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The international sport of seducing rich expats

Formula 1 racer Lewis Hamilton has recently left Switzerland for Monaco, where individuals are exempt from taxes on income and wealth. Keystone

Often vilified by its neighbours for the system of lump sum taxation offered to foreign residents, Switzerland is surrounded by countries that themselves give generous tax breaks to wealthy expatriates. 

Britain and Portugal spring to mind as popular destinations for so-called “tax exiles”, but even France, so quick to denounce its wealthy citizens who leave for tax purposes, is also flirting with moneyed foreigners. 

Later this month, Switzerland will face France in its second-ever Davis Cup final. But apart from the spectacular tennis, there is also an interesting political aside to the event: this year’s French team is likely to be composed entirely of players who live in Switzerland. 

Lump sum taxation, the system by which foreign residents not gainfully employed in Switzerland are taxed according to their spending habits, has long made the country a popular destination for French sports stars and artists. 

But will Jo-Wilfried Tsonga, Richard Gasquet or Gilles Simon remain in the country if the Swiss vote in favour of an initiative to abolish lump sum taxation? Launched by the Left, the initiative to “End tax breaks for millionaires (abolish lump sum taxation)” will be put to a popular vote on November 30, a week after the “100% Swiss” Davis Cup. 

Philippe Kenel, a tax lawyer who specialises in relocating the wealthy suggests “tax exiles” like France’s tennis stars will flee, “no doubt to Britain or Portugal, currently the two most attractive countries in Europe for people who are not gainfully employed there”. 

Similar models 

Created in 1862, the Swiss model for lump sum taxation is, with the exception of Liechtenstein, unique to Europe, but it does strongly resemble the British version. 

“The statute of ‘resident non-domiciled’ means a French actor living in London will not be taxed on revenue generated outside the country, provided the money is not repatriated to Britain,” explains Vincent Simon, a taxation expert from the Swiss Business Federation. “That said, they can work in Britain and be taxed in the same manner as a British citizen which is something the Swiss system does not allow.” 

Those expats who want to take advantage of the lump sum taxation regime for seven years or more must pay a flat fee of £30,000 (CHF46,294) per year, and £50,000 per year from 12 years. The fee structure was introduced in 2012 following a barrage of domestic criticism towards the some 123,000 ‘residents non-domiciled’ in Britain, according to The Financial Times. By comparison, there are fewer than 6,000 beneficiaries of lump sum taxation living in Switzerland. 

In Portugal, the system is still more advantageous: expats who do not earn an income in the country are excused from paying taxes for ten years. 

“Established in 2009 at the height of the financial crisis, the system is very attractive for annuitants. It applies to both the very wealthy and ordinary retirees,” says Simon. 

The French touch 

Kenel says there are two types of countries in Europe: those such as Britain, Portugal, Malta, Ireland, Holland and Austria that have special statutes for foreign residents, and those that favour attractive tax regimes for the wealthy regardless of nationality, such as Luxembourg, Italy, Belgium and countries across Eastern Europe. 

Belgium, which taxes neither the fortune nor capital gains on private assets, has become a haven for many French looking to reduce their tax bills. While angry at both Switzerland and Belgium for poaching thousands of its wealthy taxpayers, France has come up with its own method of enticing wealthy foreigners to its shores. 

“Foreign taxpayers resident in France are exonerated from paying wealth tax for five years,” says Kenel. “But also, France accords a particular treatment for citizens of Qatar who benefit from the exemption for life if they officially leave the territory every five years, for three years.” 

Those who want to pay no tax at all need only apply to micro states like Andorra and Monaco. In 2012, Formula 1 driver Lewis Hamilton left Switzerland to live in Monaco, where real estate prices are amongst the highest in the world. Otherwise, more exotic destinations such as the Bahamas and Belize could also be the answer. Outside of Europe, countries like Canada, the United States, Morocco, Hong Kong, Singapore, Israel, China, Japan and Thailand each have methods for attracting wealthy expats. 

Not such a bargain 

Those advocating the abolition of lump sum taxation say the international competition for wealthy foreigners proves that Switzerland is an attractive destination for more than just its taxation system, and will remain so should it be abolished. 

Taking the example of canton Zurich which killed off lump sum taxation in 2010, Marius Brülhart, economics professor at the University of Lausanne, estimates that between 20 to 50% of people who benefit from lump sum taxation will leave Switzerland in the event of a “yes” vote on November 30. 

“In Zurich, the alarmist warnings of the opposition did not come true because they overestimated the actual mobility of these taxpayers. Switzerland has other advantages than lump sum taxation,” says Brülhart. 

The lifestyle Switzerland offers, its stability, security, cultural attractions and comparatively low taxes, make it a country that is naturally appreciated by foreigners. 

Brülhart suggests that Switzerland will emerge a winner by abolishing lump sum taxation because not only will the departure of wealthy foreign taxpayers be compensated for by increased taxes paid by those who stay, but some indirect benefits could also be higher. 

“The system as it stands encourages people to minimise their spending in Switzerland and to live in a more luxurious fashion abroad (because lump sum taxation is calculated based on a taxpayers spending habits and not on revenue or fortune). With ordinary taxation, the incentive will no longer be there. So in the end, lump sum taxation is probably not such a boon for our country,” he says. 

However, Simon fears that well over half of those who benefit from lump sum taxation will leave Switzerland if the system is abolished. 

“Most European countries do not have a wealth tax, which can be quite high in Switzerland, particularly in the French-speaking cantons which are most affected by this initiative,” he says. 

Kenel, whose work puts him in contact daily with the foreigners who will be most affected by the initiative, does not mince his words when predicting the consequences of a “yes” vote.

“The beauty of an Alpine view or Paris to Brussels in an hour and 20 minutes is a consideration when deciding to relocate to Switzerland or Belgium, but only if the country is one of those offering favourable conditions. My clients come to Switzerland for the financial advantages; they will leave pronto should those advantages disappear,” he says.

Buying residency? 

Lump sum taxation was developed as a means of taxing wealthy foreigners who retired to Switzerland. Previously subject to age limits, this provision was removed when Switzerland signed an agreement with the European Union for the free movement of people. Now, any European citizen who is not gainfully employed in Switzerland may live in the country and benefit from lump sum taxation as long as they are able to provide for themselves and their family. 

The age limit of 55 on lump sum taxation still applies to non-European citizens. They may live in Switzerland without gainful employment as long as they have personal links to Switzerland and the necessary financial resources. 

However, exceptions are possible, notably if “major cantonal taxation interests” are at stake, as set out in the Ordinance relative to entry, residence and employment. This amendment was created in 2007 at the initiative of People’s Party strongman Christoph Blocher who was then head of the justice ministry. 

Opponents of lump sum taxation denounce this measure as akin to allowing non-European “fictional unemployed” to “purchase” residency. Recent examples of non-Europeans settling in the country that have hit the headlines include the daughters of the Uzbek and Kazakh presidents Lola Karimova and Dinara Kulibaïeva respectively, Russian billionaire Viktor Vekselberg and more recently, Russian tycoon and opponent of President Vladimir Putin Mikhail Khodorkovsky.

(Translated from French by Sophie Douez)

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