Swiss 'Flat Taxes' Under Attack

By Editorial 14 March, 2012

During recent federal and cantonal votes, the Swiss canton of Appenzell Ausserrhoden in the north of Switzerland voted in favour of abolishing the flat rate of tax currently benefiting wealthy foreigners. It is the third canton after Zurich and Schaffhausen to abolish the longstanding tradition, which was introduced in the Swiss canton of Vaud in 1862.

In contrast, although again clear evidence that the tax perk is becoming increasingly unpopular among the Swiss population, voters in the canton of Lucerne voted in favour of plans to tighten the system, by increasing the amount of tax paid by wealthy foreigners domiciled in the region to seven times the rental value and to insist on a minimum taxable income of CHF600,000 (USD650,069) (EUR497,622).

Switzerland’s lump sum tax basis is currently accorded to wealthy foreigners provided that they are not gainfully employed in the Confederation. The tax is based on the cost of living rather than the individual’s wealth or income, making the benefit a highly attractive proposition.

Currently twenty-two wealthy foreigners in Appenzell benefit from the tax perk, which generated CHF1.5m in tax revenues in 2010, corresponding to 0.53% of the total communal and cantonal tax revenues (CHF284m). The figure compares to around 160 foreigners currently benefiting from the flat tax in Lucerne, and over 5,000 nationally.

The news follows hot on the heels of the Swiss Council of State’s decision to back a bill maintaining, although increasing, the minimum flat tax rates.

In accordance with the provisions, the tax base for calculating direct federal tax and cantonal tax will now be seven times the cost of living, compared to 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.

Proponents of the tax argue that the tax serves to generate around CHF668m in direct taxes (federal, cantonal and municipal), and around CHF300m in value-added tax (VAT). Wealthy foreigners also contribute by paying their social insurance contributions. The flat tax, which is also said to be particularly economically beneficial to the outlying areas of the country, has reportedly created around 22,500 jobs.

The bill is now due to be submitted to the Swiss National Council, or lower house, for its examination, as Bern prepares to deliver its vote on the issue shortly.

Tags: Individuals | Expatriates | Tax | Investment | Entrepreneurs | Offshore | Tax Rates | Switzerland | Individual Income Tax |


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