Lump-sum taxation comes under the spotlight

Formula One racer Michael Schumacher has a home on Lake Geneva Reuters

Tailor-made tax deals for rich foreigners face a challenge this year from a series of potential cantonal votes, while the government ponders changes to the system.

The controversial lump-sum taxation scheme, which allows cantons to set preferential rates for wealthy residents that settle in Switzerland from overseas, has come under increasing pressure both at home and from abroad.

Some 5,000 people in Switzerland currently benefit from a system that ignores income and wealth, but typically sets taxes at around five times the rental valuation of the individual’s property.

Stars of the sporting, showbiz and business worlds, including Michael Schumacher, Tina Turner, Phil Collins, Russian industrial baron Viktor Vekselberg and Ikea founder Ingvar Kamprad flock to Switzerland to take advantage of the system.

But the recent financial crisis and global recession appears to have hardened attitudes towards the rich in Switzerland. Canton Zurich voted in 2009 to abolish the lump-sum tax system from the beginning of last year and at least five other cantons may hold similar votes in 2011.

At the same time, the government has proposed increasing the tax rate to seven times the property rental value with a minimum taxable income threshold of SFr400,000 ($427,000).

The new set of proposed standards, that would apply across all 26 cantons, are currently being debated among interested parties before any decisions are made.

Free ride?

“This shows that the public have come to the conclusion that rich people cannot simply have a free ride,” parliamentarian Roger Nordmann, of the left-centre Social Democratic Party, told swissinfo.ch. “They have been tipped over the limit by this system of inequality.”

Nordmann added that abolishing lump-sum taxation would also ease pressure from European Union countries, such as France, that have frequently expressed annoyance at Switzerland for luring away their highest tax contributors.

Nordmann’s home canton, Vaud, is home to more than a fifth of all lump-sum tax beneficiaries. An attempt to force a public vote on abolishing lump-sum taxation in Vaud failed last year, but enough signatories have been gathered in Basel City, Glarus, St Gallen, Lucerne and Thurgau.

But not everyone agrees that it would be a good idea to abolish the system of lump-sum taxation. Some observers fear that rich foreigners would simply melt away to other tax friendly jurisdictions such as Monaco, Cyprus or Belgium – taking away their revenues and damaging Switzerland’s status as a tax-competitive nation.

Lump sum “not cheap”

Tax lawyer Toni Amonn, who advises wealthy clients on settling in Switzerland, said some cantons already charge these people more than five times the rental value of their property. Other living expenses, such as school tuition fees and running cars, yachts or planes, are also added to the bill, he said.

“It is not as cheap as people imagine,” Amonn told swissinfo.ch. “Many of our clients think it is actually quite an expensive system but the attraction is its simplicity and the certainty in advance of how much taxes they will be paying.”

But the anti-lump-sum tax camp is drawing yet more momentum from the experience of Zurich that abolished the system a year ago. Despite Zurich city losing a quarter of its 105 wealthy foreigners in the last year, tax officials have said it has made little difference to the tax income.

The Tages Anzeiger newspaper has also quoted real estate specialists saying that villas on the “gold coast” of lake Zurich are being re-filled by normal tax payers as soon as lump-sum beneficiaries leave.

Winners or losers?

“I am convinced that it would be the same in Vaud,” Nordmann told swissinfo.ch. “We would have no problem attracting new people who pay normal tax rates and the canton would have more money.”

However, Amonn disagreed, arguing that Zurich is a special case as most of its taxes come from business rates and that the city is a magnet for new residents as the financial hub of Switzerland.

“Abolishing lump-sum taxation would have far more serious consequences for smaller cantons in the countryside,” he told swissinfo.ch. “These cantons cannot attract multinational companies and their ability to attract wealthy people would also be destroyed.”

Tax revenues are only one side of the story, Amonn added. Lump-sum tax beneficiaries also contribute some SFr4.5 billion per year to the economy by buying and maintaining property and through other living expenses, he said.

Lump-sum Taxation

In 1862 Vaud became the first canton to introduce separate measures to tax foreigners living, but not working, in Switzerland.

The federal authorities later created a separate tax category for people who came to Switzerland for health reasons and not to work.

Lump-sum taxation is regulated by the Tax Harmonisation Act, brought into force in 2001 to compel cantons to follow the same guidelines when setting individual rates.

Beneficiaries of this system must live at least six months and one day in the canton, have their principal residence in Switzerland or have been absent from their home country for at least 10 years and not be employed within Switzerland.

Tax consultants KPMG conducted a survey in 2007 to compare the numbers of lump-sum beneficiaries in Switzerland in 2003 and 2006.

They found the numbers had shot up from 2,394 in 2003 to 4,175 three years later. This figure has since climbed above 5,000, according to the Swiss government.

Canton Vaud had the most lump-sum tax residents in the KPMG report (1,100 in 2006, 260 in 2003), followed by Valais (860, 647), Geneva (600, 555), Ticino (477, 410) and Graubünden (250, 168).

Canton Zurich occupied sixth place on the list (150, 38) but scrapped the lump-sum tax system at the start of 2010.