Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland? Switzerland is an attractive country and is granting substantial tax benefits to immigrating foreigners. The advantages of Switzerland include: (1) Residence permit granted to EU-citizens without major problems, (2) Purchase of real property possible, (3) Low tax rates in certain cantons, (4) Lump-sum taxation, (5) No inheritance tax for spouses and children in most cantons.
Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?
If a person thinks about leaving his home country permanently and taking up residence in Switzerland, he will have to think about his desires for life in the future at first and then about the legal requirements to be met and the taxation ramifications. When I am asked by potential immigrants about the best place in Switzerland to live from a tax point of view, I always recommend them to take a car and to drive through Switzerland. Then they should come back to me and tell me which place they like best. It will normally be possible to find acceptable tax solutions in most of the places in Switzerland.
In a second step, the following main issues need to be addressed:
- Residence permit;
- Purchase of property;
Residence permit in Switzerland
As a general rule, only persons aged 55 and above who have a close association with Switzerland and are not gainfully employed in Switzerland can obtain a residence permit with non-employed status. They must have the necessary financial means at their disposal. As an exception, foreigners without a close association with Switzerland can be granted a residence permit since 2008 if they are of particular financial interest to the canton.
This means, in practice, that a minimum tax, which may range from CHF 400’000.00 to CHF 1 mio., always depending upon the canton of residence, is agreed and annually paid. According to NZZ (24 May, 2014), 389 such permits have been granted until present.
Due to the bilateral Agreement on the free movement of persons between Switzerland and the EU and a similar agreement between Switzerland and the EFTA (“the Agreement”), EU/EFTA-citizens are entitled to obtain a residence permit in Switzerland provided that:
- they have sufficient financial resources; and
- health and accident insurance equivalent to Swiss health and accident insurance.
It is accordingly rather easy for an EU/EFTA-citizen to be granted a residence permit in Switzerland at present.
The situation may, however, change due to an amendment of the Swiss Federal Constitution caused by a federal vote of the Swiss people on the so-called Mass Immigration Initiative. 50.3% of the votes were in favour of this initiative, which provides that Switzerland shall control the immigration of foreigners itself in the future.
The result of this vote is in contradiction to the Agreement. Under the Agreement, the EU has the right to cancel essential parts of the bilateral agreements with Switzerland, unless a mutual understanding can be found within the next three years.
For the time being, nothing has changed in practice. Immigration of EU/EFTA-citizens is still covered by the Agreement until Switzerland has released a law introducing limits to the immigration of EU/EFTA-citizens. The Swiss government hopes to be able to find a solution for continuing the bilateral agreements with the EU in the future.
Purchase of property in Switzerland
Switzerland had traditionally heavy restrictions on the acquisition of real property by foreigners. Some years ago, the restrictions in respect of the purchase of commercial property were abolished. Foreigners with no residence in Switzerland do, however, still need a permit for the purchase of private property in Switzerland. A permit will only be granted in special cases, e.g., vacation apartments in certain parts of Switzerland (maximum 200 m2).
A citizen of the EU/EFTA is entitled to acquire commercial and private real property without limits, if he is a resident of Switzerland. For other foreigners resident in Switzerland, certain restrictions apply until they have been granted a C-permit.
Income and Net Wealth Tax – Lump-Sum Taxation
A person resident in Switzerland is subject to unlimited tax liability in Switzerland. He will have to pay income taxes at rates ranging between 20% and more than 40% as well as net wealth taxes ranging from 0.1% to 1% on his worldwide income and net wealth. Real estate and permanent establishments abroad are exempt from Swiss taxation.
The tax rate heavily depends upon the canton and commune of residence. Whilst the overall income tax rate in Wollerau, Canton of Schwyz, is at present 18.5%, cities like Zurich, Geneva and Lugano have maximum income tax rates between 40% and 46%.
A special tax system, the so-called lump sum taxation, can be elected by foreigners who, for the first time or after an absence of at least ten years, take up tax residence in Switzerland and do not engage in any gainful activity in Switzerland. Under this system, Swiss income tax is levied on the basis of the living expenses rather than on actual income. Under federal regulations, the living expenses must amount to at least five times the annual rent or rental value of the owned property at present.
Due to new legislation, this amount will be increased to seven times of the annual rent and must not be lower than CHF 400’000.00 for federal tax purposes. Whilst the new rules will come into force as of 1 January, 2016, persons who are already subject to lump sum taxation will be granted a grandfathering until 1 January, 2021.
Some cantons have, abolished the lump sum taxation for cantonal tax purposes (most importantly Zurich), whilst other cantons have introduced similar provisions as the Federation. In addition, a net wealth tax is levied by the canton, the basis of which is normally determined by a capitalisation of the taxable income at a rate of 5%.
For each year, a comparative calculation between the agreed lump sum tax and the tax on Swiss source income, foreign source income for which treaty benefits have been claimed and Swiss net wealth has to be made. The higher amount will be the basis for the annual tax.
Several double taxation treaties concluded by Switzerland (Belgium, Germany, Italy, Canada, Norway, Austria and the US) only grant treaty benefits to a person resident in Switzerland, if such person is subject to the generally imposed income taxes in Switzerland with respect to all income from the respective state. As a consequence, Switzerland introduced the so-called modified lump sum taxation.
Under this system, which can be elected for each state separately, the income from sources of the respective state needs to be included in the aforementioned comparative computation with the result that such income is deemed taxed in Switzerland under the respective treaty. According to my experience, this method seems, however, not to work with the US. In case of US source income, it is, therefore, recommended to agree with the cantonal tax administration to have such income subject to ordinary Swiss taxes.
On 19 October, 2012 a federal initiative regarding the abolition of the lump sum taxation on the federal and cantonal level has been filed. It is expected that the vote on this initiative will take place in 2015.
Should the majority of the voting people and cantons accept this initiative and thereby cause an amendment of the Swiss Federal Constitution, a law concerning the abolition of the lump sum tax will have to be released within three years. The acceptance of this initiative would, therefore, mean that the lump sum tax system would be abolished in Switzerland in 2018. It is not yet known, whether there will be any grandfathering rules.
Social security contributions
Persons who are resident in Switzerland and do not exercise any gainful activity in Switzerland are subject to Swiss social security contributions until age 64 for women and age 65 for men. The annual contribution per person depends upon the living expenses and the net wealth of the individual and amounts for the time being to a maximum CHF 24’800.00.
Inheritance and gift tax
For the time being, inheritance and gift taxes are only levied by the cantons. In most of the cantons, spouses and descendants are exempt from inheritance and gift tax, whilst the tax rates can be higher than 50% for third persons.
The canton of the last residence of the testator is entitled to levy the inheritance tax from the heirs. The residence of the heirs is not relevant for Swiss inheritance tax purposes. If the testator lives, e.g., in Monaco and gives a large portfolio to his heir resident in Switzerland, Switzerland is not entitled to levy any inheritance tax. Should the testator, however, be a Swiss resident and the heir a Monaco resident, the heir in Monaco would be subject to Swiss inheritance tax.
In 2011, an initiative for an amendment of the Federal Constitution was launched according to which inheritances exceeding CHF 2 mio. and gifts exceeding CHF 20’000.00 per year and person shall be taxed on the federal level at a rate of 20%. The competence of levying inheritance taxes would thereby be transferred from the cantons to the federation. This initiative is not family friendly at all due to the fact that descendants and third parties will pay inheritance taxes at the same rates. Only spouses shall be exempt from inheritance tax.
It is very difficult to foresee, whether this initiative will be accepted in the federal vote which will most likely only take place in 2019 due to several complex issues. https://allemann-recht.ch/