FLAT-RATE TAXATION IN SWITZERLAND The new Federal Law on Expenditure Taxation: The Swiss parliament ratified the new Federal Law on Expenditure Taxation on 28 September 2012, which will regulate flat-rate taxation for prosperous foreign nationals following a transitional period of five years (National Council: 120 yes votes to 49 votes with 14 abstentions / Council of States: 36 yes votes to 9 no votes with 0 abstentions). Flat-rate taxation was first introduced over 150 years ago in the Canton of Waadt; it very soon rose to become a mainstay in the attractiveness of Switzerland as a location. Additionally, the federal structure quickly gave rise to competitive rivalry between the Cantons, which courted outside taxpayers as a means of generating substantial added tax revenue. Meaning The level of employment in branches of industry that profit directly or indirectly from persons subject to flat-rate taxation is approximately equated with the workforce of UBS in Switzerland or the population of the city of Lucerne. Accordingly, in the region of 20,000 full-time jobs are dependent on the system of expenditure taxation, including the corresponding positions within the federal government, canton, local government and private sector administrations. Roughly 700 million was generated in tax revenue over 2010, income that would cease to flow in the event of abolition. The Cantons of Waadt, Wallis, Tessin and Geneva account for 74 percent of this; together they collect approximately 78 percent of all taxes. Further, flat-rate taxation is of crucial economic significance to the Canton of Graubünden. Structurally weak municipalities in particular have the option of attracting prosperous foreign nationals and hence making a decisive contribution to their infrastructure. Opponents The opponents and supporters of the initiative to abolish flat-rate taxation, submitted in a valid form almost simultaneously, fail primarily to realise the substantial benefits to the national economy inherent to the fact that these are additional persons, voluntarily choosing to pay their taxes in Switzerland. This "voluntary nature" is based on Switzerland's attractiveness as a liberal business location. In the event of abolition, prosperous
foreign nationals would not be taxed simply on an equal basis; they would not be taxed at all, as they would move to a different country. Recently, even Denmark came out in favour of flat-rate taxation. The new regulation The new regulation consistently implements the objectives of the message: - Clarification that global expenditure is authoritative; - Minimum limits in direct federal taxes and canton taxes: 7 times the rental price, resp. imputed rental value; - Fictitious minimum income of CHF 400,000 for direct federal taxes; - Cantons must define minimums, but may set them autonomously; Personal preconditions The subjective preconditions have essentially remained unchanged: - No Swiss citizenship; - Liable to pay tax in Switzerland for the first time or following 10-year interruption; - No gainful employment in Switzerland; Spouses living in conjugal community must both satisfy the aforementioned preconditions. Assessment according to expenditure The new law clarifies that the basis of assessment is not just the cost of living in Switzerland, but instead global activities and lifestyle. This has so far been the subject of dispute and resulted in effective competition between the different cantons as to which parts of the cost of living must be included in the fictitious calculation of income. New features include consideration of elements that provide for, among others, education costs in Switzerland and abroad for children eligible for support and also, for instance, for breeding polo horses in Argentina and the costs of maintaining a yacht in Sardinia. In comparison: Until now, cantons have been able to consider exclusively the cost of living accrued in Switzerland. From here on in, the cost of living accrued in Switzerland and abroad must be used as a reference and declared as income. This breakdown requires significant expertise in the assessment facilities relating to aircraft, yachts and such like. Kneller Attorneys at Law has the requisite knowhow and will support you in your negotiations with the tax authorities. Tightened regulation Hence, the negotiated rulebook represents a compromise between the Directors of the Treasuries on a canton and a national level, targeted at a new regulation, particularly in view of the tighter stricture in the context of financial policies. However, the federal law is only in a position to
precisely regulate the underlying principles of tax assessment within the framework of its competence to collect federal taxes. In general, it represents a tightening of the provisions and specifications applicable to the cantons in the determination of their taxes. In terms of direct federal taxes, the regulations specified that a minimum assessment basis of CHF 400,000 must be applied as fictitious income. This minimum fictitious income of CHF 400,000 on the level of federal taxes can be increased if the actual income accrued from Swiss sources is higher. A further new minimum limit for global expenditure as regards direct federal taxes specifies seven times the rental price, resp. imputed rental income or three times the hotel price for accommodation and catering (until now five times). This means that persons liable to tax will initially have to consider whether they wish to generate income from Swiss capital investments, etc. In the event that such persons do not generate this form of income in Switzerland, the assessment will remain fixed at seven times the imputed rental value of the real estate they purchase, and is located, in Switzerland. Accordingly, the fictitious income for calculating the federal taxes will be based on the annual cost of living in Switzerland and abroad. The following lower limits apply in this: a) CHF 400,000, or b) for persons liable to pay tax with their own household: seven times the annual rental price or imputed rental value, or c) three times the annual hotel costs for accommodation and catering at the place of residence. In the event that the fictitious income is calculated according to the aforementioned formula, the tax authorities will carry out a control calculation that the person liable to pay taxes should also perform. This control calculation covers income from all Swiss sources. This includes all income generated in Switzerland, for instance from the lease of movable items, movable capital assets invested in Switzerland, income from patents and licenses, etc. exploited in Switzerland and also from annuities and pensions originating from a Swiss source. In the event that this control calculation reveals a higher fictitious income as the fictitious income indicated above, the income generated factually from Swiss sources is quite naturally the authoritative basis. In this, the legislator has satisfied a vital premise in the principle of equal treatment. By the way, the foreign national is entitled to move their place of residence each year to a different canton that applies flat-rate taxation; the persons will thereupon be liable to pay tax there (move from Zurich to Graubünden). Double taxation treaty
In the event that a double taxation agreement stipulates the relief on foreign income, this income must be disclosed to the Swiss tax authorities nevertheless (so-called modified flat-rate taxation). Canton alignment with the provisions under federal law The regulation created under consideration of the canton tax sovereignty essentially provides for the definition of minimum standards; however, it does vest significant freedoms in the cantons themselves as regards the actual structure, hence preserving functioning competition between the cantons. Accordingly, the cantons have not received specification of any minimum limits in terms of actual francs similar to the federal government specification of a CHF 400,000 limit for fictitious income. The cantons are therefore still permitted to prescribe minimum sums for fictitious income within an autonomous framework. However, it is new that the cantons are required to transparently elucidate this minimum sum in francs within the body of legislation. It can be expected that the canton sovereignty will sensibly leave this specification up to the government, which will then be in a better position to promote financially disadvantaged regions. In line with this, the government of the Canton of Graubünden has already submitted a draft bill that adopts the minimum income specified under federal law (government notification by the cantonal parliament dated 22 May 2012). Wealth tax The federal government has no wealth tax. It is therefore in the hands of the cantons, resp. the municipalities to levy a wealth tax. A new feature is that the cantons are required to disclose the nature in which the wealth tax is collected. They are entitled to do without wealth tax entirely, provided they take this into consideration in the calculation of income. Alignment and ratification by the cantons The regulations of the new federal law specify a transitional period of five years. This period offers foreign nationals living in Switzerland under the regime of flat-rate taxation sufficient time to adjust to the new circumstances or alternatively to move to a different canton or leave Switzerland altogether Conclusion In good Swiss tradition, the new regulation represents a compromise between demands made by opponents and supporters. It lends consideration to the tighter stricture in the context of financial policies, while preserving the fundamental liberal attitudes in Switzerland. It introduces new minimum income that must at least be generated. The cantons remain at liberty to specify the lower limits in terms of francs, but must render these limits transparent. Lower limits based on seven times the imputed rental value, resp. rental price for the properties the foreign nationals inhabit in Switzerland are mandatory.
Kneller Attorneys at Law can draw on profound expertise in this field. We would be pleased to advise you in the evaluation of Switzerland as a new location / residence and would negotiate the assessment with the authorities on your behalf. Dr. Kneller is personally at your disposal: Tel. +41 81 422 59 59 Fax. +41 81 422 59 55 email: michael.kneller@kneller.ch.