From January 1, corporate tax in Obwalden will be cut to 6.6%, making it the lowest rate in Switzerland. For individuals, those earning up to CHF70,000 will pay 8% (down from 10%); those with income up to CHF300,000 will pay up to 6%; and those earning more than CHF300,000 will see tax cut to 1% from 2.35%. Property tax will also fall by at least 30%.

While the cantonal government has promised that everybody will benefit from the tax cuts, not just the wealthy, the move is likely to excite opposition from groups agitating for an end to special tax regimes designed to attract wealthy foreign celebrities and business people. For example, the Social Democratic Party has pledged to help coordinate a Europe-wide campaign against what it calls "increasing competition" among countries seeking to attract the rich and famous, and has warned that a "race to the bottom" on tax will endanger public finances.

In Switzerland, cantons are free to set their own tax rates within the framework of the 2001 Tax Harmonisation Act. This allows cantons to compete to attract foreign companies, and the country has gained a reputation for attracting wealthy foreign celebrities and business persons with special tax deals offered by certain cantons. It is estimated that around 3,000 wealthy foreigners are currently benefiting from fiscal incentives.

However, the Swiss tax system has also raised eyebrows in Brussels. In a letter sent to the Swiss Mission in Brussels in October, the European Union suggested that certain parts of the Swiss corporate tax regime "may be incompatible" with Switzerland's obligations under the 1972 Free Trade Agreement between Switzerland and the European Union.

Guido Jud, head of corporate tax in canton Zug, told swissinfo recently that he was "surprised" by the EU's viewpoint.

"The rules on taxation in Switzerland have not changed recently so we do not see why, in 2005, there should be suddenly be a problem," he stated.