Rich set to pay more tax

Phil Collins has a residence near Lake Geneva Keystone

The cabinet said on Thursday that tax breaks for wealthy foreigners should stay, but that these residents will have to pay more to ensure public acceptance.

The move comes amid attacks against lump-sum taxation which have notably led to canton Zurich abolishing the practice in a public vote in 2009 and some cantons increasing their levies.

Lump-sum taxes have been a feature in Switzerland since 1920, allowing cantons to ignore the wealth and income of wealthy foreign residents as long as this has been earned abroad. Instead, cantons have levied a charge that has typically been based on five times the rental value of the resident’s property.

Famous celebrities taking advantage of the deal include Phil Collins, Tina Turner and Michael Schumacher. There were 5,445 such taxpayers in 2010, according to recent figures.

The government has now recommended that lump-sum taxes should be raised to seven times the rental value of properties, while only people with an income of at least SFr400,000 ($476,000) would qualify for a tax break.

Cantons would be free to set their own limits for taxable income under Switzerland’s triple federal, cantonal and communal tax system.

As for married couples, both partners will now have to fulfil the conditions for tax breaks. These changes will however require parliamentary approval before they can be implemented.

Criticised tax

“Lump-sum taxation has come in for increased criticism over the past years,” said a finance ministry statement.

“These proposed measures will improve the application of lump-sum taxation. This should strengthen its acceptance, thus both guaranteeing the country’s attractiveness as a location and a tax equality.”

Finance Minister Eveline Widmer-Schlumpf added at a media conference in the capital, Bern, that the reform was a “realistic compromise”.

Widmer-Schlumpf said she expected the majority of people benefiting from lump-sum taxation to pay more under the new system.

“Revenue for the federal authorities will roughly double from SFr130 million to SFr255 million,” she said. “We have to realistically reckon with people leaving, but we do not think it will be a huge number.”

There will be a five-year cross-over period for those living under the present lump-sum tax rules.

Popular backlash

Since the financial crisis, there has been a growing popular backlash in Switzerland against “fat cat” foreigners paying proportionally less tax than ordinary citizens who live and work in the country.

Zurich became the first canton to feel the force of voter anger when it was decided to abolish lump-sum taxation in a ballot in 2009. This came into force in January 2010.

In May votes, Thurgau rejected a move to abolish the practice but agreed to a counter-proposal to increase the tax burden for wealthy foreigners. Glarus decided to retain lump-sum taxes.

Voters in Lucerne, St Gallen and Basel City will have their say on the issue in the coming months.

In addition, several parliamentary proposals have been unsuccessfully submitted to abolish or modify lump-sum taxation.

Switzerland’s tax breaks have also drawn criticism from neighbouring countries for poaching their wealthy citizens and their tax revenues.

Around SFr668 million is estimated to flow into federal, cantonal and communal tax coffers from lump-sum tax.

Topical issue

Reacting to Thursday’s proposals, the centre-left Social Democrats – long-time opponents of lump-sum taxation – said the government was legalising “a deplorable state of affairs” that had already been declared unconstitutional by the federal court.

It said that simply raising levies was not enough and called for lump-sum taxation for the superrich to be abolished in its entirety.

Widmer-Schlumpf was under no illusions about the  issue. “The  issue of lump sum taxation will remain topical for a long time,” she told reporters.

Lump-sum tax

In 1920 Vaud became the first canton to introduce separate measures to tax foreigners living, but not working, in Switzerland.

Fourteen years later the federal authorities also recognised as a separate tax category 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. They must be making their tax home in Switzerland for the first time, or have lived outside the country for at least 10 years. They must 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 to 5,445, according to the Conference of Cantonal Finance Ministers.

Canton Vaud has the most lump-sum tax residents, followed by Valais, Ticino and Geneva. In the German-speaking areas Graubünden leads, followed by Bern. Canton Zurich has lost 92 of its 201 lump-sum tax payers since abolishing the levy.

(With input from Urs Geiser)