France Denies Tax Exiles In Switzerland DTA Perks

By Editorial 08 January, 2013

The French government has recently published an instruction preventing French tax exiles domiciled in Switzerland from January 1, 2013, from continuing to benefit from the generous provisions provided for within the framework of France’s bilateral tax agreement (DTA) with the Confederation.

Upping the ante yet further in its drive to penalize wealthy French nationals seeking to evade their tax responsibilities in France by relocating abroad, the government has said that expatriates residing in Switzerland while carrying out a professional activity in France will no longer benefit from the tax breaks accorded under the terms of the Franco-Swiss DTA.

Up until now, French tax exiles agreeing to pay a flat tax in Switzerland and in receipt of a certificate from the Swiss tax authorities showing that they are domiciled and paying their taxes in the Confederation, have benefited, for example, from significantly reduced withholding tax rates imposed on dividends collected in France in accordance with the bilateral accord.

It is said that around 2,000 French expats are among the 5,000 foreign millionaires currently benefiting from Switzerland’s generous and highly controversial flat tax regime. The lump sum tax basis is accorded to wealthy foreigners provided that they are not gainfully employed in Switzerland. The tax is based on the cost of living rather than the individual’s wealth or income, making the benefit a highly attractive proposition.

Yet the tax privilege has become increasingly unpopular both in Switzerland and in neighboring countries, in particular France, over the last few years, with opponents criticizing the provision, which potentially results in a significantly lower effective tax rate for foreigners.

Indeed, since 2009, five of the twenty-six cantons have voted to abolish the flat tax system, including Zurich, Schaffhausen, Appenzell, Basel-Stadt and Basel-Landschaft.

In its autumn session last year, the Swiss National Council endorsed plans to maintain, although to increase, the minimum flat tax rates, contained in a bill backed by the Swiss Council of States at the beginning of March.

The bill provides that the tax base for calculating direct federal tax and cantonal tax will now be seven times the cost of living, compared with five times as is currently the case. For individuals staying in hotel accommodation, the rate will increase from two to three times the cost of board.

In addition, as regards direct federal tax, a minimal taxable income of CHF400,000 will apply. The Swiss cantons will be required to determine their own minimum taxable amount.

Although Bern recently voted to keep its flat tax regime, it nevertheless voted in favor of plans to tighten the system by increasing the minimum taxable income threshold to CHF400,000. It is expected that this decision will increase the tax burden of around 80% of the individuals currently subject to the flat tax in the canton.

Marking perhaps the most significant step, at the end of November 2012, the Swiss people’s initiative calling for an "end to tax privileges for millionaires" succeeded in gaining the necessary 100,000 signatures to trigger a referendum on plans to abolish nationwide the flat tax regime.

The referendum is likely to be held in two years’ time.

Tags: Individuals | Expatriates | Tax | Investment | Double Tax Agreement (DTA) | Withholding Tax | France | Switzerland | Tax Breaks | Dividends |


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