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The tax shield allows wealth tax to be capped in certain cases. This mechanism is in place in six cantons. In the Canton of Vaud, its application is a subject of debate. What is it all about and how does it work?

 

This tax cap mechanism aims to prevent confiscatory taxation. It was introduced by certain cantons in order to guarantee the property rights of their taxpayers (article 26 of the Swiss constitution ("Cst")) and to ensure that taxation respects taxpayers' ability to pay (127 II Cst). This mechanism therefore aims to prevent taxpayers with little or no income from having to draw on their assets to pay their taxes over a prolonged period.

 

The tax shield primarily applies to taxpayers with assets that generate little or no income. Of course, there are certain conditions that must be met to qualify for it. We discuss this with Cedric Panchaud, attorney and certified tax expert at PANCHAUD Tax & Legal SA.

 

What is the basic principle behind the shield?

 

The tax shield is a protective mechanism designed to prevent confiscatory taxation. The tax shield means that if your wealth does not generate sufficient income, your wealth tax will be limited/reduced. The best example is the Bernese tax shield. It calculates your wealth tax and looks at its return. If your wealth tax exceeds 25% of the return on your wealth, the shield applies and caps your wealth tax at 25% of the return on your wealth. In the absence of income, the minimum wealth tax is set at 0.24% (which corresponds to a hypothetical return on wealth of 0.96% p.a.).

 

Which cantons have implemented a tax shield?

 

Currently, Geneva, Vaud, Valais, Bern, Basel-City, Lucerne, and Aargau have a tax cap. With lower wealth tax rates, the other cantons do not necessarily need one. For example, Obwalden has a rate of 0.14% (starting at CHF 1 of taxable wealth) (see Hinny/Eckert, Tax Law 2025, p. 2929).

In other cantons, it remains high, as in Neuchâtel (0.68%, starting at CHF 1 million in taxable assets) (see Hinny/Eckert, Tax Law 2025, p. 2929), but the decision not to have a tax shield is likely a political choice.

 

Does it apply in the same way in all French-speaking cantons?

 

No it does note. Geneva and Vaud were once very similar, but Vaud has since changed its calculation basis. Under Geneva's tax shield, total municipal and cantonal taxes (income and wealth) are capped at 60% of net taxable income. However, the direct federal tax (11.5%) on income must also be added, bringing the maximum effective income tax rate to 71.5%.

 

Since December 2021, Vaud has raised the threshold for entry into the tax shield in certain cases, for instance by taking into account dividends that are eligible at 100% (instead of their taxable basis of 70%) for the calculation of the tax shield. This new methodology is causing a stir among taxpayers, representatives, and politicians.

 

The Valais, on the other hand, has a completely different system. To put it simply, “taxpayers subject to unlimited taxation whose cantonal and municipal taxes on wealth and on net income from wealth exceed 20 percent of their net taxable income are entitled to a tax reduction. […] A minimum tax of half the wealth tax applies in all cases 1.

 

In general, shields apply automatically, provided that the conditions are met.

 

What is the current status of discussions regarding the Vaud tax shield?

 

 

The Federal Supreme Court has issued its ruling and dismissed the appellants’ claims (9C_541/2025 of April 22, 2026). The Vaud government was indeed within its rights to link a potential return to the tax shield, in its “pre-2021” version, to the outcome of the vote on the so-called “12%” popular initiative, which aims to impose a tax cut of that same percentage in the canton. The State Council will now be able to set a date for the vote on this popular initiative, which, if approved by the electorate, would prevent a return to a tax cap that—let’s not beat around the bush—effectively limited the tax burden on certain taxpayers and prevented confiscatory taxation prohibited by the Constitution. 
 
This is a referendum that promises to be complex, to say the least… Best-case scenario: the initiative is approved, leading to a general tax cut. But wealthy taxpayers, who contribute more than average to public finances, may leave the canton—if they haven’t already. This could eventually lead to higher taxes, as the resulting deficit would need to be covered. Tails: The initiative is rejected. In that case, there is no general tax cut. But wealthy taxpayers, benefiting from the tax cap, might stay. If they have already left, however, taxes may also rise to make up for this shortfall. In other words, regardless of the outcome of the vote, the tax burden on the population could very well, in the end, increase. 
 
In the meantime, it is advisable to systematically file appeals against tax assessment decisions in cases where the tax shield, in its pre-2021 version, might apply. This prevents tax assessment decisions from becoming final and ensures that affected taxpayers remain eligible for a potential return to the old system should the Vaud cantonal government reject the 12% initiative and, consequently, reinstate the tax shield in its pre-2021 form. It goes without saying that we are happy to assist you throughout this process. 

 

What are the quantified benefits of the tax shield?

 

In concrete terms, to take the example of Geneva, the tax shield stipulates that the total cantonal and municipal tax burden must not exceed 60% of taxable income. So, broadly speaking, if you have assets of CHF 10 million, your cantonal and municipal tax could be capped at CHF 60,000. For the shield to be effective, your investment returns would have to amount to exactly 1% (in this case CHF 100,000) and you would have to have no other income. This usually requires some upfront work to structure your income and assets.

 

It follows from the above that, paradoxically, very small and small businesses are often too profitable for their owners to qualify for the tax cap. For example, if the tax authorities value the shares of your corporation at CHF 5,000,000, the corporation pays you an annual salary of CHF 200,000, and you have no other sources of income or assets, then your cantonal and municipal taxes could, very roughly speaking, be capped at around CHF 150,000 2, which is well above the effective tax burden (approximately CHF 85,000 3). In other words, the shield does not apply. For it to apply, the salary would have to be eliminated and dividends distributed up to 1% of the value of the shares. This would, however, have other consequences that should be anticipated (AVS, increase in share valuation, LPP, etc.). Finally, in our example, it would not necessarily be easy to maintain one’s standard of living (including taxes) on CHF 50,000.

 

Debates surrounding the wealth tax are on the rise. This is particularly evident with the l’Initiative sur l’avenir, which was rejected on November 30, 2025, in Switzerland, and the Zucman tax, which has stalled in France. As a tax expert, what is your take on this?

 

In Switzerland, the wealth tax dates back to the Napoleonic era, when it replaced the customs duties collected by the cantons. It represents a significant source of revenue for local governments, accounting for approximately 10% of cantonal and municipal revenues. That is substantial. Furthermore, revenue from this tax is relatively stable over time and fluctuates less than that from income tax. Finally, it allows for consistency checks, ensuring that individuals have properly declared all their income. Is wealth tax fair? It’s an eternal debate. The tax base for the wealth tax includes, in part, assets that have already been taxed once through income tax, and on which the taxpayer is, in a sense, penalized simply because they have not spent the money.

 

As it stands, is the tax shield still an appropriate tool?

 

I would readily advocate for the abolition of tax caps if the wealth tax rate were significantly lower. Obwalden, for example, has a rate of 0.14% (rate excluding church tax, calculated from the base tax rate of 0.02% multiplied by the municipal and cantonal coefficient for Sarnen (OW) of 7.11 for 2026, see Art. 55 para. 2 LI-OW, RS-OW 641.4 in conjunction with https://www.ow.ch/publikationen/8258) does not need a shield. This means less work for the administration or tax advisors and greater transparency for everyone. However, there currently appears to be no political support for this in the French-speaking cantons.

 

  1. Ordinance on the confiscatory nature of wealth tax dated August 14, 2002, RS-VS 642.300. ↩︎
  2. Theoretical return on assets: 1% of CHF 5,000,000 plus salary of CHF 200,000, i.e. CHF 250,000 in total. The ceiling corresponds to 60% of CHF 250,000, or CHF 150,000. (In practice, however, net wealth and net income are used as a calculation basis, which would need to be included in the above simulation). ↩︎
  3. Single person, no children, no religion, residing at 1204 Geneva, tax rate 2025 (salary CHF 200,000, assets CHF 5,000,000). ↩︎

 

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