Switzerland: Lump-sum taxation vote

Author: | Published: 9 Dec 2014
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Daniel Bader Ruth Bloch-Riemer
In a popular referendum on November 30 2014, Swiss voters decided by a clear majority of 59.2% on the retention of the lump-sum taxation regime on a federal, cantonal and communal level. A separate vote in the Canton of Geneva had the same result on the cantonal level in Geneva: a majority of 68.7% of the Geneva voters decided on the retention of the lump-sum taxation regime on the Geneva cantonal level.

Besides the retention of the lump-sum taxation regime, Swiss voters also clearly decided against the so-called Ecopop referendum, which would have foreseen restrictive requirements for immigration to Switzerland.

Under the lump-sum taxation regime, income tax for qualifying individuals (taxpayers in Switzerland and abroad) is calculated on the basis of their total annual living expenses. Typically, the amount of the (deemed) annual living expenses is disclosed and agreed in a ruling sought from the respective cantonal tax authorities before relocating to Switzerland.

At present, the taxable expenses imposed federally and in most cantons amount to at least five times the rental value of the taxpayer's home or five times the rent paid. The lump-sum taxation regime also provides for a comparative calculation method (known as control calculation) according to which the lump-sum tax payable must not, in any event, be lower than the tax calculated on specific gross elements of income and wealth at regular taxation rates. The relevant income includes all income from Swiss sources as well as income for which the taxpayer claims relief from foreign taxation under any double taxation agreements to which Switzerland is a party. Under certain circumstances, cantonal tax and immigration authorities define minimum amounts to be paid by non-EU citizens relocating to Switzerland and applying for residence permits.

The lump-sum taxation applicable to a taxpayer does not cover their position under the applicable Swiss cantonal inheritance and gift tax acts.

To strengthen the acceptance of the taxation regime, the Swiss Federal Council increased the assessment basis for the lump-sum taxation in 2012. As of 2016, more stringent conditions will apply for the lump-sum taxation regime at a federal, cantonal and communal level. In particular: married applicants will both be required to meet the criteria for lump-sum taxation; the taxpayer's relevant worldwide expenses must amount to at least seven times the housing costs; a minimum taxable income of SFr 400,000 ($412,000) will be deemed to apply for the calculation of federal income tax; and, the cantons will be required to define at their discretion a minimum amount as the assessment basis, by taking into account both cantonal and communal income and wealth taxes. This will result in the assessment basis for wealth tax amounting to at least twenty times the deemed taxable income.

Existing legislation and rulings will continue to apply for a transitory period of five years from January 1 2016 for individuals taxed under the existing lump-sum taxation regime.

The cantons of Zurich, Appenzell-Ausserrhoden, Schaffhausen, Basel-Stadt and Basel-Land, still do not offer a lump-sum taxation regime at a cantonal and communal level.

Rulings in place today for lump-sum taxed individuals are likely to lapse after the end of the legal transitory period. Exceptional prolongations will need to be negotiated on a case-by-case basis with cantonal tax authorities. In each case, the affected taxpayers and their legal, taxation and financial counsels will have to evaluate planning options to optimise the Swiss tax burden.

Planning options include the reduction of housing costs and the income streams considered under the control calculation. Finally, for certain cases not reaching the minimum taxable income of SFr 400,000, a change to the ordinary taxation regime in combination with wealth and succession optimisation measures may need to be considered.

Today's ruling for individuals relocating to Switzerland under the lump-sum taxation regime do, in most cantons, already reflect the upcoming enhanced pre-requisites, either by a limitation of the ruling's application until January 1 2021, or by providing for enhanced financial requirements.

By Daniel Bader and Ruth Bloch-Riemer of Bär & Karrer in Zurich