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Clocking in for Swiss tax benefits
by Christian H. Kälin, Henley & Partners, Switzerland
Published in Private Client Practitioner, October 2007

Switzerland's political and economic stability, combined with excellent communications and transport links, efficient public services, low tax rates and many more advantages have long made it the ultimate choice for business and residence. Interesting tax planning opportunities are offered by the unique preferential lump-sum taxation regime available to foreign citizens who are not gainfully occupied in Switzerland. This makes Switzerland even more attractive as a place of residence for wealthy individuals and families.

Foreign citizens who fulfill certain requirements can avail themselves of a special tax arrangement whereby Swiss taxes are levied on the basis of expenditure and standard of living in Switzerland rather than on the usual worldwide income and assets. This fiscal arrangement is called lump-sum taxation (forfait fiscal in French, Pauschal-besteuerung in German). Previously only known in certain cantons, this is available throughout the country thanks to the introduction of a Federal tax harmonisation law in 1990.

This Federal tax law and the corresponding cantonal tax laws require that a foreigner wishing to benefit from this special tax regime must not have been resident in Switzerland during the last ten years. Moreover, he or she may not carry out a gainful occupation. Indeed, the lump-sum taxation provisions are specifically aimed at financially independent persons who are not seeking employment in Switzerland. The tax regulations specify no age requirements or similar restrictions.

However, all foreign persons who wish to become resident in Switzerland must of course obtain a residence permit under one of the categories provided for by Swiss immigration law and regulations. These outline the conditions under which permits may be issued to foreigner persons who do not intend to carry on a gainful occupation in Switzerland (students, persons visiting Switzerland for health treatment, retirees, etc.). In general, retirees may obtain a residence permit only if they are over 55 years of age, can demonstrate close ties to Switzerland, will not be engaging in a gainful occupation and can show that they have sufficient financial means. The key condition here is the minimum age of 55 years, which - read in the context of the requirements to qualify for the lump-sum tax arrangement - appears to exclude the possibility of a lump-sum arrangement for younger persons, unless they qualified under some special provisions of the regulations, which however are applied very rarely, for instance in the case of celebrities or where it is in the national interest to grant a residence permit to a particular person.

Despite these restrictive regulations, foreign citizens who do not meet the age requirement under the retired persons category may still obtain a residence permit and benefit from the lump-sum taxation arrangements in some cantons. Provided they agree to pay a certain minimum in annual taxes, which is generally higher than for persons over 55 years of age and which again varies from canton to canton, they may obtain a permit by establishing a company in that canton and basically receiving a residence permit under the annual cantonal residence permit quota. The cantonal tax authorities will then still qualify them as not pursuing a gainful occupation and thus agree to apply the lump-sum tax regime. While this is possible in some cantons, others generally do not allow financially independent persons under 55 years of age to obtain a residence permit while at the same time benefiting from a lump-sum tax arrangement.

The changes in Swiss immigration law and regulations resulting from the Agreement on the Free Movement of Persons between Switzerland and the European Union has removed the restrictions imposed by Swiss immigration law on residence permits for financially independent E.U. citizens. As the lump-sum taxation regime remains unaffected by these changes, it is possible for all E.U. citizens who can show sufficient financial means to become resident and benefit from lump-sum taxation in all cantons throughout Switzerland.

Under the lump sum taxation regime, the Swiss tax authorities generally require the assessment of a minimum taxable income that amounts to at least five times the annual rental payments for the apartment or house in which the foreigner will reside in Switzerland. In all cantons certain minima apply, and in some cantons these minima are higher for non-EU citizens than for EU citizens (even though there is no legal basis for such a distinction). In case of owned real estate, the annual rental value is taken as the basis for this calculation. An important aspect of the lump-sum taxation regime is also that if taxed on this basis, you are not asked to declare your worldwide income or assets, which offers wealthy individuals and families considerable privacy with regards to their financial affairs. The amount of tax effectively payable, however, must exceed the income tax which would be due on certain expenses in Switzerland. It must also exceed the tax which would be due on Swiss source income as well as income for which a partial or total reduction of foreign taxes is requested by virtue of an international tax treaty.

In several tax treaties concluded by Switzerland, including the tax treaties with Belgium, France and Germany, it has been agreed to limit treaty benefits to foreign source income which is taxed in Switzerland at the regular tax rates. Because these treaty clauses would normally exclude persons who are taxed under a lump-sum arrangement, a modified lump-sum taxation has been introduced. Under the modified lump-sum taxation regime, the income derived from the respective treaty country will be included in the broader tax base as assessed annually. In order for the tax authorities to determine the correct tax rates at which the foreign source income should be taxed, the total worldwide income would have to be taken into account. However, if the worldwide income is not declared, then the highest tax rates apply on the respective foreign-source income for which treaty relief is sought.

Besides offering unique lump-sum taxation which effectively caps the income and net wealth tax for qualifying foreign citizens, Switzerland is also an attractive place of residence with regard to inheritance and gift taxes. The country has no Federal inheritance or gift taxes. Instead, the cantons levy inheritance and gift taxes in their own competence, which means that there are 25 different inheritance and gift tax regimes, while the Canton of Schwyz dispenses entirely with inheritance or gift taxes. Many cantons do not levy inheritance taxes between spouses or between parents and children, or levy only a very modest tax of below 10 percent for descendants. According to the cantonal inheritance and gift tax laws, the relevant cantons are competent to levy these taxes on real estate situated in the canton and on the worldwide estate of deceased persons or donors who had their last domicile in that canton. Heirs and recipients of gifts are not taxed in Switzerland. Where inheritance and gift taxes apply, there is usually a progressive scale depending on the relationship and size of the donated property or estate. The highest tax rates apply to gifts and inheritances between persons who are not related to each other and in such cases tax rates may reach up to about 50 percent in certain cantons. So it is also important to pay attention to the applicable cantonal gift and estate taxes when choosing one's place of residence in Switzerland.

Depending on the circumstances, it may also be necessary to take international tax issues into consideration. For example, while in many cantons there will be no tax liability for spouses and close relatives, it may nevertheless be desirable in some cases to pay a very small percentage of gift or inheritance taxes to prevent the home country of the deceased, donor, heirs or recipients from assuming jurisdiction to tax the estate or gift. Moreover, some Swiss inheritance and gift tax treaties provide for some important exceptions to the general rule that Switzerland is competent to levy inheritance and gift taxes on the worldwide estate of deceased persons or donors who had their last domicile in Switzerland. For instance, the treaty with Germany generally grants that country a competing, unrestricted right of taxation if the deceased, having lived at least five out of the last ten years in Germany before giving up his or her German residence, had moved to Switzerland during the last five years prior to his or her death. But foreign domestic tax rules need to be taken into consideration as well. Again, in Germany for instance, heirs or recipients who are resident there are subject to German inheritance taxes regardless of the last domicile of the deceased.

Irrespective of such special issues, however, the absence of inheritance and gift taxes, or the very low tax rates, naturally provide interesting possibilities for succession planning. Besides this scope for tax planning, Swiss international private law also allows foreign persons who live in Switzerland to choose whether to apply the inheritance law of Switzerland or of their country of origin, a situation that offers further flexibility for estate planning.

The hypothetical taxable income is based, as mentioned above, on the rental payments (or the rental value of the apartment or house) in Switzerland, and it therefore bears no relation to actual worldwide income or assets. Suppose the annual rental value of your apartment in Switzerland is CHF 50,000. The taxable income is then calculated as five times the annual rent, which amounts to CHF 250,000. This amount serves as the hypothetical annual income on which the normal tax rates apply, which of course vary depending on the canton as well as the commune in which you live. On an income of CHF 250,000, you may expect to pay approximately 40 percent in taxes, which amounts to a total annual income tax bill of about CHF 100,000. In addition to this calculation for income tax, five times the annual rental value will be capitalised to calculate the taxable hypothetical net wealth on which the cantonal net wealth tax is applied, which would amount to a total wealth tax bill of about CHF 20,000. These two calculated amounts added together will then yield the lump-sum tax payable to the tax authorities and represent your total tax liability, regardless of your worldwide income and assets. If you rent or own a large property in Switzerland, its rental value will be higher and your total annual tax bill will consequently be higher as well.

Just as under ordinary taxation, with a lump-sum taxation arrangement the overall tax rate also depends on the actual place of residence, and there are considerable differences between cantons and even between individual communes. Moreover, other income elements must also be considered when calculating the total tax liability, namely whether assets or sources of income are located in Switzerland or if it is of interest to the taxpayer to claim tax treaty relief under one of the double tax treaties concluded by Switzerland. If the tax on such income exceeds the tax on the lump-sum amount agreed with the tax authorities, then the income tax for the respective year will be levied on the higher amount. Income from all other sources is not relevant and does therefore not have to be disclosed to the Swiss tax authorities.

Swiss real estate has been in high demand by foreign investors for a long time. As a result, Switzerland has restricted the right of such acquisition for decades. This has even lead to a widespread belief that non-Swiss citizens are not permitted to purchase Swiss real estate at all.

The reality is however quite different. It is correct that, in principle, all non-resident foreign citizens who wish to acquire Swiss residential real estate must obtain approval prior to their purchase, which will otherwise be invalid. Such approval is difficult to obtain. A foreign person may be authorised to purchase a holiday home in a place designated by the respective cantonal authorities as a holiday resort. But every authorisation must be deducted from the annual quota assigned to the cantons by the Federal government for holiday homes and hotel condominium units. The cantons and communes may also apply their own restrictions, which may be even more stringent. Holiday homes and hotel condominium units may only be acquired by physical persons under their own name, and under no circumstances by a company. These restrictions also mean that tax and estate planning options with regard to Swiss holiday homes owned by foreign persons are very limited.

However, foreign citizens who hold a Swiss residence permit can now acquire real estate easily. In fact, since 1997, foreign citizens holding a Swiss residence permit may purchase a reasonably sized house or apartment for their personal use with no further need to seek prior approval. Even they subsequently leave the country, they are not forced to sell again and can therefore keep their property. As financially independent EU citizens will easily be able to obtain a Swiss residence permit, they also gain the right to acquire Swiss residential real estate, and as EU citizens without any restrictions whatsoever, i.e. if they are resident in Switzerland they can acquire as much real estate of any kind as they like in the same way as Swiss citizens can.

While these provisions concern only residential real estate, the acquisition and holding of purely commercial real estate by foreign persons (including entities) is no longer restricted in Switzerland. As a result, there is again ample scope for tax planning by investors wishing to invest in Swiss commercial real estate.

• Political, social and economic stability
• First-class infrastructure, excellent banking facilities
• Very attractive lifestyle and healthy environment
• Efficient and reliable public services
• Flat-tax arrangements possible for qualifying foreign persons
• Pre-immigration trusts may be used for tax planning
• Tax rulings may be obtained easily

Christian H. Kälin is an internationally known real-estate, tax and estate-planning specialist and a partner at Henley & Partners, Zurich, as well as one of the founding partners of Verica Trust & Capital Management, Zug, an investment advisory firm. He is also a member of the Board of the International Financial and Legal Network (IFLN), a member of the Society of Trust and Estate Practitioners (STEP) as well as of numerous other professional organizations such as the IFA, ITPA, FIABCI, etc.

After completing Zurich Business School and his training at a Swiss private bank, he lived and studied for many years in France, the USA, New Zealand and Switzerland. A holder of a cum laude Masters degree in law from the University of Zurich, he is a frequent writer and speaker on international tax-planning issues, in particular on cross-border business relocation and private residence planning and is regularly quoted in international and Swiss media.

He is the editor and one of the co-authors of the Switzerland Business & Investment Handbook. This is the key publication on the subject, supported by the Swiss Government and many important companies, and with contributions by more than 40 leading authors covering all aspects of doing business, investing and living in Switzerland.

He also specializes in real-estate structuring and real-estate investments and is a member of the panel of judges for the International Property Awards. He is the editor and one of the co-authors of the International Real Estate Handbook, a standard work in the field.