Service Swiss

David Anderson solicitor and chartered tax adviser and Graeme Perry solicitor both at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.

Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

Following the announcement in the 2009 budget of a new additional rate of income tax for those earning L150,000 or more, large numbers of executives, fund managers and other high earners are contemplating moves away from the UK. One of the most popular destinations for these individuals is Switzerland; historically this has been a country which has attracted people seeking to mitigate their personal tax exposure.

Anyone considering a move to Switzerland should seek expert advice on the consequences of a move tailored to their personal circumstances. We look below at the options which are typically available for those moving to the country.

As Switzerland is a federation, tax is levied on individuals at different levels at a federal (national) level, in each Canton and in the Commune in which you are resident. Generally there is an option for non-Swiss nationals who move to Switzerland either to be taxed based on their actual income and wealth, or to negotiate a forfeit tax. As you would expect there are pros and cons with both options.

The default Swiss tax regime

There are several levels to Swiss tax and the rates vary from one canton to the next. However, when you become Swiss resident you are, on the face of it, subject to Swiss income tax on your worldwide income. Certain types of non-Swiss income are exempt from all tax, including income from foreign based real estate. The rates at a federal level are banded and vary depending on your marital status as well as how many children you have; the highest rate at this level is around 13%.

Income tax is also charged by the canton in which the individual resides. The rates will vary from one canton to another. As a rule of thumb, and unfortunately for those moving to Switzerland, the tax rates generally increase when the quality of life in the canton improves. Geneva is probably of most interest to UK individuals as this is a particularly popular area for people to move to. The very top rate of income tax in Geneva is 34.9% but this is only charged on earnings of over 579,000 Swiss Francs (roughly L330,000) per annum. This compares favourably with the UK where the additional rate of 50% will be charged on all earnings over L150,000.

Wealth tax is also chargeable at the cantonal (but not federal) level and is levied on the net wealth of an individual at rates varying from around 0.2% to 1%. Certain assets, notably non-Swiss assets, will be exempt from this charge.

The 'Forfeit Tax'

This option for taxation is available to non-Swiss nationals who become Swiss residents. It covers an individual's income tax and wealth tax exposure. When moving to Switzerland an individual can negotiate with their canton the lump sum of tax which they are required to pay annually to cover their liability for income and wealth tax. In Switzerland around 3,600 individuals are currently taxed on this basis, the majority are based in Geneva, Grisons, Tessin, Vaud and Valais.

A crucial factor to bear in mind with this form of taxation is that a condition for being taxed on this basis is that the individual is not permitted to carry out any lucrative activity in Switzerland.

The level of tax to be paid will generally be based on the individual's personal living expenses. This will include all costs of living for any dependants. The tax payable will, as a general rule, not be lower than five times the annual rental value of the property in which the individual resides. There is an annual control check carried out on the lump sum amount. The agreed amount is compared to the amount of tax which you would have paid on both:

1. Swiss source income (i.e. any dividends from Swiss companies, rents from Swiss property); and
2. Any overseas income for which tax relief from foreign tax is required under a double tax treaty or a relief at source is applied due to domicile.

If this total exceeds the forfeit amount, it is the higher tax which will apply.

Considerations when electing for the forfeit tax

As can be seen the forfeit taxation can be extremely advantageous for individuals who are moving to Switzerland, will not be carrying on work there, but will receive significant income from overseas work. If modest accommodation is obtained in Switzerland, individuals may end up with a relatively low exposure to Swiss tax. Care will always have to be taken with residency issues if moving to Switzerland but spending significant times in other countries.

You will, however, need to consider whether this forfeit tax will always be beneficial. For example, if your income is from royalties or investments there may be years when you do not realise a high yield, or may even suffer a loss. You would still be tied in to the forfeit tax and bound to pay over a lump sum to the Swiss authorities.

The type of income which you will receive after moving to Switzerland will also need to be borne in mind. Several forms of income will be exempt from the standard Swiss income tax system and electing for the forfeit tax if the majority of your income falls within these definitions may not be the most beneficial option for you.

It may also be difficult to make claims under the terms of double tax treaties as some countries' treaties with Switzerland do not recognise individuals as Swiss resident when they pay income tax on the forfeit basis. Notably, the treaty with France does not class individuals whose forfeit tax is based on the rental value of their residence, as Swiss resident. This prevents these individuals from benefiting from the treaty meaning they are taxable in France on certain income/gains which Swiss residents ordinarily would not be. Some other countries insist that income from those countries to Swiss based individuals must be submitted to ordinary taxation in Switzerland for the person to benefit from the terms of a double tax treaty.

In all cases you will need to consider whether your income is subject to tax in other countries.

Other taxes

Other taxes aside from income and wealth tax are not covered by the forfeit tax and you will need to consider these separately. Examples are capital gains tax which is likely to be levied only in specific circumstances such as professional equity and for real estate traders, inheritance tax which varies from one Canton to another and depends on the relationship between the deceased and the beneficiary, as well as stamp duty on certain transfers.

Summary

Although there are several high profile examples of wealthy individuals moving to Switzerland and keeping their tax exposure very low by electing the forfeit tax, you will need to consider how this might apply to you. All of your personal circumstances need to be considered and detailed calculations should be carried out before you commit to either the forfeit tax or the default Swiss tax system. Key points will be your family situation, the canton to which you are moving and the type of income you will receive after moving to Switzerland.