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Will Zurich experience a flight of wealth?

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A decision by Zurich voters to end tax breaks for rich individuals has led to speculation over who will leave, with other cantons queuing up for their revenues.

This content was published on July 10, 2009 - 08:12

Cantons as far afield as Graubünden and Geneva say they have received enquiries from some disgruntled well-heeled Zurich inhabitants but nearby Zug and Schwyz are expected to take the lion's share of defectors.

At the end of 2008, 201 wealthy individuals on so-called lump-sum taxation deals contributed some SFr25 million ($23 million) to the canton's coffers. But voters decided in February to end the preferential tax treatment from the beginning of next year.

The vote was interpreted as a backlash to the economic crisis and the growing trend of Swiss cantons to lower tax rates ever further to attract big earners inside their borders.

The Swiss press has been furiously speculating that business tycoons, like Russian billionaire Viktor Vekselberg, who recently had a property built in Zurich, and German milk baron Theo Müller, will be seeking greener grass in neighbouring cantons.

So far, no big names have relocated but at the very least the vote would have dissuaded more wealthy people setting up home in Zurich.

"They are certainly not going to get any more in the future. Zurich will now be out of the equation for people wanting to move to Switzerland," Francois Micheloud of Geneva-based relocation firm Micheloud & Co told swissinfo.ch.

"Even if you like the city of Zurich, you can live very close by in Zug or Schwyz and still enjoy the area."

Fight back

The lump sum tax system is employed by many cantons to attract wealthy people, particularly in the western cantons in the French-speaking part of the country.

Unlike "normal" inhabitants, tax is not calculated on the basis of income or wealth but a figure is derived based on property. The typical figure is five times the rental value of the individual's home.

Canton Schwyz had 58 lump-sum tax inhabitants at the end of 2008 and expects that number to rise to around 80 at the end of this year. Zug also expects a substantial increase in wealthy inhabitants on special deals from 92 to some 110 during the year.

However, Zurich is preparing to fight back by drawing up a revised set of tax rules that are not quite so generous to the wealthy. But it would be some time before voters get an opportunity to give their verdict.

In the meantime, the canton is hoping that their valuable inhabitants do not lose patience with the goalposts being moved so suddenly and unexpectedly.

"Will we see during the course of the year how many people will leave, where they will move to and how many will stay," Robert Huber, spokesman for Canton Zurich's tax authority told swissinfo.ch.

More challenges

Zurich is not the only canton to face a challenge to its preferential treatment of the rich.

Obwalden's decision to introduce a regressive rate of income tax was struck down by the Federal court last year while its recent plan to set aside prime land for the wealthy to build houses has also attracted criticism.

The centre-left Social Democrat party in Zug has put in a formal objection to lump sum taxation to the cantonal government and is trying to stimulate a similar public initiative that was successful in Zurich.

In addition, questions are being raised around the country about some lump sum tax beneficiaries breaking the rules by conducting their business activities in Switzerland.

Matthew Allen, swissinfo.ch in Zurich

Tax exiles in Switzerland

More than 4,100 wealthy foreigners with residency status in Switzerland benefited from special tax treatment, according to 2006 figures by the cantonal authorities.

Most beneficiaries live on Lake Geneva and in Valais, Graubünden and Ticino regions.

The lump-sum tax results in annual revenue of SFr392 million ($336 million) – between 1% and 2% of the total tax proceeds for the federal, cantonal and local authorities.

More than half of Switzerland's 26 cantonal authorities offer a lump-sum scheme to rich foreigners. A number of cantons have residents who benefit from the preferential rate, according to 2005 figures by the federal authorities.

A proposal to scrap such fiscal breaks is pending in parliament. Two previous attempts by the centre-left failed.

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