In our last story we looked at how to set up a GmbH and what it costs. Now we come to the question, why should we want to do it? Well in order to answer that question we need to look at our alternatives. Here they are and for this overview we will say that 1 is good 5 is bad Employee for someone else: Tax efficiency 5, Simplicity 1, Options available 4, cost 1 Soletrader: Tax efficiency potential 3, Simplicity 2, Options available 3, cost 1(2) GmbH: Tax efficiency potential 2, Simplicity 4, Options available 2, cost 4 AG: Tax efficiency potential 2, Simplicity 4, Options available 1, cost 5 + anonymity 1... So onto the alternatives… Employee: Briefly said as an employee and even as an employee of your own company you are dependent on the structures set up within the company. This is what hurts most freelancers when they believe they have a "bad" agent. If the structure within the payroll company is not to your liking you cannot change much to meet your needs. Furthermore, any potential tax efficiency needs to be achieved by having the right structure in the company, something the payroll companies and hence agents have little interest in, and by ensuring that your location is tax efficient. To the latter, when I say that a change in employment location and a change of agent could necessitate a change of domicile in order to be tax efficient you might be shocked but it is true. The best an employee can achieve is to claim mileage allowance by living in a place such as Neerach which is low tax and has poor public transport and by having a 3rd pension pillar. As a Soletrader you actually are in a reasonable position. You simply declare yourself self-employed and fill in the necessary AHV form to register as such. This is usually available at your local town hall. It is possible to move a lot of life costs to company costs but you are in the situation of not being able to benefit from many things. Pension is more difficult if not impossible. Differentiating between personal monies and business money is difficult to maintain. But perhaps the hardest thing of all for the small person is you are not able to write statutes to allow you to forego certain things and thus all expenses are actual expenses with all the necessary requirement to keep every possible receipt and then to prove that the expense was necessary when someone asks. You also run into potential difficulties with the AHV guys if you do not have multiple customers so a shop or carpenter works fine but an IT contractor with a 12 month contract with UBS does not. And finally, just one small additional point, if you run up a debt or are subject to some kind of fine as a soletrader you pick up the bill and I am talking of every last penny of it, even if that means selling your house to pay. The next two options to be discussed are companies. Note there are other forms of doing business but I do not want to go into those really. Ì guess the only thing to say is IF you choose a partnership make sure it is in the form of a company and not a partnership in the UK sense. If you do not then you run the risk of your partner putting you in a sticky spot. You are both responsible for any debts the company has and both of you for the full amount of them, so if the other can't pay you pick up the can for the full amount. That is dangerous unless it is your spouse or close relative but even then you might end up in the mire; some marriages have been known to fail… GmbH and AG: - they both share many similar properties. AG generally has more prestige and requires a larger initial investment and it is anonymous. You have no idea who owns what part of the business. So I could appear as the President of Mickey Mouse AG and have just 1 share from the 10 million issued. As long as Mickey Mouse is not listed on the stock exchange there is no obligation to state my ownership levels. Given the formal nature of the structures they require more effort and there are more hurdles to be overcome in order to set them up. Both are able to be used as a tax efficient vehicle. The basis to this is the statutes that are written for the company and the associated documents.
An initial investment of at least 10000 for a GmbH and 50000 for an AG is currently required. This will change as of 01.01.2008 when the partial liberation of capital will no longer be permitted. The primary differences between the two are in their structures but as I guess few will be interested in a GmbH then there is little point covering the differences in detail.
So now to the question, "why bother going to the trouble?" Okay lets look at a typical freelancer, rather wet behind the ears and not knowing the surprises Switzerland holds for them. They are going to be taxed through Swiss PAYE and they are going to, because they know no better, choose somewhere to live that is close to their place of work. For our example they earn 100 per hour after the agency's 20% cut. A typical month provides our contractor with 170 hours of work and they therefore earn 17K. They do this for 12 months and thus earn 170x12 minus (14K for holidays(just a few days plus public). This gives them an annual salary so they think of 190K. They used this figure to decide to come here assuming circa 25% of deductions ie still 140K left which compared well with their rate in London which left them with £50K. So they arrive and the first pay slip arrives. Instead of receiving the expected 12K they instead only receive about 8300! This is because: Start salary 15833K (190/12) Pension contribution 7% = 1108 AHV/IV/OE/ALV 13% = 2058 BU/NBU 2.5% = 396 KG 1% = 158 Tax 24% = 3800 Total Deductions:= 7520!!! Suddenly things don't look so rosey! Add to that that there is very little they can do to reduce their tax bill and other deductions and you have one disillusioned contractor… Given that they started out with SFr125 per hour and after all deductions including the agency they are only left with SFr. 52.50 per hour life is not so good. That is just like Germany, 58% deductions However, they are not stupid and investigate alternatives. One such is to set-up a GmbH. If they do this and remain a little slow then the overall deductions remain more or less the same. If however they are clever they do the following. Firstly they look for accommodation that is a little away from the centre and not so easy to get to work from. ie when they drive they are over 1 hour per day faster. They do this by reading on a forum that you can put your home and work addresses into www.sbb.ch and it calculates how long it takes including walking time and all forms of public transport to get to their place of work. Now that was a good tip because in their tax return they can claim 65rp per kilometre and they now live 30Km away from work in the tax beneficial village Neerach… They then read about company expenses. They found out on a great forum that you can have 5% of your salary paid out tax free in representation expenses, just like that! They also discovered that there is a little VAT trick that nets them just over 1% for doing nothing, yippee!! And of course that car well this is maybe a business expense that they can claim. Oh and I forget to mention because they are working away from their contractual place of work ie home they deduct SFr. 30 per day for lunch. So now lets look at the equation… The company receives 15833 per month plus VAT at 7.6% That is 17036 per month. The company pays the employee 10000 per month or 120K per year. The salary slip now comparing to the previous example now looks like this: Pension contribution 3.5% = 350 AHV/IV/OE/ALV 6.5% = 650 BU/NBU .5% = 50 KG 0% = 0 Tax 14.5% = 1450 Total Deductions= 2500 Only 7500 left now – what is wrong, they are 800 worse off!! Simple the new pay slip has some additions not just deductions… Firstly there are 21 days in the month and that means SFr. 630 for food. Then there is the 500 per month in expenses. And then travel to work… The company pays the employee 65rp per kilometre and there are a total of 30x2x21Km per month travelled or better said 1260Km at .65 = SFr. 819 That is a total of 1949 paid per month tax free. So the new total is 9449 per month. Now that is better, but there is more. The company will pay in a year a total of 159000 in fully expensed salary which still leaves 31000 as clear profit plus just over 1% of the 190000 or 2000 as additional profit for the VAT. ie 33000 to cover telephone bills, internet connection, and other business expenses. Whatever is still left if anything will be taxed as company profit. But of course that will not happen… So the net effect of being more efficient is a yearly win of some, 33000 plus 14000 in net salary plus a few bills additionally paid by the company. Now it is possible to do other things to make life even more tax efficient. We can look at those for both cases later. Next up will be a look at VAT or MwSt…