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.

High net worth individuals moving to Switzerland are often advised to agree a ‘forfeit’ tax with the authorities. This basis of taxation is provided for in article 14 of the Swiss Federal Tax Code. It is offered to non-Swiss nationals who become resident in Switzerland but do not carry out any lucrative activity there – in other words do not work in Switzerland. It is an alternative to paying Swiss income tax on your worldwide earnings (subject to exceptions for certain types of income), which is the default position upon becoming Swiss resident.

Switzerland is a confederation made up of 26 cantons and the forfeit tax payable is agreed with the tax authority of the Canton you are moving to. Accordingly the amount you end up paying varies greatly from canton to canton. Cantons such as Geneva, Vaud and Zurich have much higher tax rates than less sought after cantons which tend to be further east.

It is revealing that only around 3,600 individuals currently residing in Switzerland elect to fall within the forfeit regime.

The Swiss law and published guidelines

Swiss forfeit tax is usually portrayed as furtive and shrouded in mystery. This is not the reality of the position. It is provided for in the Swiss tax code with a law dated 15 March 1993 setting out how the tax is calculated. There are also published Swiss Tax guidelines as to how it is to be implemented. These guidelines are published as a circular from the central administration to the cantonal administrations dated 3 December 1993. It is important to be aware of these so that you do not end up paying too high a forfeit tax and ensure you choose your canton carefully.

Basis of forfeit tax

The forfeit tax is founded on the principle that you are taxed, not on your income but, on the annual living expenses of you and those dependent on you, living in Switzerland. It is a tax on expenditure and not income. On a ‘pure’ basis, the sum on which tax is charged is calculated as five times the market rate for the annual rental value of the property in which you live. This figure is, however, subject to a control by the authorities meaning it cannot be less than the total of Swiss source income plus any income from abroad for which you require a tax credit by virtue of a double tax treaty. The amount which results from this calculation is then taxed at the applicable federal, cantonal and communal income tax rates. An example of how this works is set out below.

Tax position in Geneva

The way article 14 of the Federal Tax Code is applied in Geneva is set out in a Geneva Cantonal Réglement of 7 November 2001. In Geneva, the basis of calculating the tax is a minimum taxable sum of CHF (Swiss Francs) 300,000. There are special rules for people who live in an hotel or other similar serviced accommodation who are taxed on twice the annual cost of staying in the hotel for the taxpayer and their spouse and ¾ the annual cost for dependants. There are other more case specific embellishments to article 14 of the Federal Tax Code.

Tax position in Vaud

The position is set out in article 15 of the cantonal direct tax law of 4 July 2000 and does not have a minimum figure as in Geneva. The taxation is based on the expenditure of the taxpayer and his family and must not be less than the tax which would be payable on all Swiss assets, including Swiss land and other investments situated in Switzerland. There is no explicit mention of the five times rental value which appears in the federal code however the method of application is covered in separate rules voted by the Canton. It is necessary in each case to obtain all the Réglements passed by the Canton.

What is and is not covered by the forfeit tax?

Another myth is that the tax you pay is fixed until you die and covers all tax liabilities in Switzerland. This is not the case. Firstly the forfeit tax covers your liability to income tax and wealth tax. Subject to exemptions for particular forms of income, Swiss income tax would otherwise be due on your worldwide income. Wealth tax is, under the normal position, charged on the net value of your Swiss based assets. You should always bear in mind that other taxes will continue to apply. You should obtain written confirmation from the cantonal tax authority as to what taxes are covered by the forfeit tax.

Am I better off paying ordinary Swiss tax?

It is essential to work out whether you will be better off simply paying Swiss tax in the normal way. If, for instance, you are mainly invested in UK real estate you will have to pay UK tax as a non-resident landlord in any event on your net income. Switzerland does not tax income from non Swiss real estate so there is no benefit in paying the forfeit tax as opposed to the default Swiss income tax in such circumstances.

Countries which do not give treaty protection to Swiss “forfeit” residents

If you have income arising in France then there may be no point agreeing a forfeit tax because France does not give protection under the Franco-Swiss treaty to Swiss resident individuals whose forfeit tax is based on the rental value of their residence. Double tax treaties which Switzerland has concluded with a number of other countries have only a restricted application to individuals who elect to be taxed on the forfeit basis. These are treaties with Germany, Austria, Belgium, Canada, USA, Italy and Norway. Individuals who are from one of these countries or who own assets there will need to consider how much protection they will receive from the applicable treaty if taxed on the forfeit basis.

The UK will in most cases give you the benefit of the treaty. At a practical level this is because the UK has similar rules which apply to wealthy foreigners who are resident here but are only taxed on income and gains remitted to the UK. This is effectively a tax on expenditure rather than earnings and mirrors the Swiss arrangements. The UK challenging the Swiss forfeit arrangements would call into question protection of non UK domiciled people under relevant tax agreements with the UK.

Negotiating your forfeit tax

Advice on negotiating the forfeit tax can be obtained from major banks and accountancy practices as well as small firms such as Sykes Anderson. The key issue is that the forfeit tax is negotiated locally. Your first step should always be to get a copy of the specific rules in the cantons you are interested in. This will usually involve visiting the “Chancellerie” in each canton, usually located at the Hotel de Ville. This may give rise to a few questions which you should decline to answer at this stage. You should then work out whether, in each canton, you are better off simply paying the ordinary Swiss income and wealth tax.

Example

As an example we consider the tax exposure of a musician moving to Switzerland. He will not carry out any work in Switzerland but will have Swiss source income of CHF (Swiss Francs) 250,000 per annum. His annual overseas income amounts to CHF 2,000,000, on which he does not need to claim any credit under the terms of a double tax treaty. He owns assets in Switzerland with a net value of CHF 10,000,000. The property he has purchased in Switzerland has been assessed as having an annual rental value of CHF 150,000.In order to calculate his forfeit liability you have to look at the “pure” position and then the “Revenue control test” and take the higher.

Under the “pure” forfeit tax regime, the amount which would be subjected to Swiss tax would be CHF 750,000 being 5 times the rental value of his property (CHF 150,000 X 5). Assuming a total tax rate of 40% encompassing the federal, cantonal and communal charges, this would result in a tax bill of CHF 300,000 (40% of 750,000).

The Revenue control test will take into account the Swiss source income and his Swiss wealth. With a total income tax level of 40% as above and a wealth tax exposure of, say 1% this will result in the following calculation:

Income: 40% of 400,000 (Swiss source income CHF 250,000 + Rental value of property CHF 150,000) = 160,000

Wealth: 1% of 10,000,000 (Swiss assets) = 100,000

This gives a total of CHF 260,000 which is lower than the forfeit tax. The Swiss Revenue will impose the higher of the two calculations; therefore he will have an annual exposure of CHF 300,000.

If the forfeit tax regime had not been opted for, the exposure would have been significantly higher as all of his worldwide earnings (including the CHF 2,000,000 of overseas income) would have been taken into consideration. This assumes that his overseas income was not rental income or other types of income exempt from Swiss tax.

Your position

The tax rates will vary according to which canton you move to and the lump-sum payment you make will, of course, depend heavily on how the annual rental value of your property is assessed. This is likely to involve some negotiation with the Swiss cantonal authorities. As with several high profile examples, if this can be successfully negotiated it can be possible to achieve residency in Switzerland with a favourable tax position.

In all cases you will need to carefully consider exactly how the various options will apply to your personal circumstances before you make a decision on which route to follow.

June 2009