On Nov. 30, 2014, Swiss voters rejected an initiative that would have put an end to lump sum taxation of certain foreigners in Switzerland. The rules in question were introduced more than a century ago, and numerous individuals have benefited from this attractive system.
Lump sum taxation has, however, also been subject to political controversies.
In recent years, five Swiss cantons have abolished lump sum taxation in their own respective jurisdictions (Appenzell Ausserrhoden, Basel-Stadt, Basel-Landschaft, Schaffhausen and Zurich). The recent vote doesn’t reinstate lump sum taxation in these cantons.
As a result of last Sunday’s national vote, lump sum taxation remains available for non-Swiss individuals who meet the respective requirements and who wish to establish their domicile in Switzerland.
Lump Sum Taxation in Switzerland
Lump sum taxation is a special method of determining the taxable income of a qualifying individual, if he:
- isn’t a Swiss citizen,
- hasn’t yet lived in Switzerland, and
- doesn’t exercise a gainful activity in Switzerland.
Instead of requiring that such individual report his worldwide effective income on an annual basis, the taxable income is determined by referring to that individual’s annual cost of living. The taxable income must at least amount to a multiple of the annual effective or deemed rental costs.
Pursuant to a legal amendment that will take effect on Jan. 1, 2016, the rental cost multiple will have to be at least seven. Furthermore, a minimum income tax base will be introduced (for instance, for federal income tax purposes the minimum will amount to CHF 400,000). Existing lump sum tax rulings will benefit from a 5-year transitional period before they’ll need to be adapted to meet the new requirements.
Given the outcome of the vote, lump sum taxation will remain an attractive Swiss tax feature (and as experience shows: an interesting immigration planning tool) available to foreign high-net-worth individuals.