What is a lump sum tax?
The lump-sum tax in Switzerland (sometimes also called the “chord tax” or “expenditure tax”) has every chance to use the most foreign residents who were previously not taxed in Switzerland but would have been normal taxes for the last 10 years, that is:
- Individuals with dual citizenship, one of which is Swiss, are excluded from the pool of candidates. For them, the only way out is to renounce the citizenship of our state.
- If applicants are wives, they are both not required to hold Confederate citizenship.
- Only newly arrived foreigners have every chance to apply for a lump-sum tax in Switzerland (those who either never stayed in the Confederation, or who lived for a stage before moving here but for 10 years).
Perspectives on lump-sum taxation
The lump-sum tax in Switzerland allows wealthy foreigners to achieve 2 main goals:
- legally obtain a local residence permit
- legally save on deductions to the treasury thanks to tax optimization.
Depending on the citizenship of the candidate, one or the other goal becomes central. Initially, the lump-sum tax was conceived as a way to obtain a residence permit in Switzerland for wealthy foreigners who wanted to spend their old age surrounded by the beauty of the local lakes and the Alps. The first canton introduced a lump-sum tax as early as 1862. At the level of the Federation, he was entrenched in 1938.
Since it was difficult for the Swiss tax authorities to determine the tax base of persons who no longer worked, the Confederate authorities decided to tax the “rich lifestyle”. This is partly why the lump-sum tax is popularly called simply “the tax for the rich” (not to be confused with the “wealth tax”, which is known in a number of countries).
The purpose of the tax is a Swiss residence permit
The opportunity to live in a prosperous Switzerland is the object of many foreigners’ aspirations. However, the local migration laws that apply to citizens of so-called “third countries” are considered, and in fact are, among the most stringent in the world.
Swiss citizenship cannot be bought. However, actually wealthy foreigners can acquire a residence permit in Switzerland. This permission can be obtained by agreeing with the cantonal authorities on the payment of a lump-sum tax.
Tax optimization
Wealthy foreigners are encouraged to pay a lump-sum tax that replaces the (regular) Swiss income tax and property tax. The percentage of fees is calculated in accordance with the “household” expenses of the foreigner. In particular, the amount that he spends on rent or hotel accommodation in Switzerland is taken as a basis.
As a result, expenditure-based taxes can be substantially lower than what a foreigner would have to pay in his (or any other) country, subject to taxing his income and property in the usual way.
The legitimacy of such taxation
Special provisions allow the issuance of category B residence permits if there are “important public interests”. Accordingly, each canton is free to determine unilaterally what it understands by these “important public interests”. Many Swiss cantons include their fiscal interests in this definition. These facts make obtaining a residence permit in Switzerland through lump-sum taxation a very specific procedure.
But paying lump-sum tax in Switzerland as a way to obtain a residence permit has certain disadvantages, namely the obligation to pay a significant amount of money as tax every year. This factor makes lump-sum taxation affordable only for very wealthy foreigners.
In addition to periodic deductions, one must also take into account the initial one-time costs for a Swiss lawyer when applying for a permit. You should also take into account contributions to mandatory (social) funds. However, in comparison with the amount of the tax itself, these lines of spending are of secondary importance.
Financial requirements for a lump-sum tax payer
To be able to obtain a residence permit in Switzerland by paying a lump-sum tax, you must meet the financial requirements of the local authorities. Since each payer is an individual case, it is impossible to talk about any exact tax rates.
In the canton of Zug, a foreigner with a taxable income of 1 million francs and a capital of 20 million francs can become a flat-rate tax payer. Often, these relatively high rates apply to third-country nationals. As a result of this, and taking into account independent federal requirements, the annual tax burden will average 295,000 francs.
This amount is distributed among the three levels of government: the federation, the canton and the geminde. The last two account for about 195,000 francs a year from the pocket of one foreign taxpayer.
For holders of EU/EFTA citizenship, obtaining a residence permit in Switzerland through lump-sum taxation has great financial benefits. The taxpayer must have an income of at least 500,000 francs and a capital of 10 million francs. As a result, the cantonal treasury will receive tax deductions of 141,000 francs per year.
Lump-sum taxes are Swiss income
During its existence, the lump-sum tax managed to become an important column of tax revenues of the Swiss cantons. This can be confirmed by the tax statistics of the canton of Zug, where in 2002 the lump-sum tax amounted to 3.7 percent of all tax revenues. Already by 2008, it reached the mark of 10 percent.
However, such a well-established “tax income” mechanism requires the Swiss cantons to provide full stability for foreign payers. In 2013, the authorities of the canton of Basel-Lands decided to mark the lump-sum tax on their territory, which immediately frightened off wealthy foreigners. This decision led to the outflow of half of all wealthy foreigners, and the loss of tax deductions of the canton was expressed in 750,000 francs per year.
Let’s summarize
Despite the importance of lump-sum tax payers for the budget, due to political considerations, not everyone who wants to, even if they have money, will be approved by the cantonal authorities.
Traditionally, the migration authorities prefer to deal with a candidate represented by a local lawyer who has already carried out work on “optimizing the client’s file”. Agents, lawyers and representatives located outside Swiss jurisdiction are not contacted by the cantonal authorities.
Read more: https://taxtaxation.com/what-are-the-features-of-swiss-taxes/
