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Tax breaks for rich foreigners under scrutiny

Michael Schumacher is a prominent beneficiary of Switzerland's lump-sum tax Keystone

Despite growing public opposition, some 3,000 wealthy foreigners in Switzerland benefit from special tax perks and the country’s complex fiscal system.

This content was published on February 25, 2005 - 16:28

Parliament is due to consider a proposal to scrap these breaks, although the authorities are happy to grant them to the rich and famous.

There is more than one reason for wealthy foreigners, such as the Formula One racer, Michael Schumacher, or former tennis star, Boris Becker, to seek a Swiss residency permit.

They can benefit from Switzerland’s fiscal system, which not only allows for considerable regional differences, but also grants a group of privileged people preferential treatment.

The tax due is not based on income or wealth, as it is in the case of ordinary Swiss citizens. Instead, the so-called lump-sum tax is calculated on a minimum amount – the equivalent of five times the annual rent or the rental value of the house they live in.

The philosophy of this system is that such a level of taxation allows taxpayers to maintain their previous lifestyle when they move to Switzerland.

Under this system, Schumacher pays SFr2 million ($1.7 million) in annual revenue.

But what appears to be a hefty amount is in fact not more than two per cent of the Ferrari driver’s annual income, or 0.2 per cent of the estimated value of his assets.

Ready offers

The number of beneficiaries is likely to grow in the near future, as more wealthy foreigners move to Switzerland as a result of bilateral agreements with the European Union.

While the public frowns upon the system more and more, the cantonal and local authorities, which have the right to raise their own taxes, appear keen to make good use of it.

Attracting rich foreigners helps boost their revenue – a more than welcome source of income when the authorities are facing public-spending cuts.

Undercover research by the consumer magazine Beobachter carried out last year revealed just how enthusiastic some officials were.

Its journalists sent out letters to about 30 local authorities in the name of fictitious potential property buyers.

More than a third of the communes wrote back and offered tax perks for the fictitious millionaires.

Parliament is scheduled to discuss the issue of preferential taxes during the forthcoming spring session, which opened on Monday.

Susanne Leutenegger Oberholzer, a member of the centre-left Social Democratic Party, has filed a proposal to abolish the fiscal perks, because they are considered unfair and undermine the morale of ordinary taxpayers.

"It allows those privileged few to pay just a tenth of what they would have to pay under normal circumstances," she said.

She added that Switzerland already offers enough other advantages for rich foreigners and such a policy risked the wrath of EU countries.

Swiss not alone

Tax expert Marco Bernasconi of Lugano University disagrees. "It’s true that Switzerland is the only country with a global tax, but other European states offer their own privileges," he told swissinfo.

According to Bernasconi, the lump-sum tax allows the authorities struggling to maintain public services to gain additional revenue.

The tax expert also rejects proposals by rightwing politicians to extend the tax benefits to wealthy Swiss citizens.

"There is nothing wrong with the current system as long the lump-sum tax applies only to foreigners who have acquired their wealth outside Switzerland," he said.

Bernasconi added that in the strict sense of the law only rich Swiss expatriates who return to their home country could feel treated unfairly.

Swiss expatriates can only benefit from a lump-sum tax during the first year after returning and they must have spent at least ten years outside the country.

swissinfo

Key facts

More than 3,000 wealthy foreigners with residency status in Switzerland can benefit from special tax treatment.
About half of Switzerland’s 26 cantonal authorities offer a lump-sum tax to rich foreigners.
90% of the beneficiaries live on Lake Geneva, the Valais, Graubünden and Ticino regions.
It is estimated that the lump-sum tax causes is a loss in annual revenue of SFr2 billion ($1.7 billion) for the Swiss authorities.

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