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Tax Competition Heats Up In Switzerland

by Ulrika Lomas, Tax-News.com, Brussels

30 December 2005


At least eighteen out of Switzerland's 24 cantons are planning to cut rates of taxation in 2006, following the lead of Obwalden whose electorate voted to reduce both personal and corporate income tax from January 1.

According to a report by the Neue Zürcher Zeitung, Cantons Zurich, Valais, Fribourg, Uri and Schaffhausen will all reduce taxes in the New Year, with competition to attract foreign businesses and wealthy tax exiles seemingly intensifying. A number of other cantons are also considering cutting taxes in the near future.

Recently, voters in the small central Swiss canton of Obwalden approved new laws which will substantially cut income tax for individuals and corporations, and are aimed at attracting higher numbers of wealthy persons and encouraging more companies to locate offices in the area.

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%.

In Switzerland, cantons are free to set their own tax rates within the framework of the 2001 Tax Harmonisation Act, and the direct link between voters and tax policy has helped to push local tax rates lower. However, the Swiss tax system has raised eyebrows in Brussels, and European Commission officials have suggested that certain parts of the corporate tax regime "may be incompatible" with Switzerland's obligations under the 1972 Free Trade Agreement between Switzerland and the European Union.

In a letter sent to the Swiss Mission in Brussels made public in October, the EC made particular reference to the tax regimes in Cantons Zug and Schwyz which, officials warned, could "grant fiscal advantage to undertakings for... economic activities taking place outside Switzerland".

Currently, the tax rate for companies in Zug ranges from 14% to 17%.

However, not all in Switzerland are supportive of tax cuts, and 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.

A comprehensive report in our Intelligence Report series giving background tax and residence information on many of the key offshore jurisdictions is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report4.asp

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