The tax shield allows wealth tax to be limited 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 (26 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 mainly applies to taxpayers with assets that generate little or no income. There are, of course, a number of conditions that must be met in order to trigger it. We discuss this with Cedric Panchaud, lawyer and certified tax expert at Beker Guiramand & Associés.
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 the shield?
Currently, Geneva, Vaud, Valais, Bern, Basel-Stadt, Lucerne, and Aargau have a tax shield. With a lower wealth tax rate, other cantons do not necessarily need one. For example, Obwalden has a rate of 0.14%
(from CHF 1 of taxable wealth) cf. Hinny/Eckert, Tax Law 2025, p. 2929)
. In other cantons, it remains high, as in Neuchâtel (0.68%, from CHF 1 million of taxable wealth) (see Hinny/Eckert, Tax Law 2025, p. 2929), but it is probably a political choice not to have a shield.
Does it apply in the same way in all French-speaking cantons?
No. Geneva and Vaud were very similar, but the latter changed its calculation basis. With the Geneva tax shield, total municipal and cantonal taxes (income + wealth) are capped at 60% of net taxable income. Added to this is direct federal tax (11.5%) on income.
Since December 2021, Vaud has raised the threshold for entry into the tax shield in certain cases, notably by taking into account dividends that are 100% eligible for the calculation of the tax shield. This new methodology is causing a stir among taxpayers, representatives, and politicians.
Valais, meanwhile, has a completely different mechanism. To simplify, "taxpayers subject to unlimited taxation whose cantonal and municipal taxes on wealth and net investment income exceed 20 percent of their net taxable income are entitled to a tax reduction. [...] A minimum tax of half the wealth tax remains in allcases."1 ."
In general, shields apply automatically, provided that the conditions are met.
What is the current status of discussions regarding the Vaud shield?
The Federal Court must rule on the matter. Then, depending on the Federal Court's decision, the people of Vaud will have to vote on the issue. Ultimately, depending on the outcome of this imbroglio, we could return to a tax shield in its pre-2022 version, with retroactive effect for tax periods that have not yet been definitively taxed. The threshold for entering the scope of the Vaud shield was raised in 2022, even though the canton already has one of the highest tax rates in the country. The question now is whether there will be a reversal or whether this change will be maintained. Faced with these uncertainties, some wealthy taxpayers are avoiding moving to or are leaving the Canton of Vaud. However, it is difficult to know whether this factor alone or in conjunction with the Young Socialists' initiative ("For the Future") was decisive. At this stage, taxpayers affected by this "threshold increase" in the Vaud tax shield in its 2021 "version" must prevent their tax assessments from becoming final. To this end, it would be advisable to systematically appeal against their tax assessments.
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 micro-enterprises and SMEs are often paradoxically too profitable for their owners to benefit from the tax shield. For example, if the tax authorities value the shares in 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 be capped at around CHF 150,000.22, which is well above the actual tax burden (approximately CHF 85,00033). 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. However, this would have other consequences that would need to be anticipated (AVS, increase in share valuation, LPP, etc.). Finally, in our example, it would not necessarily be easy to maintain one's lifestyle (including taxes) with CHF 50,000.
Debates surrounding wealth tax are becoming increasingly frequent. This is particularly evident in theInitiative on the Future rejected on November 30 in Switzerland and the Zucman tax at a standstill in France. As a tax specialist, what is your view on this?
In Switzerland, wealth tax dates back to the Napoleonic era, when it replaced customs duties collected by the cantons. It represents a significant source of revenue for local authorities, accounting for around 10% of cantonal and municipal income. This is a substantial amount. In addition, the revenue generated by 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 declared all their income. Is wealth tax fair? This is an ongoing debate. The tax base for wealth tax includes assets that have already been subject to income tax, meaning that taxpayers are penalized simply because they have not spent their money.
As it stands, is the tax shield still an appropriate tool?
I would readily advocate abolishing tax shields if the wealth tax rate were significantly lower. Obwalden, for example, with a rate of 0.14% (source?), does not need a tax shield. This means less work for the administration and representatives and greater transparency for everyone. However, there currently seems to be no political support for this in the French-speaking cantons.
- Ordinance on the confiscatory nature of wealth tax dated August 14, 2002, RS-VS 642.300. ↩︎
- 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 taken into account, which would need to be included in the above calculation). ↩︎
- Single person, no children, no religion, residing at 1204 Geneva, tax rate 2025 (salary $200,000, assets $5,000,000). ↩︎
