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Since 2011, wealthy Geneva residents with low incomes can rely on the tax shield to limit their annual tax burden.

Indeed, in art. 60 LIPP, while respecting the constitutional principle of the guarantee of property, the legislator wanted to limit the cantonal and communal tax burden on income and wealth to 60% of the net taxable income, in order to prevent the annual tax from becoming confiscatory. In 2016 and 2018, the Federal Court also clarified the application of this article, i.e. that the worldwide wealth is decisive and the deductions on income must be taken into account to determine the maximum tax burden.

1. How does the tax shield work?

To benefit from it, the taxpayer must, first of all, be domiciled in Switzerland. As for the calculation, the net return on assets is set at a minimum of 1% of his net assets.

Based on this article of law, the maximum tax burden cannot exceed 60% of the taxable income and if the taxpayer does not benefit from a sufficient income, the net return retained is 1%, before adding the other income and applying the deductions to which he is entitled.

2. Example

A Geneva taxpayer, married with no children, has the following taxable income:

Net income from employment CHF 9’500.00
Gross property yield CHF 761’800.00
Property maintenance costs CHF (535’300.00)
Mortgage interest CHF (73’100.00)
Other income CHF 29’500.00
Health insurance premiums CHF (13’600.00)
Medical expenses CHF (2’400.00)
Voluntary contributions and donations CHF (500.00)
Net taxable income CHF 175’900.00
Gross movable assets CHF 559’200.00
Gross real estate assets CHF 24’348’800.00
Other assets CHF 2’867’900.00
Mortgages CHF (4’750’000.00)
Social deduction on assets CHF (164’000.00)
Net taxable assets CHF 22’861’900.00

The calculation of the tax shield is as follows (amounts in CHF):

Calculation of the minimum income on assets
Effective Determinant
Total net assets (worldwide) 22’861’900.00
+ Social deduction on assets 164’000.00
= Taxable assets (before social deduction) 23’025’900.00
1% of assets (minimum net return on assets) 230’259.00
Determination of the return on assets
Gross income from movable assets 29’500.00
Gross property income 761’800.00
= Gross return on assets 791’300.00
Interest on debts 73’100.00
Maintenance costs on properties 535’300.00
= General deduction from private assets 608’400.00
Return on assets (actual)/(determining) 182’900.00 230’259.00
Determination of shield income
Return on assets (decisive) 230’259.00
+ Net salaries 9’500.00
Other deductions 13’600.00
Social deductions 2’900.00
= Net income / Shield income (60% cap) 223’259.00 133’955.40
Shield calculation
Taxable in GE
Taxable income 175’900.00
Taxable wealth 22’861’900.00
Taxes in GE
Income tax (excluding TP, IIC, imputations) 34’045.30
Wealth tax 223’554.05
= Total tax before tax shield calculation 257’599.35
Reduction according to the calculation of the Geneva tax shield 123’643.95

We note that the taxpayer does not benefit from sufficient returns, so the amount of CHF 230,259.00 represents the 1% of the net wealth determining the calculation of the tax shield. Then come the other incomes as well as all the usual deductions. Therefore, this taxpayer will pay cantonal and municipal taxes on income and wealth of CHF 133,955.40 instead of CHF 257,599.35, i.e. a tax rate of 60% on net income instead of 115%.

3. Conclusion

In the above example, we can only conclude that the application of the tax shield is necessary to preserve the taxpayers’ constitutional rights. Indeed, it would not be admissible that a taxpayer has to divest himself of his wealth to be able to pay his taxes, which would be the case, in this instance, with a tax rate of 115%.

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