchanges depends on the nature of the assets and investor protection. At the same time, they must comply with local anti-money laundering (AML) and counter-terrorism financing (CFT) and consumer protection obligations, but some banking rules and thresholds are more relaxed.
At the end of 2015, in the face of the rapid development of new technologies in the financial market, Switzerland established the "Fintech Desk" (FintechDesk) to provide the public, start-ups and mature financial service providers with information on the current financial market laws on fintech. In September 2017, the Swiss Financial Market Authority (FINMA) issued the "Guidelines for the Supervision of Initial Token Offerings (ICOs)", which elaborated FINMA's position on ICOs, emphasized the areas in which the existing financial legal market may cover ICOs, and improved and issued the second ICO guidelines in February 2018. In December 2018, the Federal Council issued the "Blockchain Legal Framework" report based on the principles of technology neutrality and market priority to provide advice for legislation. Based on this, the Swiss Federal Government issued the Federal Law Adapting Distributed Ledger Technology Development Act (DLT Act) in November 2019. This law aims to amend and update existing laws and regulations to better adapt to and support the development of blockchain and distributed ledger technology (DLT). It stipulates the rules for cryptocurrency licensing, trading, anti-money laundering, financial market infrastructure for trading cryptocurrencies, and bankruptcy. From its "technological neutrality" principle, it can be seen that the purpose of the DLT Act is not to strictly restrict the blockchain market, but to emphasize the protection of the integrity and stability of the Swiss financial market, with the aim of protecting financial participants and the entire market. In September 2020, the Swiss Parliament passed the Blockchain Act, which further determined the legality of cryptocurrency exchanges and cryptocurrency transactions in Swiss law. Legislation requires that once the token can be technically transferred to the blockchain infrastructure, it must comply with local initial coin offering (ICO), anti-money laundering (AML) and combating the financing of terrorism (CTF) requirements.
On November 10, 2023, the Swiss Financial Market Authority (FINMA) issued a statement announcing that Switzerland and 48 other countries including the United Kingdom, the United States, Germany, France, Canada, and Australia will implement the Crypto-Asset Reporting Framework (CARF) by 2027. The Crypto-Asset Reporting Framework was issued by the OECD Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). The framework stipulates the automatic exchange of tax information on crypto assets with the aim of promoting tax transparency of overseas financial accounts. As a global financial center, Switzerland, with the enthusiastic response of major European and American countries, is of course also actively participating in international cooperation to enhance its reputation as an international financial center and ensure the stability and security of its financial system. At the actual regulatory level, the framework may passively strengthen the Swiss government's grasp and control of crypto asset information.
6. Summary and Outlook
Switzerland's joining CARF predicts that Switzerland's regulation of crypto assets may continue to be influenced by the international community. As the international community's regulatory requirements for crypto assets continue to increase, Switzerland may further refine and strengthen its compliance requirements for crypto assets to ensure the transparency and security of its financial system. Faced with the turbulent global financial market, the Swiss government may be more cautious in the future and strictly abide by international standards to maintain its international credibility.
We believe that all Swiss compliance and regulatory actions are ultimately for the better development of the financial industry. "Technology neutrality, market priority" will remain the first principle of Swiss regulation of crypto assets. The Swiss government will continue to support the development of crypto asset technology and blockchain, and will make timely adjustments based on new trends and challenges in the crypto asset market to ensure that the regulatory framework is flexible and effective. For example, in order to avoid the impact of strict tax supervision on centralized exchanges, decentralized alternatives such as DEX may receive policy benefits; at the same time, crypto assets outside of CARF supervision, such as closed-end crypto assets, central bank digital currencies (CBDCs), and specific electronic currency products, may also be developed.
