Author: Lawyer Andrea Amedeo Prospero
Switzerland has a very special taxation mode, designed to attract wealthy foreigners to reside and live in cantons that allow it.
In German, this mode of taxation is called “Pauschalbesteurung”, in French “impôt au forfeit” or more commonly “forfeit fiscal”; while internationally, it is known as “Swiss lump sum taxation”.
Similar types of taxation are known in England as ‘taxation for non-domiciled residents’, or more commonly referred to as ‘non-dom taxation’, and Italy has also recently introduced a form of taxation called ‘100,000 euro taxation’.
Numerous celebrities and stars in Switzerland have made use of this form of taxation, including Michael Schumacher, Johnny Holiday, Charles Aznavour as well as many internationally active tycoons and industrialists.
This tax system provides for the payment of direct taxes (i.e. income and wealth taxes) according to overall expenditure. The law provides for a tax minimum and the expenditure is calculated according to precise criteria, in particular by taking the rental value of the house in which the taxpayer and his family live and multiplying it by seven.
Obviously, this system appears attractive if the tax forfeit resulting from the agreement with the cantonal tax authorities provides for a lower overall income than the actual one.
This system of taxation only applies to citizens who do not have Swiss nationality and who have not resided there in the 10 years preceding the agreement with the tax authority of the Canton in which they wish to reside.
This special tax regime has been criticised in the past, particularly by politically left-wing circles, and some Cantons have abolished it (notably Zurich, Basel-Stadt and Basel-Landschaft, Schaffhausen and Appenzell Ausserrhoden). A popular initiative had tried to call for its abolition throughout the federal territory, but the Swiss people voted against this initiative; however, the Federal Council took up the initiators’ criticism by imposing more homogenous rules and higher tax minimums on all cantons.
Another criterion for benefiting from this attractive taxation modality is the absence of gainful employment in Switzerland, this also to avoid unequal treatment of wealthy Swiss citizens working in Switzerland.
Nonetheless, I personally find this taxation system particularly attractive because of the advantages, not only in terms of taxation, but also because of the facilitation it grants in the granting of residence permits in Switzerland. In fact, while for EU citizens this advantage is not considerable, since the bilateral agreements concluded between Switzerland and the EU allow the right of free movement to be extended to Swiss territory, for non-EU citizens. Speaking of South Americans, Americans, Chinese, etc., it seems almost impossible for them to obtain a residence permit (commonly known as Permit B) in Switzerland. In practical terms, this translates into reduced timeframes for the obtaining of a B EU/EFTA permit. In fact, the beneficiary of the flat-rate taxation on expenditure becomes a person of public interest, whose presence benefits the economy of the canton in which he intends to reside. Obviously, once in possession of the residence permit, it will also be possible to purchase real estate for residential use throughout Switzerland, without any limits (but taking care not to increase one’s tax allowance, which can be increased if the sum of income from Swiss sources exceeds the amount agreed with the tax authorities).
If a wealthy foreigner has an interest in living in Switzerland with his or her family, it would be advisable to consider this method of taxation, which allows a residence permit to be obtained quickly. In the Canton of Ticino, a reasoned and documented application must be submitted to the district tax office where the location chosen for residence is located. At the same time, an application must be submitted for a residence permit for the taxpayer, extended to all members of his family (wife/husband and minor children). Once an agreement has been reached on the flat-rate amount of the expenditure (i.e. the amount of income tax determined as a lump sum), this agreement is passed on internally by the tax administration to the foreigners’ administration and the process of obtaining the residence permit proceed smoothly.
It is now possible for the wealthy foreign national to open a bank account with a Swiss bank as a Swiss resident, thus also obviating the need to exchange information with other countries and thus protecting privacy and security.