This article – part of a series – examines issues around relocating to Switzerland, such as the tax treatment of HNW individuals in the Alpine state.

Unsurprisingly, following moves by countries such as the UK to squeeze HNW individuals (ending the resident non-domicile system, for example), there is interest in moving to other countries which, hopefully, levy lower taxes. Of course, most people don’t move purely as a result of how much the state takes from them – there are quality-of-life issues to consider. A country that, despite the naysayers, remains an important financial hub and home to internationally mobile individuals is Switzerland. To discuss the Swiss situation and its “lump-sum” tax system are Grégoire Uldry, partner and Alexia Egger, associate at Charles Russell Speechlys. They are based in the firm's Geneva office.

This is part of a series that began with an article published in August on Relocating to Switzerland, covering key points, and another article published in October on Swiss tax residency. The editors of this news service are pleased to share these views; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com if you want to comment.

General considerations
Most of the Swiss cantons offer the possibility for foreign nationals relocating to Switzerland to pay taxes under the lump-sum regime (so-called “forfait” in French), in contrast to the ordinary tax regime applicable to the vast majority of people living in Switzerland. This means that the taxable basis is calculated on the taxpayer’s living expenses rather than on his/her effective income and wealth.

Conditions
The forfait is available only to foreigners who come to live in Switzerland for the first time or after an absence of 10 years and who will not be gainfully active in Switzerland. It is in principle possible to work outside Switzerland (at least according to the authorities of some of the cantons), but under restrictive conditions. The management of personal wealth is not considered as a gainful activity in this respect. 

The lump-sum regime requires an advance tax ruling confirmation by the competent cantonal tax authority whereby the facts and assets of the taxpayer are discussed. The application for a tax ruling must be filed before submitting the first tax return as the possibility for a lump-sum agreement may be forfeited after an ordinary tax return has been filed. It is important to plan ahead, as it can take several weeks/months for the tax authority to issue a ruling, depending on the canton and its workload.

Taxable basis
The taxable basis (i.e. the amount on which the actual taxes will be determined) is assessed on the taxpayer’s worldwide living expenses, which includes, in particular, costs of accommodation, general living, cars, housekeeping, etc. 

The taxation basis is then subject to the ordinary income tax rate applicable at the federal, and cantonal and communal levels. The tax rates vary considerably among the cantons and municipalities.

The taxable basis cannot however not be lower than:

-- the equivalent of seven times the annual rental expense; 
-- a minimum expense threshold of SFr429,100 ($479.065) for federal tax and the minimum threshold set by the relevant cantonal tax legislation for cantonal and communal tax purposes; or
-- the taxable amount resulting from the control calculation (see below).  

In practice, depending on the canton, European Union and The European Free Trade Association nationals can expect to pay a minimum annual tax liability of between SFr100,000 and SFr160,000, and third-country nationals between SFr250,000 and SFr400,000. 

Control calculation
Each year, lump-sum taxpayers must file a special tax return, the so-called “control calculation.” The tax burden resulting from the living expenses, as set by the tax ruling, is subject to this control calculation and must be at least equivalent to the ordinary tax payable on the following taxable items:

-- Swiss-source income (e.g. Swiss real estate, securities issued by Swiss entities, Swiss source pensions or royalties, etc.); and 
-- foreign income for which the benefits of a double tax treaty is claimed, i.e. partial or total relief from foreign taxes. 

In other words, the taxpayer must pay the higher of the above-mentioned amounts (seven times the annual rental expense, minimum expense threshold or control calculation). 

Application of double tax treaties (DTT)
In principle, individuals taxed on the basis of the forfait are deemed Swiss residents within the meaning of DTT and may therefore claim treaty benefits. However, some DTT concluded with Switzerland prohibit those individuals which are under the forfait from enjoying treaty benefits. 

It is therefore important to review every year the source of income and wealth of the taxpayer and, if necessary, to request the “modified lump-sum” tax regime. The latter allows the taxpayer to claim the benefits of DTT only if all his/her income from these states (and not just income taxed at source) is taxable under Swiss tax law and subject to federal, cantonal and communal taxes.

In practice, each year, if they wish to benefit from the DTT benefits, taxpayers who request the modified lump-sum tax regime must declare all their income from these countries.