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Switzerland Tightens Foreigners' Flat Tax Perk

by Ulrika Lomas, Tax-News.com, Brussels

21 February 2013


The Swiss Federal Department of Finance has recently announced that measures aimed at tightening the controversial flat tax regime, currently benefiting wealthy foreigners in the Confederation, are to apply fully from 2016.

The measures aimed at toughening the flat tax system are to enter into force through the country’s tax harmonization law (StHG) on January 1, 2014. The Swiss cantons then have two years in which to adapt their cantonal laws to the changes. From January 1, 2016, the new provisions will also apply for direct federal tax.

The Federal Council’s decision to provide for entry into force of the measures in two stages is intended to ensure that the changes take effect at the same time for both direct federal tax and cantonal tax.

Switzerland’s flat tax regime is based on the cost of living rather than the individual’s wealth or income. In accordance with the new provisions, from 2016 the tax base for calculating direct federal tax and cantonal tax will be seven times the cost of living, compared with five times as is currently the case.

In addition, as regards direct federal tax, a minimal taxable income of CHF400,000 (USD429,311) will apply. The Swiss cantons will be required to determine their own minimum taxable amount.

For any individuals subject to the Confederation’s flat tax regime at the time of the legislative changes' entry into force, the current law will continue to apply for a further five years.

The Federal Council approved the changes in order to improve the existing instrument for taxing wealthy foreigners in Switzerland and to increase acceptance for this form of taxation. The Federal Chambers adopted the legislative changes on September 28, 2012. No referendum was called to challenge the proposals.

Despite the Federal Council’s attempts to gain acceptance for the flat tax regime, in November 2012 the Swiss people’s initiative calling for an "end to tax privileges for millionaires" succeeded in gaining the necessary 100,000 signatures to trigger a referendum on plans to abolish the increasingly unpopular regime, nationwide.

Launched by Switzerland’s Alternative Left party, the initiative, backed by the Green Party and the Social Democrats, as well as by Swiss trade unions, collected 103,012 signatures. The referendum is likely to be held in two years’ time.

Around 5,000 foreign millionaires currently benefit from the generous tax regime, which in 2010 yielded tax revenues of around CHF700m.

However, the tax privilege has become increasingly unpopular in Switzerland over the last few years, with opponents criticizing the provision, which potentially results in a significantly lower effective tax rate for foreigners.

Indeed, since 2009, five of the twenty-six cantons have voted to abolish the flat tax system, including Zurich, Schaffhausen, Appenzell, Basel-Stadt and Basel-Landschaft.

Although Bern recently voted to save the tax regime, it nevertheless also voted in favor of plans to tighten the system by increasing the minimum taxable income threshold to CHF400,000. It is expected that this decision will increase the tax burden of around 80% of the individuals currently subject to the flat tax in the canton.

TAGS: individuals | Finance | tax | law | Switzerland | tax breaks | trade | individual income tax

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