Swiss taxes: where does taxpayers’ money go?

The Swiss tax bill sometimes gives the impression of a single levy. In reality, it combines several different systems: the Confederation, the canton and the municipality each claim their share, with different tax bases and spending priorities. For an SME, a self-employed person or a tax adviser, understanding this structure is not merely a theoretical exercise: it is key to forecasting advance tax payments, comparing the impact of different business locations, explaining a municipal coefficient or assessing the true impact of VAT on prices.

According to data reported by watson.ch, the total revenue of the Swiss ‘state’ amounted to 266 billion francs in 2024, taking into account the Confederation, the cantons, the municipalities and social insurance schemes, but after offsetting internal transfers between these levels. More than 85 per cent of this revenue came from taxes. Behind this figure lies a reality that is useful for businesses: part of the tax burden depends on profit, another part on the wage bill, and yet another on consumption invoiced to the end customer.

Three levels of taxation, a single business to manage

Swiss fiscal federalism is based on a simple idea: public responsibilities are divided between the Confederation, the cantons and the municipalities. Activities closely affecting the local population generally fall more within the remit of the cantonal and municipal levels, whilst national responsibilities are assumed by the Confederation. This structure explains why a taxpayer – whether an individual or a business – receives a tax bill that does not correspond to a single, uniform tax.

For a company, this structure has very practical implications. Direct federal tax is governed by national rules, whilst the cantons tax, in particular, companies’ profits and capital according to their own criteria. Municipalities generally follow the cantonal framework but apply their own tax rate. In other words, two companies engaged in comparable activities may face different tax burdens depending on their canton and municipality of tax residence.

This is a key consideration when setting up a business, relocating a registered office, opening a branch or converting a sole trader into a limited company. The choice of location should never be based solely on the advertised tax rate: one must also take into account the labour market, rents, access to customers, logistics, permits, any available grants and administrative costs. However, taxation remains a key management factor that influences the cash flow available after tax.

Social security contributions are another factor to consider, even though their rationale differs from that of taxation. They primarily fund old-age and disability pensions (AVS and AI) as well as unemployment benefits, mainly through employer and employee contributions, with a contribution from the Confederation. For the employer, the distinction is important: social security contributions are not a tax on profit, but they form part of labour costs and must be included in the personnel budget, quotations and cash flow plans.

The Confederation relies on direct federal tax and VAT

In 2024, the Confederation collected 86.5 billion francs, according to figures cited by watson.ch. Its primary source of revenue is direct federal tax, which accounts for around 35 per cent of its revenue. This tax is levied on individuals’ income — wages, pensions or investment income such as interest and dividends — as well as on corporate profits.

The breakdown between individuals and companies is almost evenly balanced in direct federal tax: 48 per cent of revenue comes from individuals and 52 per cent from companies. For SME managers, this serves as a reminder that corporation tax is not a marginal factor in public financing. Taxable profit is therefore not merely an indicator of performance: it also results in a cash outflow that must be provisioned for and planned.

VAT is the other pillar of federal taxation. It accounts for around 31 per cent of the Confederation’s revenue. Unlike income tax or corporation tax, VAT is levied at the point of consumption. The business issues an invoice to its customers, deducts input tax where entitled to do so, and then pays the balance to the tax authorities. In practice, this mechanism can create a dangerous illusion: the money received as VAT passes through the bank account but does not constitute available turnover.

For an SME, VAT management must therefore be treated as a cash flow issue as much as a tax obligation. Rapid growth, long customer payment terms or input tax adjustments can create cash flow pressures if the company has not set aside the amounts due for remittance. Accounting controls must enable the probable VAT liability to be identified at all times, particularly when margins are tight or cash inflows are irregular.

Watson.ch also notes that consumption taxes — VAT, mineral oils, tobacco and other similar levies — together constitute the largest item in the federal budget, accounting for 43 per cent. This information has economic implications: a significant proportion of public revenue depends directly on consumer spending. For businesses operating in retail, catering, transport or consumer goods, indirect taxation is an integral part of the final price.

Cantons and municipalities: location affects the tax bill

The cantons levy their own taxes independently of the Confederation. They tax the income and wealth of individuals, as well as the profits and capital of businesses. Each canton sets its own rates. The watson.ch article illustrates this diversity using the example of a family that often pays significantly less in Zug than in Geneva, given comparable income and wealth.

For companies, this diversity results not only in inter-cantonal tax competition but also in more subtle trade-offs. A company does not simply choose a canton; it chooses an administrative environment, a labour market, infrastructure and, at times, proximity to partners or institutions. Tax costs must be weighed against these factors. A tax saving may lose its appeal if it is accompanied by higher operational costs or increased complexity.

Local authorities add their own layer. They use the same types of tax as their canton, but apply a tax coefficient, set each year by the local council or the local assembly in accordance with the local budget. In some cases, additional charges apply, for example for water or waste collection. For an SME, these amounts are not always significant in isolation, but they can add up in the total cost of a site, a workshop, a restaurant or a shop.

This reality makes tax comparisons tricky. A tax adviser does not simply look at a tax scale: they analyse the legal form of the business, the director’s circumstances, the remuneration policy, any dividend payments, the taxable capital, investments and cantonal specifics. The right question is not simply ‘where is the tax rate lowest?’, but ‘where is the overall structure most consistent with the business’s activities and risks?’.

Who pays the most: progressive taxation on income, concentration on profits

Direct federal tax is progressive for individuals: the higher the taxable income, the higher the tax rate applied. According to 2022 figures cited by watson.ch, around a third of taxpayers pay no direct federal tax, largely because tax deductions mean that modest incomes fall below the tax threshold. Half of the taxpayers with the lowest incomes account for 19 per cent of total income, but pay only 2.4 per cent of the tax. At the other end of the scale, the top 1 per cent of taxpayers with the highest incomes account for 11.5 per cent of total income and pay nearly 40 per cent of the tax.

For an SME director, these figures inform remuneration decisions. Salary, dividends, pension contributions, business expenses and profits retained within the company do not have the same tax and social security implications. This is not about finding a one-size-fits-all solution: each situation depends on the legal form of the business, the canton, the director’s personal needs, social security cover and investment plans. However, the progressive tax system requires careful planning, especially when profits vary significantly from one year to the next.

On the corporate side, direct federal tax is also heavily concentrated. In 2022, public limited companies and limited liability companies accounted for over 98 per cent of tax revenue from legal entities, according to watson.ch. The most profitable companies pay the bulk of the tax, but their share of the tax burden – 77 per cent – remains lower than their share of profits, which stands at 90 per cent.

One of the explanations cited is the deduction for shareholdings. This mechanism is designed to prevent the same profit from being taxed multiple times when a company holds shareholdings in other companies and receives income linked to those shareholdings. Within corporate groups, the legal structure therefore influences taxable profit. For an SME that holds subsidiaries, strategic shareholdings or a holding company, the challenge lies in correctly documenting cash flows, dividends, book values and supporting documentation. The apparent simplicity of a structure can sometimes prove costly if tax implications are overlooked, but an overly complex structure can also generate disproportionate costs and obligations.

Where does the money go: schools, AVS, healthcare and infrastructure

In 2024, the Confederation, the cantons and the municipalities together spent around 263 billion francs, after deducting transfers between levels of government. For the Confederation, the main item of expenditure is social security, which accounts for more than a third of a budget of around 86 billion francs. The bulk of this corresponds to the federal contribution to the AVS, i.e. funds that are subsequently passed on. Transport, education, and security and defence are also among the federal government’s major expenditure items.

At cantonal and municipal level, education dominates. Municipalities allocate around 18 billion francs to schools out of a total budget of approximately 61 billion. The cantons allocate around 31 billion francs to education out of a total budget of 110 billion. Healthcare also accounts for a significant proportion of cantonal spending, with around 16 billion francs allocated to hospitals.

For businesses, these expenditure items are not abstract. Education influences the availability of a skilled workforce. Transport determines access to suppliers, customers and staff. Healthcare and social security affect the overall balance of the labour market. As for local authorities, they provide part of the framework within which day-to-day economic activity takes place: schools for employees’ families, local infrastructure, local services, and waste and water management.

The national financial equalisation scheme completes the system. According to watson.ch, it has redistributed around 5.9 billion francs. The Confederation transfers part of its revenue to the cantons, whilst cantons with strong financial capacity also contribute to supporting those with fewer resources. For businesses, this mechanism partly explains why tax flows are not reflected solely in the local tax bill: a portion of the money circulates between local authorities to balance out financial capacities.

Ultimately, the distribution of taxes in Switzerland reveals a constant tension between the ability to pay, consumption and public needs. High earners bear a significant share of direct federal tax on individuals; profitable companies finance a large proportion of corporation tax; whilst VAT largely affects consumption. For an SME, the challenge is not to comment on the system from a distance, but to incorporate it into its decision-making: pricing, wages, investments, legal form, location and cash flow. This is where taxation ceases to be an annual bill and becomes a management tool to be monitored throughout the year.