Taxes and investment funds : How will your investments in funds/ETFs be taxed?

Welcome to this article devoted to investments and, more specifically, to the taxes linked to your investments and, even more specifically, to the taxes linked to investment funds and your ETFs.

If your portfolio is diversified and covers other types of assets, don’t hesitate to consult our other articles:

• Equity: Taxes on investments: How are your shares and their returns taxed?
• Real estate: Tax and real estate: How are rents, value and gains taxed when you sell your property?

As always, here’s today’s menu:

• A brief summary of investment funds and ETFs
• What taxes apply to investment funds and ETFs?
• Tax statements
• How do you declare your investment funds and ETFs on your tax return?

Without further ado, let’s begin this new article:

What is an investment fund / ETF?

Investment funds, like ETFs, are a grouping of several assets under a single product. It’s as simple as that: as soon as you have more than two assets you can buy in a single transaction, you’ve invested in a fund (in this example, a fund with very little diversification).

Why buy investment funds? Because they allow you to diversify your portfolio by:

• Region (country, continent)
• Theme
• Valuation
• Type of industry

It is often complicated to select all the interesting companies, and even more difficult and costly to buy a share/bond or other financial product in each of these pre-selected companies. That’s why funds exist. In a single purchase, you can gain exposure to two or more companies.

What is the difference with ETFs?

From our point of view, it’s mainly the type of management that differs: a fund can be recreated ‘manually’, in other words, it’s people with varying degrees of talent who, after hours of meetings, will decide for you whether to sell, buy or do nothing, with the aim of making you money. We call this active management.

Conversely, once the basic rules have been laid down, an ETF can be managed almost automatically. It will know when to sell, when to buy and when to do nothing. The person behind the fund will lay down selection rules such as: “Buy a share in the biggest company in each country”. And there you have it, you’ve just created an ETF diversified across the globe, with a focus on equities and high valuations. What’s the aim? To keep management costs as low as possible. Take away the meetings, the brainstorming, the administrative management and pow you’ve got a cheaper financial product that’s just as sophisticated. In short, these are passive management products.

What types of funds / ETFs are there?

There are hundreds of thousands of different funds, and any bank or asset manager can create investment funds under certain conditions. All they have to do is define the rules for selecting assets, then buy and sell them accordingly. Among the funds you can find :

Equity funds

Made up entirely of company shares.

Bond funds

Made up entirely of corporate or government bonds.

Crypto funds

Composed solely of cryptoassets.

Real estate funds

Mixed funds

These are funds that can be made up of equities, bonds or other products.

Taxes on investment funds and ETFs

As a fund is not a specific product, but rather an aggregation of different financial products, it is less easy for me to tell you exactly how your investment fund units will be taxed, and the return they may generate.

It all depends on what’s inside:

Equity funds

You will be taxed on the dividends received. If the funds have increased in value as a result of a rise in share prices, then this capital gain will not be taxed (see our dedicated article), but you will still have to declare their value at 31.12 in your statement of assets.

Bond funds

Same principle as for shares, coupons and interest received will be taxed as income (see our dedicated article). However, within certain limits, this income may be exempt, as it is considered to be “interest due on savings capital”.

As you will have realised, it is the composition of your fund that will give you the answer as to the tax treatment of your investment.

How do you do that when you have a mixed fund with a bit of everything? Or quite simply, how do you know which part is considered income and which part is considered a capital gain? And for the clever amongst you, if your fund reinvests the gains and therefore pays you nothing, is it still taxable?

This is why institutions in Switzerland and many other countries have created tax statements.

What is a tax statement?

It is a document issued by an asset manager, a bank or your broker that will tell you exactly what to report on your tax return. The items on your tax statement include :

Taxable assets at 31.12 of the year in question

This is the value that will be taken into account when calculating your wealth tax.

Income subject to withholding tax

This is income that has already been taxed on a flat-rate basis by Switzerland and that can be reclaimed once your assets and their returns have been declared on your tax return.

Income subject to tax at source

Similar to withholding tax, this is a tax levied by a state other than Switzerland which, under certain conditions, may be refunded to you (at least in part).

Returns not subject to withholding tax

This is the income that has not been taxed and has been paid to you in full.

With all these elements in place, you can easily find out what will or will not be taxed.

How do you declare your investment funds and ETFs on your tax return?

It couldn’t be simpler – well, in some cases it is. The most technologically up-to-date Swiss financial institutions can provide you with a statement showing a bar code on the first page. This can be directly loaded and scanned by the GETax, VaudTax or VSTax tax return software. With just one click, all the values can be implemented directly without having to touch anything.

For those who place their money with their neighbour-broker-friend, who does not provide a bar-coded statement, you’d best take heart… These documents are often very, very long and you will need to be able to find all the figures described above. It’s tedious, but crucial, because in most cases, if it’s done properly, you can hope to recover some of the tax paid and therefore increase your net return.

After these few lines, I hope that you will be able to approach the world of investment funds with greater peace of mind.