Many Swiss have invested in securities and trade directly or indirectly at the stock exchange with parts of their savings. These investment activities may lead to profits but also to losses.
Most of this kind of securities dealers do not think that they could possibly be qualified as performing a self-employed activity in the sense of Swiss tax law and hence would not report such profits or losses to the tax authorities.
The term «tax-free capital gains» is somehow deeply rooted within the general opinion of Swiss people regarding such securities trades. Furthermore, Swiss population has supported the rule on the ballot on several instances over the past few years.
Nevertheless, the term «tax-free capital gains» has been increasingly restricted by tax authorities in recent years, also due to recent court decisions. Tax authorities have on various occasions qualified the self-dependent management of private assets as performing a self-employed activity in the sense of tax law and therefore tax capital gains realized in the course of that activity.
Since the term of self-employed activity has not been exhaustively defined in any Swiss tax statute, tax authorities could convince courts to steadily restrict the concept of «tax-free capital gains».
For the taxpayer the decisive question is then, which criteria apply in order to qualify his or her trading in securities as a self-employed activity subject to tax.
Concept of Security
Securities in the sense of the Circular issued by the Swiss Federal Tax Authority (SFTA) are any certified rights resp. value rights with the same function. Securities strictly speaking are divided into full participation rights in the sense of civil law (e.g. shares), securities with merely economical participation rights (e.g. participation share) or securities with creditor rights (e.g. bonds). Additionally, assigned registered participation- and creditor rights, futures and derivatives are included in the definition of securities.
Professional Trading in Securities
All circumstances at hand must be considered in order to determine whether in a specific case the trade with securities is qualified as a self-employed activity or as private wealth management which is tax free. The facts are tested in view of the so-called «Safe Haven Rules», whereas all criteria must be fulfilled cumulatively in order to exclude that the dealer is qualified as a professional dealer in securities:
- Holding period of the securities of at least 6 months;
- The transaction volume, i.e. the sum of all purchase prices and sales proceeds for each calendar year is smaller than 5 times the securities portfolio at the beginning of the tax period;
- Making profits from trading in securities cannot represent a necessity for the individual in the sense that it creates his or her living. In other words, the realized capital gains may not constitute more than 50% of the net income incurred in the relevant tax year;
- The investments are not debt financed or the taxable investment income from securities (e.g. interest or dividends) are higher than the proportionate debt interest;
- The purchase and sale of derivatives (especially options) are restricted to hedging of its own positions.
If only one of the above-mentioned criteria is not fulfilled, then tax authorities further test the case in view of the criteria developed by the Federal Supreme Court in accordance with the following weighting:
The following criteria are at the forefront:
- The size of the overall transaction volume:
A short holding period indicates, that the tax payer predominantly aims for rapid earnings and is not trading for investment purposes. Additionally, the relationship between the number of transactions and assets under management should be considered.
- The use of derivatives to hedge participations
Whenever the use of derivatives exceeds hedging of participation risks and when the turnover in derivative positions is considerably high, then this indicates that the taxpayer deals in securities in the course of a self-employed activity.
- The use of substantial debt capital to finance the transactions
The taxpayer bears a higher risk when financing the transaction by borrowed money and therefore a higher use of debt capital indicates that he deals in securities in the course of a self-employed activity
Criteria of subordinate importance:
- A systematic and planned approach
Whether someone deals in securities in the course of a self-employed activity demands that this person is doing these trades in an organized manner, for example in the form of an organized company or that outwards to the other market participants it seems clear that the taxpayer is acting in the course of a self-employed activity.
- The close relationship between the transaction and the professional activities of the taxpayer and the use of expertise
It is also relevant, whether the taxpayer has conducted the transactions by himself or through an authorized third party or whether there is a close relationship with his professional activity.
The question whether a taxpayer qualifies as a self-employed securities dealer is in accordance with the applicable administrative rules and jurisprudence often uncertain and not straightforward. The basis for assessment is imprecise and have been weighted differently by courts on a case by case basis. In theory, the threshold for applying the standard for self-employed activity seems to be low. However, practice has shown that cantons are rather reluctant in applying the standard strictly. This situation creates substantial legal uncertainty for taxpayers dealing in securities.
Furthermore, it must be noted that many cantons have developed other rules for the qualification of self-employed securities dealers for cantonal- and communal income tax purposes. It is therefore recommended that persons dealing in securities consider the above-mentioned tax risks and review on a regular basis whether their investment strategies and behaviour is in line with the applicable tax rules and jurisprudence in order to avoid unpleasant surprises.