Winners of games of chance have two reasons to rejoice. Not only have they won a large sum of money with no or a miniscule contribution, but the lucky ones are also allowed to transfer their winnings to the bank without paying (almost any) income and withholding taxes. As of 1 January 2019, the rules regarding the taxation of winnings were amended.
If you are one of the lucky winners, you will find the answer to the question as to whether a part of the winnings must be ceded to the tax authorities in the following article.
A variety of different games
In order to understand the respective taxation rules, be it regarding income tax or withholding tax, the definitions of the Gambling Act (Bundesgesetz über Geldspiele BGS), which came into force on 1 January 2019, must be explained. Art. 3 BGS defines the various types of games:
- Money games are games in which the conclusion of a legal transaction or the use of a monetary asset offers the prospect of a cash prize or a monetary advantage.
- Casino games include money games that are open to a limited number of people. A prime example is a table game in a Swiss casino.
- Major games are lotteries, sports betting and skill games that are either organised and carried out online, automatically or intercantonally.
- Minor games, on the other hand, are lotteries, sports betting and poker tournaments that are not held online, not automated or simply held regionally and not intercantonally. Examples are small poker tournaments and tombolas (raffles).
- Lotteries are any games that are open to a very large or unlimited number of people and in which the winner is chosen by a random drawing or a similar procedure.
- Games of skill are all games where the winning depends entirely or mainly on the skill of the player.
- Sports betting refers to games in which a win depends on the correct prediction of the Course or outcome of a sports event.
Popular initiative and counter-draft
By referendum of 11 March 2012, the Swiss electorate adopted the Federal Council's direct counter-proposal (Federal Decree) to the popular initiative «For games of chance in the service of the common good». On the one hand, the initiative sought a clearer division of competences between the Confederation
and the cantons; on the other hand, profits should be used entirely for charitable purposes. The primary reason for the Federal Council's counter-proposal was the legislator's limited scope of action; jurisdictional
problems between the Confederation and the cantons would not be solved; delimitation difficulties would result between the area of casinos and the area of lotteries and betting.
Thus, the Federal Council's counter-proposal contained a competing legislative competence of the Confederation in order to avoid conflicts of competence as well as the standardisation of numerous non-profit activities by the cantons (the main concern of the initiators). Overall, this counter-proposal was intended to create a sound basis for the revision of the gambling legislation. The Swiss electorate shared this view and followed the Federal Council's counter-proposal on 11 March 2012.
The small chamber sets the pace for the large chamber
Based on the new constitutional article, the Federal Council adopted the message on the revision of the Gambling Act of 1998 in October 2015. The primary pillar of the draft is innovation. Social and technological developments are to be considered by allowing casino games to be offered online, small poker tournaments with low stakes and low potential winnings are to be permitted from now on. The second core concern is the prevention of gambling addiction. This innovation is directed mainly at the cantons, which are called upon to set up treatment and counselling services for gambling addicts and their social environment. The former Gambling Act provided for unequal treatment regarding the taxation of money winnings. Winnings from casinos were tax-free, while winnings from sports betting and lotteries had to be taxed in full. According to the Federal Council's proposal, all monetary winnings should henceforth be completely tax-free. The Federal Council argued that this would increase the competitiveness of the gambling industry.
From a tax perspective, the small chamber (Council of States) insisted on the taxation of money winnings exceeding CHF 1 million in the consultations. In contrast to the Federal Council, the representatives of the cantons only wanted to exempt CHF 1 million of money winnings from tax. The large chamber (National Council), on the other hand, shared the Federal Council's opinion that taxes should be completely exempt. It was only in the context of the procedure for settling differences that the National Council gave up its position (108 votes to 78). Following a referendum by various young parties, the people voted on the bill on 10 June 2018. The revision was approved with 72.9 % of the votes. On 1 January 2019, the new Federal Act on Gambling (BGS - Geldspielgesetz) came into force.
The tax treatment of these various games must now be explained based on income tax on the one hand and withholding tax on the other:
The income tax at federal level, regulated by the Federal Act on Direct Federal Tax (DBG), was fundamentally altered by the change from Art. 23 lit. e DBG to Art. 24 lit. i to lit. j DBG. In the old version before 1 January 2019, Art. 23 lit. e DBG stated that winnings of more than CHF 1’000 from a lottery or lottery-like event constituted taxable income. The amendment to the Gambling Act rendered this provision obsolete. In return, Art. 24 DBG, concerning the area of tax-free amounts, was extended as follows:
- Art. 24 lit. i remains the same in terms of content, as winnings from casinos are tax-free. Only the wording changed somewhat so that only those casinos are included which are recognised by the Gambling Act (BGS). In addition, winnings from self-employment are not covered.
- Art. 24 lit. ibis DBG has been newly added. Winnings up to an amount of CHF 1 million are tax-free if they originate from major games as defined by the BGS or from online participation in a casino game.
- Art. 24 lit. iter DBG makes winnings from minor games permitted under the BGS subject to tax exemption.
- Art. 24 lit. j DBG sets a limit of CHF 1’000 for lotteries and games of skill that are not subject to the BGS in order for winnings to remain tax-free. This amends the former Art. 24 lit. j DBG. This provided for a limit of CHF 1’000 in winnings for a lottery or lottery-like event.
Art. 7 para. 4 lit. l StHG to Art. 7 para. 4 lit. m StHG provides corresponding provisions for the cantons. The cantons must comply with these provisions and have amended their tax legislation accordingly as of 1 January 2019.
Art. 1 para. 1 VStG now defines the subjecting of various profits to the withholding tax obligation. In detail, winnings from money games as well as lotteries and games of skill for sales promotion are now subject to withholding tax. Read together with Art. 6 para. 1 and 2 VStG, only those winnings that are also taxed with income tax are subject withholding tax.
- Winnings from casino games are generally tax-exempt and are only subject to withholding tax if they relate to online participation in a casino game and the tax-free amount of CHF 1 million is exceeded. If this is not the case, the winnings from these games are exempt from withholding tax, as is the case with income tax (Art. 6 para. 1 VStG i.V.m. Art. 24 lit. i and ibis DBG i.V.m. Art. 42 et seq. BGS).
- Major games are only subject to withholding tax if the tax-free amount of CHF 1 million is exceeded, same as with income tax. Otherwise, profits are tax-free (Art. 6 para. 1 VStG in conjunction with Art. 24 lit. ibis DBG in conjunction with Art. 42 et seq. BGS).
- Minor games require the approval of the competent cantonal authorities. If such a permit is available, winnings from these games are exempt from withholding tax (Art. 6 para. 1 VStG in conjunction with Art. 24 lit. iter DBG in conjunction with Art. 32 ff. BGS).
- Lotteries and games of skill for sales promotion are subject to a special tax rule: The DBG and VStG refer in their respective standards to the definitions of the BGS. According to Art. 1 para. 2 lit. d and lit. e BGS, lotteries and skill games for sales promotion are excluded from the area of application of the BGS. Despite this exception of the BGS, Art. 1 Para. 1 VStG nevertheless makes such games subject to withholding tax under certain conditions. For games that are offered exclusively through the purchase of goods/services at market prices (Art. 1 para. 2 lit. d BGS), the full amount is subject to withholding tax if it exceeds CHF 1’000 (Art. 1 para. 1 VStG in conjunction with Art. 6 para. 2 VStG in conjunction with Art. 24 lit. j DBG). Winnings from participation in such games which are only possible free of charge are not subject to withholding tax irrespective of the organiser (Art. 1 para. 2 lit. e BGS e contrario i.V.m. Art. 1 Para. 1 VStG in conjunction with Art. 6 Para. 2 VStG in connection with Art. 24 lit. j DBG). Furthermore, profits from participation in these games are not subject to any withholding tax if participation is free of charge itself through the purchase of goods/services or under equally good conditions and if it is not a media company that operates the game (Art. 1 para. 2 lit. e BGS e contrario i.V.m.). Art. 1 para. 1 VStG in connection with Art. 6 para. 2 VStG in connection with Art. 24 lit. j DBG). However, if the above-mentioned case concerns a media company, any profit exceeding the limit of CHF 1’000 is fully subject to withholding tax (Art. 1 para. 2 lit. e BGS in conjunction with Art. 1 para. 2 lit. j DBG). Art. 1 para. 1 VStG in connection with Art. 6 para. 2 VStG in connection with Art. 24 lit.j DBG)
- Winnings from illegal and unauthorized games do not simply move in a legal vacuum due to the origin of the winnings, but these winnings are taxable to the same extent as income of legal origin.
With the entry into force of the Federal Act on Gambling (BGS) and the abolition of the former Lottery Act, it became necessary to amend Article 1 para. 1 of the VStG, Articles 23 and 24 of the DBG as well as the cantonal decrees in order to achieve consistency regarding terminology. The fact that, depending on the
category of games, substantive adjustments were made to the withholding tax and income tax recording of winnings corresponds to an old political concern, but also to an adaptation to the new gaming environments, which result above all from modern means of communication. The boundaries between a tax-free and a
taxable profit are - with a few exceptions for small games and lotteries and games of skill for sales promotion - extensively set at CHF 1 million, which can be seen as a sign of a good Swiss compromise between the political camps. Well-equipped with tax knowledge, we wish you the very best of luck in the