Taxes in Vaud: what the 12 per cent reduction means

Taxpayers in Vaud will see their cantonal income and wealth tax reduced by 12 per cent from 2027. The initiative ‘Tax cuts for all – restoring purchasing power to the middle class’ has been approved by the citizens of Vaud, according to RSM Switzerland, which is analysing the tax implications of this vote.

For an SME, the implications go beyond simply a lower personal tax bill for its director. In a canton where taxation plays a significant role in decisions regarding remuneration, dividends, business wealth and attractiveness, this decision may alter certain calculations from the 2027 planning stage onwards. However, it does not eliminate the need for an individual analysis: the actual impact will depend on family circumstances, taxable income, wealth, the municipality and the company’s ownership structure.

A general reduction in cantonal personal tax

The approved measure targets cantonal income and wealth taxes payable by private taxpayers. According to the analysis published by RSM Switzerland, it applies generally to the tax burden of each taxpayer concerned, without distinction based on tax rate or tax burden.

In practical terms, this reduction should be distinguished from a targeted change to deductions or a relief measure reserved for a specific category of taxpayers. A general reduction lowers the tax burden calculated in accordance with the applicable rules, once income, deductions and assets have been determined. On its own, it does not alter the tax classification of income, nor the accounting principles used to determine the profit of a sole trader or a company.

For the self-employed, the link to their professional activity is direct: taxable personal income depends largely on the profit from that activity, after taking into account tax-deductible expenses. For company owners, the impact is felt primarily in terms of their personal taxation: salary, dividends, taxable wealth and any other income. The company itself is not affected by this initiative as described by RSM, which refers to private taxpayers and cantonal income and wealth taxes.

This point is important for business leaders: one must not confuse a reduction in personal tax with a reduction in corporation tax. A limited liability company (Sàrl) or public limited company (SA) must continue to plan its corporate tax affairs in accordance with the rules in force for legal entities. However, the entrepreneur’s total remuneration — comprising salary, dividends and wealth accumulation — may need to be reviewed in personal budgets and financial planning.

The actual benefit compared with the existing arrangements

Before the initiative was passed, the Vaud State Council had already sought to address the tax burden through measures approved by the Grand Council. According to RSM Switzerland, these measures included, in particular, a gradual reduction in tax, which was due to reach 7 per cent by 2027. With the initiative now approved, the reduction will be increased to 12 per cent from 2027.

However, this does not mean that the two measures can simply be added together. RSM points out that the 12 per cent reduction will not be cumulative with the 7 per cent reduction already planned. The additional difference announced is therefore 5 percentage points compared with the scenario that had already been approved.

For a trust company or an administrative service provider for SMEs, this distinction is crucial. Tax simulations based on an expected 7 per cent reduction will need to be reviewed, but it would be misleading to present the new measure as an additional 12 per cent reduction compared with the previously known trajectory. The correct comparison is to measure the difference between the previous 2027 timeframe and the new framework approved by the vote.

In practice, business leaders can use this information to refine their personal cash flow forecasts. An expected tax reduction can influence one’s ability to save, the repayment of a personal loan, a capital contribution to the business, or the margin available to finance a share buyback, a property investment or a pension scheme. However, the actual amount cannot be deduced from a general percentage: it must be simulated on the basis of personal tax rates and the local authority of residence.

High earners, high net worth individuals and entrepreneurs: issues to be revisited

The initiative is taking place against a backdrop of inter-cantonal tax competition. RSM notes that the canton of Vaud is currently among the most expensive cantons for taxable incomes exceeding CHF 100,000 per year, and the most expensive for those exceeding CHF 1 million. The same analysis indicates that Vaud is also among the most expensive cantons for wealth tax on taxable wealth exceeding CHF 500,000, neck and neck with Neuchâtel, Basel-Stadt and Geneva.

These factors are of direct relevance to entrepreneurs. In a family-run SME, taxable wealth may include shareholdings, property, shareholders’ current accounts or other assets linked directly or indirectly to the business. Wealth tax is therefore not merely an abstract matter of private wealth: it can put a strain on available liquidity when the bulk of the value is tied up in the business.

The announced reduction in cantonal wealth tax may ease this pressure, but it does not automatically resolve cases where the tax value of a shareholding is high whilst disposable income remains more limited. It is often in these situations that planning becomes crucial: should more dividends be paid out to cover private expenses? Should liquidity be retained within the company? Should shareholder debt be reduced? These questions relate not only to taxation but also to company law, pension provision, remuneration policy and the financing of the business.

The self-employed will also need to distinguish between accounting profit, taxable profit and disposable income. A future tax cut does not transform an insufficient margin into a profitable model. It can, however, improve the ability to absorb certain private costs or to build up a cash reserve. In an environment where operating costs, wages and social security contributions remain key factors, tax cuts must be factored in as a planning variable, not as a substitute for sound management.

The tax shield will not be extended as planned

Another consequence of the vote deserves the attention of business owners: the reform of the tax shield, which was due to come into force if the initiative had been rejected, will not apply, according to RSM Switzerland. This reform was intended to broaden access to the tax shield, particularly for certain business owners receiving qualifying dividends.

The tax shield is a mechanism generally designed to prevent the tax burden from becoming excessive in relation to the taxpayer’s ability to pay. In business contexts, it can be a particularly contentious issue when taxable assets are substantial but the income actually available does not keep pace. The issue arises, for example, when the value of the business increases without the director withdrawing a proportionate amount of cash.

The approval of the initiative therefore alters the policy trade-off: the general 12 per cent reduction replaces, in this respect, the planned extension. For some taxpayers, the general reduction may be advantageous. For others, particularly those who might have benefited from broader access to the tax shield, the impact must be assessed on a case-by-case basis. This is typically an area where a cursory reading can lead to incorrect conclusions.

Managers affected by qualifying dividends, substantial entrepreneurial wealth or fluctuating income should request a personalised simulation before altering their distribution policy. A decision on dividends taken solely to optimise tax liability may weaken the company’s cash flow, disrupt investments or create tensions with future financing needs.

2027 Budgets: planning ahead without jumping to conclusions

RSM emphasises that the financial impact of the initiative on cantonal and municipal budgets remains difficult to assess in a global environment that appears to be taking a turn for the worse. The analysis also notes that adjustments to the 2027 budget will need to be monitored closely, particularly in light of campaign pledges that savings should not be made at the expense of public services, but rather through the running of the state.

For an SME, this point may seem far removed from tax returns. It is not entirely so. Public finances influence the local economic environment: the quality of infrastructure, administrative processing times, support policies, public investment, indirect costs and the general business climate. A reduction in personal tax may boost purchasing power, but the budgetary trade-offs that follow will also help shape the framework within which businesses operate.

Internally, businesses in Vaud and their trustees can already lay the groundwork. It makes sense to identify the taxpayers concerned — self-employed individuals, partners, executive shareholders and senior managers resident in the canton — and then to update remuneration and distribution scenarios as 2027 approaches. Entrepreneurs’ personal cash flow plans, which are often less formalised than those of the business, also warrant a review.

A few practical steps are essential: keep clear records of remuneration, avoid hasty decisions on dividends, check the combined impact with social security contributions and pension schemes, and do not overlook local tax or other aspects of one’s personal tax situation. A general cantonal tax cut may reduce the tax bill, but it does not eliminate the differences between tax profiles.

Finally, RSM points out that a broader review of the tax scales – or even the tax system itself – will need to be monitored in the coming years in connection with the abolition of joint taxation for married couples. For SME directors, this observation calls for caution: the 2027 tax regime in Vaud will not simply be a matter of percentages. It will form part of a broader trend in which place of residence, income structure, wealth, pension provisions and family status will continue to influence the final tax bill.

The 12 per cent reduction therefore sends a strong tax signal for Vaud, particularly for private taxpayers linked to the business community. However, its real value will be gauged by actual tax assessments. For SMEs and the self-employed, the right course of action is not to wait passively until 2027: it is to turn this announcement into simulations, cash-flow scenarios and prudent decisions, validated with a trust company or a tax specialist.