Taxation of income and wealth: what's the difference?

Taxation of income and wealth: what's the difference?

"Can you explain the difference between income tax and wealth tax? How should redundancy payments received from an employer be declared?"

Maggy, Vernier

At federal level, income tax on natural persons is governed by the Federal Direct Tax Act (LIFD). Under the terms of article 16 LIFD, income tax applies to all the taxpayer's income, whether one-off or periodic. Income also includes benefits in kind of any kind received by the taxpayer, such as board and lodging, as well as products and goods taken from the business for personal consumption. In Geneva, this type of tax is governed by the Personal Income Tax Act (LIPP-IV) and its implementing regulations. Personal wealth tax, on the other hand, exists only at cantonal level and applies to all net assets.

To find out how redundancy pay will be treated from a tax point of view, you need to determine what type of pay is involved. Replacement income or severance pay paid to an employee when he or she is made redundant is, in principle, considered to be income and is therefore taxable as such.

At federal level, art. 24 let. g LIFD allows the exemption of payments received as compensation for non-material damage if the dismissal also constitutes an unlawful violation of the employee's personality within the meaning of art. 49 of the Code of Obligations. This could be the case if the dismissal was the subject of media hype or degrading circumstances. The same principles apply in Geneva.

However, compensation for dismissal may also include damages if the dismissal does not constitute an unlawful infringement within the meaning of Art. 49 CO. Art. 336 a of the Swiss Code of Obligations requires the party who wrongfully terminates the contract to pay compensation to the other party. Art. 337 c para. 3 CO entitles the employee to damages in the event of immediate termination without just cause. The LIFD is silent on the tax exemption of such payments.

It should be noted that lump-sum benefits paid when changing jobs may be exempt from tax if the beneficiary reinvests them within one year in an occupational pension scheme or uses them to acquire a vested benefits policy.