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:
| 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 |
| Assets | ||
| 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%.
