Prohibition of intercantonal double taxation – Part 2: How does it work?

Fiscal sovereignty, namely the right to levy and collect one's own taxes, is given in Switzerland not only to the Confederation but also to each canton. However, each tax base can only be taxed by one canton. This is referred to as the prohibition of inter-cantonal double taxation. In the first article, it was explained what this is and which taxes fall under it. This second article explains how it works.

Significance of tax domiciles

To avoid double taxation, one must know where the respective income should be taxed. The main tax domicile of a natural person is at their place of residence, if they are staying there with the intent of permanent residence (Art. 3 Sec. 2 StHG). For legal entities, the main tax domicile is at the statutory seat (Art. 20 Sec. 1 StHG). Here for example, income from dependent employment is to be taxed. Additionally, there are three secondary tax domiciles:

• Real estate: Real estate and the resulting income must be taxed exclusively in the canton in which the real estate is located. If it is a different canton from that in which the main tax domicile is located, there is a special tax domicile in the canton of the real estate.
• Business location: If someone operates a permanent facility and/or establishment in a canton other than that of their main tax domicile, or pursues self-employed activity, they have a special tax domicile in that canton. Business assets and profits are then to be taxed by the canton in which the business location is situated.
• Permanent establishment: A permanent establishment is defined as a fixed business establishment in which the business activities of a company (or a freelance profession) are wholly or partially carried out (Art. 4 Sec. 2 and Art. 51 Sec. 2 DBG). A permanent establishment always represents only a secondary tax domicile. This means that the business assets and profit must be divided between the primary and secondary tax domicile.

Exemption method with progression reservation

Anyone who needs to pay taxes in multiple cantons should not be advantaged or disadvantaged compared to others. Furthermore, a way must be found to avoid inter-cantonal double taxation. This led to the development of the exemption method with progression reservation. Each canton taxes only the tax substratum which is due to it. For determining the applicable tax rate, however, the entire income is considered. An example for illustration: Max Muster lives and works in Zurich. His employment income in Zurich amounts to 70,000 CHF. He also owns a property in St. Gallen, which yields an income of 30,000 CHF. Zurich can thus tax 70,000 CHF, St. Gallen 30,000 CHF. Each canton, however, can consider an income of 100,000 CHF for tax rate determination.

Could you be affected by inter-cantonal double taxation? Findea is happy to advise you and help you keep your taxes simple and uncomplicated.

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