Is tax free interest possible in Switzerland?

Is it possible to get tax free interest in Switzerland? For example in some countries interest from sovereign bonds are tax free, in other countries zero coupon bonds are tax free.

Is there any similar rule in Switzerland?

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No, completely tax free interest is not possible as far as I know. However, you can reduce taxes by almost 50% when you choose the right bonds. If the majority of the bond yield comes from the par value difference (zero-coupon bonds are an extreme where 100% comes from the par value difference), the difference is fully taxed. However, if less than 50% comes from the par value difference and the rest from normal coupon payments, only the coupon payments are taxed and the par value difference is a tax-free capital gain.

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Any example of those kinds of bonds? If you’re talking about long term bonds then it’s mostly interest rate risk as TLT ETF shows.

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Any bond that is trading on the secondary market below 100. For instance if you have a 5-year bond with a 3% coupon that’s trading at 91.35, the YTM is 5%. ~3.28% yield comes from the coupon payment (3/91.35), the rest is from the par value difference. You only pay taxes on these 3.28%, but when you get back 100 after 5 years, that is a tax-free capital gain.

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If you buy a zero bond at 91% which was issued at 100%, everything will be tax-free.

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If it was actually issued at par value (or above), yes. While this should apply to some Swiss gov bonds issued during the negative interest era, I wouldn’t expect this to apply to many other CHF bonds. And most Swiss gov bonds were issued with a non-zero coupon even during the negative interest era, if I remember correctly.

If the bond has a zero coupon but is issued at a discount, the capital gain is taxable as “überwiegende Einmalverzinsung”, as I understand it. See ESTV Kreisschreiben Nr. 15.

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i’ve also read parts of that document a while ago. first impression was as @0xLambda described it (what counts is if majority of yield is via coupon or not). second impression was as @Cortana described it (it’s only relevant if there’s a disagio when issued / agio when repaid). still confused - also, i believe 99% of chf bonds are issued at/above par.

Yeah I read the document again, they mention that these conditions have to hold “im Emissionszeitpunkt”. But then, this treatment is applied to all of the following transactions on the secondary market. That’s a stupid policy in my opinion, why should it matter what the conditions at the emission time were when you buy the bond for instance 10 years later with a completely different YTM?

But I guess in that case it makes sense from a tax perspective to just buy bonds that were issued between 2015 and 2022 and expire soon. They have a very low coupon and most of the yield will come from the par value difference.

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there are still ~100 chf bonds with 0 coupons outstanding, if anyone wants to chase :wink:

don’t forget that the bond’s duration will also determine the ‘distribution period’, though. if you want an annual income from it, you can’t choose a ‘zerobond’ maturing in 3y, for example.

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It seems odd but I guess the intention is to only prevent the tax loophole of bonds that are intentionally issued with a zero (or very low) coupon but still have a higher imputed interest. For regular bonds, changes in market value are normal and not considered a tax loop hole as the earnings are still taxed, when looking at it from emission to maturity. If the bond is issued at par value, capital gains and capital losses on the secondary market will cancel each other out for a particular bond, so there are no net earnings besides the coupons, which are taxed.

Let me change the original question, is there a low-cost solution that is implementable by a retail investor that allows me to get 50% tax free interest?

Calculating bond prices, finding a broker selling CHF bonds at low cost and at low denomination seems hard. I think for most bonds the minimum investment is 100,000, and the liquidity is usually extremely thin.

Yes and No.

As indicated Swiss investors are taxed on the interest received, while capital gain/loss are not taxable/deductible. Accrued interest at purchase/sale are included in the capital gains/loss computation.
To avoid the loophole on zero bond issued with a disagio, the capital gain at redemption/sale is taxable (and the loss deductible).

However, the cantons may provide an exemption on interest income up to a certain amount (cantonal and communal taxes only).

Vaud → the first CHF 1’600 for a single person (code 480) are tax free
Genève → CHF 2’232 for a single person (code 56.30).

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It is doable, but would suggest you need more than just the tax savings to make it worthwhile, the tax is an optimisation in the portfolio that can boost the net return a lot, but you still need the right reasons and parameters to be investing in single bonds.
I’ve been focussing on low and zero coupon bonds (issued at least at par) and found I can lock-in 80% of my return as tax free capital gain while still having enough issues to chose from to get acceptable liquidity, spread and price.
Swissquote flat trades at 39chf mean you can achieve an all-in cost of about 0.2% of 50k nominal purchase and if you plan to hold to maturity no exit costs.

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One example would be T-Bill, right? Quick google confirmed that they are indeed zero coupon bonds.
ps. it’s just your phrasing got me confused: 0 cupon issued at 100%, who would buy that :slight_smile: I probably would say 100% face value, issued at discount (ie 91%) and bought price anything below 100%.

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yep, it’s doable via ladder. i also use flat fee trades. i don’t max out tax benefits as much (some differences to your ladders), but care that total portfolio distributions are ~70% of my withdrawals, i.e. not too low (pro trader status protection) and not too high (income tax benefits).

as a swiss investor, it’s relevant if it’s a real zerobond (issued below par) or a bond with a (close to) zero coupon (issued at/above par). with a real zerobond (t-bills usually are, i believe) you pay income tax, with the other version you don’t. and of course, you only buy a zero coupon bond if its price (after it’s been issued) is below par.

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Do you mean not accumulating too ticks against the tests for professional trader personal tax status?

safe haven criteria / already being on watch to some degree

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Well, a lot. They even bought bonds at 100% with negative interest. So you had to pay interest to get the 100% back once it matured.

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Oh wow, I thought only secondary market yield went under 0. Anyway, could you confirm that us T-Bill essentially for CH investor would be tax free? What @oslasho is stating seems contradicting this.