Amid growing concerns over the effects of the global economic crisis, voters in the Swiss Canton Zurich have elected to abolish the highly controversial flat rate tax or ‘Pauschalbesteuerung’ applicable to wealthy foreigners. Both government and parliament had previously rejected the bill.
In future, wealthy foreigners will be deprived of their special tax privileges, and will no longer be taxed according to expenditure, but – along with their Swiss compatriots – according to wealth and income.
Under current law, income or wealth tax may be replaced by a lump sum tax, provided that an individual is in possession of a residence permit, not gainfully employed in Switzerland, and has not worked in the country for at least ten years.
The flat rate tax is calculated according to the annual cost of living and amounts to at least five times the annual rent or rental value of the taxpayer’s property, generating savings of up to 90%.
Critics have argued, however, that the system is unfair, that it violates the law to tax individuals according to their means, and that it serves to encourage tax evasion, whilst also contributing to rising property prices in affluent areas.
Originally intended to benefit retired individuals choosing to spend their twilight years in Switzerland, many believe the system is currently open to abuse.
Although previous attempts by the political left to amend the tax law have so far proven unsuccessful, a proposal pending in parliament could receive a much-needed boost following approval of the initiative in Zurich.
A fear persists, however, that abolition of the lump sum tax will lead to an exodus of super-rich foreigners, either to other cantons in Switzerland or abroad, to the UK, the Benelux countries, Austria or Liechtenstein where similar tax breaks for foreigners still apply.
Whilst modifying cantonal and local tax law, however, direct federal tax will remain unaffected by the decision.
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