New tax rules for gambling winnings

If you are one of the lucky winners, you will find the answer to the question as to whether a part of the winnings must be ceded to the tax authorities in the following article.

A variety of different games

In order to understand the respective taxation rules, be it regarding income tax or withholding tax, the definitions of the Federal Act on Money Games (Bundesgesetz über Geldspiele [BGS]), which came into force on 1 January 2019, must be explained. Art. 3 BGS defines the most diverse types of games:

• Money games include games in which, through the conclusion of a legal transaction or through the use of a monetary benefit, the prospect of a monetary gain or a pecuniary advantage.

• Casino games include money games that are offered to a limited open to the public. A prime example is a table game in a Swiss casino.

• Major games are lotteries, sports betting and skill games that are either organised and carried out online, automatically or intercantonally.

• Minor games, on the other hand, are lotteries, sports betting, poker tournaments, which are not online, not automated or merely regional and not are held intercantonally. Examples include small poker tournaments and raffles.

• Lotteries include all games that are open to a very large or unlimited number of people and where the winner(s) of the game is (are) winner is chosen by a random draw or similar procedure.

• Games of skill are all games where the winning depends entirely or mainly on the skill of the player.

• Sports betting refers to games in which a win depends on the correct prediction of the Course or outcome of a sports event.

Popular initiative and counter-proposal

By referendum of 11 March 2012, the Swiss electorate adopted the Federal Council's direct counter-proposal (Federal Decree) to the popular initiative «For games of chance in the service of the common good». On the one hand, the initiative sought a clearer division of competences between the Confederation and the cantons; on the other hand, profits should be used entirely for charitable purposes. The primary reason for the Federal Council's counter-proposal was the legislator's limited scope of action; jurisdictional problems between the Confederation and the Cantons would not be solved; delimitation difficulties would result between the area of casinos and the area of lotteries and betting.

Thus, the Federal Council's counter-proposal contained a competing legislative competence of the Confederation in order to avoid conflicts of competence as well as the standardisation of numerous non-profit activities by the cantons (the main concern of the initiators). Overall, this counter-proposal was intended to create a sound basis for the revision of the gambling legislation. The Swiss electorate shared this view and followed the Federal Council's counter-proposal on 11 March 2012.

The small chamber sets the pace for the large chamber

Based on the new constitutional article, the Federal Council adopted the message on the revision of the Money Games Act of 1998 in October 2015. The primary pillar of the draft is innovation. Social and technological developments are to be considered by allowing casino games to be offered online, small poker tournaments with low stakes and low potential winnings are to be permitted from now on. The second core concern is the prevention of gambling addiction. This innovation is directed mainly at the cantons, which are called upon to set up treatment and counselling services for gambling addicts and their social environment. The former Money Games Act provided for unequal treatment regarding the taxation of money winnings. Winnings from casinos were tax-free, while winnings from sports betting and lotteries had to be taxed in full. According to the Federal Council's proposal, all monetary winnings should henceforth be completely tax-free. The Federal Council argued that this would increase the competitiveness of the gambling industry.

From a tax perspective, the small chamber (Council of States) insisted in the consultations on the taxation of monetary gains from a profit of 1 million Swiss francs. In contrast to the Federal Council, the cantonal representatives wanted to leave only 1 million Swiss francs in monetary gains tax-free. The upper chamber, on the other hand, supported the Federal Council's view of complete tax exemption. The National Council only abandoned its position (108 to 78 votes) in the course of the procedure for settling differences. Due to a referendum by various young parties, the people voted on the bill on 10 June 2018. The revision was approved with 72.9% of the votes. The new Federal Gaming Act came into force on 1 January 2019.

The tax treatment of these various games must now be explained based on income tax on the one hand and withholding tax on the other:

Income tax

Income tax at federal level, regulated by the Federal Direct Tax Act (Bundesgesetz über die direkte Bundessteuer [DBG]), was fundamentally altered by the change from Art. 23 lit. e DBG to Art. 24 lit. i to j DBG. In the old version before 1 January 2019, Art. 23 lit. e DBG stated that winnings of more than CHF 1’000 from a lottery or lottery-like event constituted taxable income. The amendment to the Money Games Act rendered this provision obsolete. In return, Art. 24 DBG, concerning the area of tax-free amounts, was extended as follows:

• Art. 24 lit. i remains unchanged in content, in that winnings from casinos are tax-free. Somewhat so that only those casinos are included which are recognised by the Federal Act on Money Games (BGS). In addition, winnings from self-employment are not covered.

• Art. 24 lit. ibis DBG was inserted. Winnings up to an amount of CHF 1 million are tax-free if they originate from large games as defined by the BGS or from online participation in a casino game.

• Art. 24 lit. iter DBG subjects winnings from minor games permitted under the BGS to tax exemption.

• Art. 24 lit. j DBG sets a limit of CHF 1'000 for lotteries and games of skill that are not subject to the BGS, so that the profits remain tax-free. This amends the former Art. 24 lit. j DBG. This saw a limit of CHF 1'000 in winnings for a lottery or lottery-like event.

For the Cantons, Art. 7 para. 4 lit. l StHG [Federal law on the harmonisation of direct taxes of the Cantons and Municipalities] to Art. 7 para. 4 lit. m StHG provides for corresponding provisions. The cantons must comply with this and have amended their tax laws accordingly as of 1 January 2019 revised.  

Withholding tax (WHT)

Art. 1 para. 1 VStG [Federal Withholding Tax Act] now defines the subjecting of various profits to the withholding tax obligation. In detail, winnings from money games as well as lotteries and games of skill for sales promotion are now subject to withholding tax. Read together with Art. 6 para. 1 and 2 VStG, only those winnings that are also taxed with income tax are subject withholding tax.

• Winnings from casino games are generally tax-free and are only subject to withholding tax if it is an online participation in a casino game and the tax-free amount of CHF 1 million is exceeded. If this is not the case, the winnings from these games are the same as Income tax, withholding tax-free (Art. 6 para. 1 VStG in conjunction with Art. 24 lit. i and ibis DBG in conjunction with Art. 42 et seq. BGS).

• As with income tax, major games are only subject to withholding tax if the tax-free allowance of CHF 1 million is exceeded. Otherwise, profits are tax-free (Art. 6 para. 1 VStG in conjunction with Art. 24 lit. ibis DBG in conjunction with Art. 42 et seq. BGS).

• Small games require a permit from the competent cantonal authorities. If there is one, winnings from these games are to be deducted from Exempt from withholding tax (Art. 6 para. 1 VStG in conjunction with Art. 24 lit. iter DBG in conjunction with Art. 32 et seq. BGS).

• Lotteries and games of skill for sales promotion are subject to a special tax rule: The DBG and VStG refer to the respective standards to the definitions of terms of the BGS. According to Art. 1 para. 2 lit. d and lit. e BGS, lotteries and games of skill for sales promotion are excluded from the scope of application of the BGS excluded. Art. 1 para. 1 VStG nevertheless makes such games subject to withholding tax under certain conditions, despite this exception of the BGS. For games that are exclusively about the purchase of goods/services is offered at market prices (Art. 1 para. 2 lit. d BGS), the full amount of the withholding tax is subject to withholding tax if it exceeds CHF 1'000 (Art. 1 para. 1 VStG in conjunction with Art. 6 para. 2 VStG in conjunction with Art. 24 lit. j DBG). Winnings from participation in such games, which are only possible free of charge, are subject to independent of the organiser, no withholding tax (Art. 1 para. 2 lit. e BGS e contrario in connection with Art. 1 para. 1 VStG in conjunction with Art. 6 para. 2 VStG in conjunction with Art. 24 lit. j DBG). Furthermore, winnings from participation in these games are not subject to withholding tax if the participation itself is made through the purchase of goods/services or under equally good conditions is also free of charge and it is not a media company that operates the game (Art. 1 para. 2 lit. e BGS e contrario in conjunction with Art. 1 para. 1 VStG in conjunction with Art. 6 para. 2 VStG in conjunction with Art. 24 lit. j DBG). However, if the company is a media enterprise in the above-mentioned case, any profit exceeding the limit of CHF 1'000 fully subject to withholding tax (Art. 1 para. 2 lit. e BGS in conjunction with Art. 1 para. 1 VStG in conjunction with Art. 6 para. 2 VStG in conjunction with Art. 24 lit. j DBG).

• Winnings from illegal and unauthorised gambling do not simply move in a legal vacuum due to the origin of the winnings, but these winnings are taxable to the same extent as income of legal origin.

Take a look at the explanatory graphic of the Federal Tax Administration.

Conclusion

With the entry into force of the Federal Act on Money Games (BGS) and the abolition of the former Lottery Act, an adaptation of Art. 1 para. 1 VStG, Art. 23 and 24 DBG as well as the cantonal decrees in order to achieve consistency regarding terminology. The fact that, depending on the category of games, substantive adjustments were made to the withholding tax and income tax recording of winnings corresponds to an old political concern, but also to an adaptation to the new gaming environments, which result above all from modern means of communication. The boundaries between a tax-free and a taxable profit are - with a few exceptions for minor games and lotteries and games of skill for sales promotion - extensively set at CHF 1 million, which can be seen as a sign of a good Swiss compromise between the political camps. Well-equipped with tax knowledge, we wish you the very best of luck in the games.