Hi All,

Just wondering if there would be any use for me writing a few tips and tricks and opening a thread where people can ask questions pertaining to being self-employed in Switzerland as a contractor/freelancer/GmbH/SA/AG/sole trader.

Thats it...

Definitely, especially if you are on-hand to answer them...

dave

Absolutely. I have a UK Ltd co, my GF a Swiss GmbH and we are trying to structure things to work together and I know we'll have plenty of questions. But you should charge for this!

Yes but we are talking about Tax efficiency. So if I charge for this I have to send you a bill. If I send you a bill then I need to enter it in my books. If I enter it in my books that nasty tax man comes along with a knife and cuts a bit off for the good of everyone...

Well it seems like there are 11 people interested in knowing more plus one or two others I guess who have been two lazy or don't want to raise their heads just now. So I guess I need to start structuring the topics and posting. Anybody got any burning issues to resolve now.

Hi,
great idea Richard
Jo

Seems like a good idea - I'm in the middle of sorting things having got here just last week so will both be helpful, and hope I could contribute on current progress against what's supposed to happen!

Well, to start off. If one were to set up a GmbH and work from home, what is the best possible scenario for tax efficiency? Assuming that one needs all the usual to live ie. an apartment, transport, insurance and other items that can be lobbed onto the company bill so one can treat it as an expense etc.

How are these scenarios different in higher tax cantons and lower tax cantons? Perhaps this is too broad so maybe compare Zug with somewhere with higher taxes?

Maybe you can find a topic in the above mess to start with?

And, thanks for volunteering your vast knowledge for the benefit of all those who want to be more tax efficient!

Let me then start by providing you with an answer to the above question. But before that let me start by providing an answer to another question.

Why do so many people want to form their own GmbH and why should they maybe not?!

A GmbH is an entity that is separated from the people who work for it. In this way it can be addressed in court, taxed and generally live its own life without a need or dependency on any one person. Indeed it is possible to set up a GmbH without any employees

Many people set them up to be a vehicle through which they can be employed and accept contracts to do work for others. The classic case is an IT contractor. The IT Contractor has just received a contract to work for a customer for the next 12 months but the customer funnily only wants the contractor to work through a company ie to have a company to company relationship and not company to individual. How strange?!

The reason for this is quite simple. The customer company would be accepting a silent liability if they had a company to individual relationship of such a duration. The reason for this is that the employing company has an obligation to pay AHV/IV/EO/ALV for any individual employed by it. As a "sole trader" there is no employing company so if the individual does not pay their contributions along comes the Social Insurance and presents a bill to the customer company - and they have to pay...

So back to our story. The IT contractor needs to have a company that will provide an umbrella for them to work. The GmbH requires minimum investment and can be quickly set up. All that is required is to pay 10K into a locked account, find a place to register it, write statutes and visit a notary publiy to have your company registered.
All the banks understand the need for a locked account and will probably charge you SFr. 200 for that but will open one immediately.
Writing Statutes is relatively straightforward and I can help with that as long as the language is German - the hardest part is your "Zweck" the purpose for the company existing in the first place.
Notary publics are easy to find given that they are all listed for each Kanton - a notary public is actually not a fully independent role. They are attached to the government through the canton where they are licensed to operate. They can however do work for companies in other cantons, and that could be cheaper dependent on whether they are employed by the canton or self employed.
Which only leaves the place to register your company. This should be easy but are you renting or do you own your accommodation? If you are renting you need to check your rental agreement and potentially ask the landlord who might well say no

So you decide to proceed. Eventually your company appears in the Schweizerhandelsamtblatt (SHAB) and there you are. Your company exists and bingo... Along come the letters. You will find first are bills from register lists. They have somewhere in the very small print that this is a service and you do not need to register. ie it is not the Company Register where you do need to be listed... Then comes the government... Your company needs to register for AHV and it needs to have accident insurance for the employees and it needs to be registered at the Gemeinde with an opening Balance. Insurances ah ha Along come countless letters from insurance companies offering their wares... Worst point is you need to have some of them. You will need:
Company Pension (BVG) - this is in effect a fund in your company's name and there is a pot there into which the company can pay. Each month there needs to be a payment made to the employees of the company. The exact amount is determined according to the salary of the employee which you need to declare, the age of the employee which you need to declare and the level of payments according to age that you have agreed. There are minimums but no set maximums. As a rule of thumb 25% is the maximum.
Accident Insurance (BU/NBU) - here your choices are whether this shall be private insurance or obligatory insurance. Given that if you have an accident you will most likely get properly damaged it is worth paying the extra for private insurance.

And that is it! You will have the insurance companies try to sell you all kind of other insurances but the above is the minimum. Clearly you can insure plenty of other things and the only one that this story would need to consider and indeed I would recommend is for sickness. "Krankentagegeld". This will pay out your salary if you are sick for a long period, kicking in after x days. The x can be chosen but is usually 30 or 60 days. Additionally with this you can also increase the level of payment to 100% from the normal 80%. This is inherently sensible.

So there you have it your company is formed. And now you need to start working. That is not to say the work in getting here has not been included but you can hardly pay yourself for work when you have not had any income. So now you have to sit down and look at your market, ah you say I have my contract from the customer company. Whoops I need to have a contract with my company. So more work to create a contract and importantly an expenses regulation document. In this you can describe lots of ways of removing money from the business without paying tax on the income (or any social contribution or pension). Ah and now I am an employee I need to take my AHV form down to the local town hall and get it stamped so I am paying my contributions formally into a fund "Kasse".

Okay so now I am set-up, or at least I think I am. I go to the bank and open my account and I go off and buy my copy of Banana accounting so I can keep accounts - which is a requirement of course.
A few days to go till I start work at ABC AG and they ask me for my MwSt number. Holy cow what is that and how do I get one. Not only is there a register of companies but also register of those companies that are registered for VAT. So you need to register and that is not so easy as you would think. So much so that I must explain that separately...

But then you are finished and can start work. Whoopee and phew.

The total cost of this exercise becomes apparent in a few days when your bills arrive.

Notary: 1700 to 3000 depending on how much you/we do in advance.
Insurance: ca 3000 should see it okay note these need to be paid in advance...
Software: 129
Bank: 200

Total expenses for set-up are thus around the 5K...

Ah ya while I am at it I need to have a company credit card and change my phone to the company and oh yes my personal phone at home and the internet connection...
And hopefully you are not setting or thinking of setting up your company in November or December because you will get another go at paying your insurances in December or January for the whole of the next year plus your BVG contributions. This can blow a big hole in 20000 even for a "one man band".

But they are all paid you still have 5K in the bank and you can finally go to work and earn some money.

And in part 2 I will directly compare why you might want to do this and indeed why you might not.

Found this link that belongs to the Postfinance with a quite detailed explanation of various tax issues in English! Very interesting and could help fill in gaps where Richard doesn't have time to fill!

http://www.postfinance.ch/pf/content/en.html

That's 10K out of my pocket...

I take it the 5K total you mention doesn't take into consideration the 10K you have to outlay initially as it is not classified as an expense, correct?

In one of the other threads it was mentioned that you could use your car (value > 10K) as the basis for opening a GmbH. Does this replace the need for the locked account?

By the way - great introduction. I'm really looking forward to reading more in part II.

Charday

The 10K is indeed out of your pocket. Wrong, the 5K total is an expense and is deducted from the 10K

A car is a so called example of sacheinlagen and they do indeed replace the need to place hard cash on the table but then again how are you going to pay the 5K bill
Part II coming soon...

Richard,

Thanks a lot for these postings! They couldn't be here at better moment to me!
Will look forward to learn more about this topic in the future.

Cheers

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…

As a matter of interest, how far (if anywhere) does your average agency, or payroll company go in booking these expenses and reducing your effective salary for deductions purposes ?

I can imagine they would try and avoid doing such additional admin, especially if they were the-agent-that-got-you-the-job and have you over a barrel, or the payroll-company-that-the-agency-tries-to-force-you-to-deal-with.

dave


[quote=Richard;87064]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. [/quote]

Another question concerning both insurances and pensions:

The law stipulates the need for the company employer and employee to make BVG compulsory pension contributions and employer to make accident insurance (both occupational and non).

Is the legal (minimum) requirement defined in terms of the benefits that must be provided or the %contributions to be made from salary ? There will obviously be some variance in the quotation from different companies provided to achieve such benefits.

I am right in thinking therefore the deductions could vary between employers schemes for the same salary....

Thanks
dave

A point to note is that regardless of the level of salary you pay the employee, the AHV deductions will have to be paid. In the first illustration showing the "bad" case you included both the employer and employee deductions from your comany (AHV/IV/OE/ALV for example).

In the second "this-is-better example" you listed the deductions once a salary was been decided, and pointed out the reduced deductions. While what you have written is correct, it is worth pointing out that the (salary dependant) employers contributions portion will still have to be made from the overall revenue received by your company.

dave

The one thing I suspect most people would like..is a crib sheet for tips on allowable expenses and useful manoeuvres (assuming the person has control over their company). Worth their weight in gold...

dave

I can imagine they would try and avoid doing such additional admin, especially if they were the-agent-that-got-you-the-job and have you over a barrel, or the payroll-company-that-the-agency-tries-to-force-you-to-deal-with.

dave


Clearly you raise a good point but... There is a basic rule that must be applied and that is that what is good for one is good for all. this means the rules that are placed within the company apply to everyone and this means the same structures apply across the company. This might not be wanted by the payrolling company hence the problem. Plus it is necessary to have these approved by the local tax authorities.

No the law does not stipulate this be careful. The law states that the minimum contribution from the company shall be 50%. Now if you increase this to 100% you effectively remove AHV liability which above 79850 is a present to the state. Also the law allows sharing of NBU costs.
You shoudl also be aware that there are other factors which can make your contributions vary such as the %age contributions that are made. The law only states minimums and not maximums for example and then there is combination of pension with life assurance policy which makes sense if you are potentially leaving money to important family members such as children...