Switzerland: Are Its Days as a Tax Haven for Foreigners Numbered?

Without the tax break, the rich and famous may choose to leave the country, which has enough money to make do without them, in any case.

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Gianluca Colla / Bloomberg via Getty Images

The Swiss national flag in Zurich

Tax breaks for the wealthy are a contentious pre-election topic in the U.S., but this issue also strikes a chord with the Swiss voters. Although they pay lower taxes across all income brackets than Americans and other Europeans, many Swiss are increasingly critical of the preferential tax treatment their government extends to wealthy foreigners.

For decades, the rich who had been overtaxed in their own countries have been flocking to Switzerland to take advantage of fiscal perks most of its 26 cantons (equivalent of the U.S. states) are offering to well-heeled expats. But if a left-wing political alliance has its way, rich foreigners may soon have to start contributing a lot more money into their host country’s coffers.

Unlike Swiss citizens, who pay taxes not only on their income but also on their assets, wealthy foreigners can negotiate lump-sum taxation, a figure based on five times the rental value of their Swiss property. To qualify for the flat-rate tax deal, they are not allowed to work in the country but must have a net wealth of at least $2 million.

(MORE: Why U.S. Tax Evaders Can No Longer Count on Swiss Secrecy)

This system has attracted more than 5,000 affluent expatriates to this nation of only 8 million people, including singers Tina Turner, Phil Collins and Shania Twain; actress Sophia Loren; as well as Ikea’s founder Ingvar Kamprad. Although wealthy foreigners collectively shell out about $700 million in federal and local taxes, they save millions that they’d have to pay in their home countries.

But this arrangement may soon be a thing of the past. Taking advantage of Switzerland’s system of direct democracy, under which citizens can bring any issue up for a vote if they collect enough signatures on a petition, several organizations are now demanding the end of tax breaks for rich foreigners. “The lump-sum system undermines tax justice and goes against legal equality for all citizens,” Niklaus Scherr of the Alternative List, a socialist party and one of the groups behind the initiative, told a Swiss news service.

On Oct. 15, his group and other left-wing organizations submitted to the federal authorities a petition with 103,000 signatures — 3,000 more than required by law to launch a national vote. The government will schedule the referendum after a parliamentary discussion of this issue.

(MORE: When the Swiss Aren’t Neutral: Chocolates and the CIA)

While many in Switzerland are calling for this change, there is also concern that elimination of tax perks will spark a mass exodus of affluent expatriates. “These people are a significant source of revenue and jobs in their communities,” says Stéphane Garelli, business and economics professor at University of Lausanne. “If we scrap their tax advantages, they’ll go spend their money elsewhere.”

In fact, at least one prominent foreigner is ready to pack his bags. Seven-time Formula One world champion Michael Schumacher, a German national who has been living near Geneva for the past 20 years, said he’d move out of Switzerland if the measure were to be approved by the voters.

Though he predicted that other rich foreigners would follow suit, so far nobody else threatened to jump ship. But even if they do leave and take their money out of the country, government finances would not suffer, Roland Meier, a spokesman for the Federal Department of Finance, tells TIME. He points out that the 2011 federal tax revenue — not including taxes collected separately by the cantons, which have fiscal autonomy to set their own rates — reached nearly $59 billion and the flat-rate taxation brought in “only” $200 million. Cantons and municipalities got additional $500 million in expats’ lump tax money.

(MORE: Mind Your Manner: The Secrets of Switzerland’s Last Traditional Finishing School)

Given those numbers, and considering that Switzerland has posted budget surpluses for several years in a row (with another one predicted for 2012), the loss of $200 million on a federal level would not make a big dent in its budget — though it might have more of an economic impact on cantons and municipalities that depend on the expat-tax revenue.

Schumacher’s departure, for example, would leave a substantial hole not only in the coffers of Gland, a small town of 11,000 residents where he lives, but would also wipe out the wages of employees who work at his sprawling $35 million waterfront estate.

However, the government is not turning a deaf ear to the critics of the current tax system. In September, the lower house of the parliament voted to maintain the lump-sum model while backing to raise the tax rate of rich expatriates to seven times the rental value of their home, from the current rate of five times. If passed by the upper house and unchallenged in a referendum, the new law would go into effect in five years. But the left-wing coalition that is pushing for the change argues that this measure is not enough and insists the flat-rate system be repealed altogether.

If the voters heed this call, life for the rich expatriates in Switzerland may get much more taxing.

MORE: Switzerland: A Painful History

11 comments
captainjohann
captainjohann

Swiss know wherre their butter lays. The real tax evaders from third world countries and anonymity is their bread and butter and it will continue.That is the reason they are not part of the UN. What they have done is to cut a deal with the Americans due to which the third world money bags can save their ill gotten wealth in Delaware in USA along with Isle of Man, Lichtenstein and of-course the swiss.

fkilc
fkilc

@captainjohann Switzerland has been part of the UN since 2002... Not a long time perhaps, but still a member.

SamuelSatter
SamuelSatter

Dude that jsut looks like its gonna be cool. Wow.

www.Anon-U.tk

clarenceswinney
clarenceswinney

People are hurting like Great Depression8 million kicked out of newhomesun--under employd sky highmin wage stagnatedPersonal Debt goneoff the chartsEducation Debt the same10% own most of wealthCEOs hugesalaries and bonuses instead of pay raises for workersMedical Costs on ZoomTrendA few get very very rich.Entire industries shippedoverseas.General Electic has more employees overseas than in AmericaOverten years paid 3.2% tax rate.Got tax refunds on Billion in profit whilesending our jobs awayLarge local plant empty  sad sad sad Since1980 we piled up debt by borrowing not taxing WealthIn 2008, top 50% paid12.5% Tax Rate. Got 86% individual inocme.

clarenceswinney
clarenceswinney

off sujject pardon m e--SAGA OF OSAMA BIN LADENWealthy—Engineer--used $$ in Middle East buildingprojectsthat endeared him to many.This videotape shown in Arab nations will never berepeated in America.He said:”I have had nightmares since watching Tallbuildings fall from American shellings.I have dreamed since that I would watch Tallbuildings fall in America”.9-11-01 was a Revenge by OBL. Saddam H. hadnothing to do with it.The Iraqi people had nothing to do with it.The Taliban government in Afghan had nothing to dowith it.OBL had a small group training in Afghan mountainto remove dictators.A senior FBI official said :”There were no morethan 100 hard core Al Quedamembers worldwide on 9-11-019-11-01 was used by the Cheney Neo-Cons aroundBush to invade two innocent, unarmed, destitute nations. The world depicted aBig Bully. The Muslim world grew a hatred for us from it.

DeborahDeCol
DeborahDeCol

Lets pretend the initiative find its way into the Swiss constitution, giving "legal equality" but initiating the emigration of those who assure the financial stability of our country, there would be a huge tax raise for those who voted for it. The voters should consider that fact too. Though our country should make sure that we won't depend upon that source of capital in the future but invest in its own people and economy.

Barton
Barton like.author.displayName 1 Like

@DeborahDeCol 

As I understand from friends who live in Switzerland, raising taxes over there is not easy. Under their system of direct democracy the government can't enact anything without people voting on the issue. So taxes can't just be raised, it would have to be approved by voters. Besides, it says in the article that Switzerland doesn't really rely on this money, it's just a little part of their revenue.

TomSullivan
TomSullivan like.author.displayName 1 Like

From very early in the article:

"For decades, the rich who had been overtaxed in their own countries have been flocking to Switzerland to take advantage of fiscal perks most of its 26 cantons (equivalent of the U.S. states)"  Do editors exist to eliminate the very obvious bias stated by the writer?  Thought I was going to read a "news" article.  not an op/ed piece.

Barton
Barton

@TomSullivan 

Nothing op-edish about it.  Sounds like a well-balanced article to me.

GaryMcCray
GaryMcCray

The primary job of any country should be to watch out for the welfare of it's own people.

Switzerland's referendum form of voting has insured that for the most part the people of Switzerland have determined what it's government does.

Swiss citizens take this privilege (and obligation) very seriously and generally research the implications of each issue rigorously before casting their vote.

It is not the Swiss peoples obligation to care for the rich of other countries it is their first obligation to care for themselves.

At this time, the Swiss economy is not dependent on foreign nationals to provide additional income to Switzerland by extending to them tax benefits that they do not extend to their own citizens.

We would not welcome such a scheme in our country so why are we surprised that the even more independent Swiss would like to terminate it there.

pbernasc
pbernasc

if you knew anything about Switzerland and Swiss people is that they do not fall for easy political TV ads .. you can feel safe, the $$ of foreigners in Switzerland will remain safe for eternity  there is a good reason Romney has Swiss Bank Accounts