Barriers are low for those wanting the high life in the cantons
A user's guide for wealthy non-doms thinking of quitting London for Switzerland.
Fed up with capital gains tax? Angry about the changes to non-dom tax rules? Furious about having to pay £25 a day to drive your Range Rover Vogue to the office? If you secretly envy the likes of UK Formula 1 star Lewis Hamilton in emigrating to tax-friendly Switzerland, the good news is that it is not just the preserve of the super-rich.
It is surprisingly easy to obtain a Swiss residence permit – provided you are from a long-established member of the European Union, have health insurance and can prove financial self-sufficiency. It helps if you are moderately rich too.
The self-employed can also win a permit, drawn from a quota, if they proffer viable business plans and show that their businesses will contribute to local employment.
Glimmer of light for non-EU hopefuls
The bad news is that easier access for EU citizens has made entry more difficult for those born elsewhere. Philippe de Sallis, head of wealth adviser Stonehage, said: “There is a policy in Switzerland aimed at maintaining a certain proportion between foreign nationals and Swiss citizens. It has become more difficult for citizens of non-EU countries to obtain residence permits, which are still subject to quotas.”
Non-EU nationals wanting to retire to Switzerland need to satisfy several conditions. They will traditionally be over 55, enjoy close ties with Switzerland, abstain from gainful activity anywhere, transfer their family office to Switzerland, and have sufficient financial resources to support their family.
They will be required to relinquish directorships, although permission may be granted for individuals to become directors of companies that they do not manage. Even then the grant of a permit is discretionary and subject to a quota system, according to local law firm Lenz & Staehelin.
But non-EU hopefuls should not lose heart. A federal law came into force last month enabling non-EU citizens younger than 55, or who lack connections with Switzerland, to obtain a residence permit while engaged in professional activity abroad. Federal authorities are likely to grant a permit if such an applicant strikes a tax deal with the relevant canton.
This law is likely to make it easier for hedge fund and private equity managers to relocate. According to Lenz & Staehelin, cantons can justify the issue of this permit “by deciding that the foreigner would represent a fiscal advantage to the canton”.
But you still have to pay tax
Each of the 26 cantons has its own tax system. Income taxes are levied at federal and cantonal levels, but net worth is taxed exclusively by local authorities. The federal government does not touch capital gains, and cantons only tax gains on local real estate.
Federal income tax rates are progressive, ranging from 0% to 11.5% for incomes above Sfr664,300 (€412,000). Cantonal and communal rates vary, but are on average twice as high, so that the total tax rate may exceed 30% for high earners. However, the maximum rate is generally much lower: in the canton of Schwyz the top rate is 22%. Local tax bills in Vaud and Geneva would total 33.7% for someone earning Sfr300,000. An additional sum, equivalent to less than 1%, would be levied on net worth.
Fiscal deals
An individual taking up residency in Switzerland is normally liable to Swiss income and net wealth taxes on their global assets. However, federal and most cantonal legislation stipulates that someone who is taking up residence for the first time or after an absence of at least 10 years, and who does not engage in any lucrative local business, has the right to pay a forfait, a lump sum tax based on standard of living.
Some cantons also require an applicant not to spend more than 10% of their time outside Switzerland in gainful activity.
The forfait was originally designed to benefit retirees over the age of 55, according to Olivier Mach of Swiss law firm Lenz & Staehelin. That condition has since been dropped. The tax may now be tapped by those of independent means who will not seek employment in Switzerland, but may carry out professional activities abroad.
Under the forfait, an applicant reaches an agreement with cantonal authorities to pay a fixed amount each year in lieu of standard tax. This lump sum is based on deemed income, calculated with reference to spending on food, clothes, housing, wages of employees, leisure activities, boats, private jets, etc. Deemed income must be at least five times the annual rent paid for the taxpayer’s home, or five times the rental value of a freehold.
The answer? Rent a modest apartment
Someone paying Sfr36,000 a year for a rented apartment would be assumed to have a taxable income of Sfr180,000. An individual who buys a property for Sfr56m would be deemed to have a gross income of Sfr14m. The tax base is determined by the relevant canton. It may be linked to an index and is reviewed every three years. Most cantons have established a minimum deemed income threshold used for tax purposes if spending falls below the minimum.
Agreeing a lump-sum tax is seen as a discussion rather than a negotiation to avoid the charge that rich foreigners can bypass the normal tax system. A source in Geneva’s Finance Ministry said: “The tax on spending is calculated on verifiable facts.” But cantons can be flexible in how they calculate the annual lump sum. Applicants do not need to declare assets and earnings which are not Swiss.
The popularity of the cities of Bern, Geneva and Zurich enables them to levy relatively high lump sums without jeopardising their appeal. Rural cantons, however, tend to be more pragmatic.
French-speaking Geneva and Vaud will not accept applicants whose declared income falls below Sfr500,000, according to Mach. In rural Valais, which contains the ski resort of Verbier, the unofficial bar is set at a more modest Sfr80,000. The minimum income threshold can be used to deter applicants from countries deemed to be undesirable, according to consultant François Micheloud.
Other benefits too
Wealthy individuals investing in Swiss businesses can look forward to a possible raising of dividend tax relief. A federal referendum next Sunday will decide whether the tax rebate on dividends paid by Swiss companies, normally 40%, should be increased to 50%.
The rebate, known as partial taxation, is generally offered on share stakes of between 5% and 20%. German-speaking cantons already offer generous tax privileges for dividends, varying from 20% in Glarus to 70% in Zug.
Inheritance and gift taxes are levied in all cantons, apart from Schwyz. Geneva taxes bequests to parents at 6%. Unrelated parties are taxed at up to 52%.
Switzerland has agreed to comply with the Hague Trust Convention, which protects the interests of families that set up trusts. But Lenz & Staehelin warns that cantons vary in the way taxes are levied on trusts. It recommends individuals get a cantonal tax ruling on the status of their trust before moving.
EU and European Free Trade Association citizens holding Swiss residence permits can buy property without restriction. Estate agents say Swiss house prices are cheaper than in London.
Commercial property may be purchased without restriction, but permission to buy a second home is only granted in designated holiday resorts, and subject to strict annual quotas.
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