To understand the system of personal taxation in Switzerland it is necessary to remember this: the country has a federal system, with an extreme form of devolution, and decision-making via direct democracy – meaning laws can always be challenged by referendums.
The federal constitution gives significant powers both to Switzerland’s 26 regional cantons, and to the individual towns and villages in them. While the federal government in Bern sets guidelines and covers national issues, many important matters, including finance and education, are up to the cantons. What this means for taxpayers is that levies are raised at three different levels. Income tax is charged by the federal government, the canton and the individual locality.
Most important is the canton, with sharp differences between regions. As a general rule, city cantons, such as Geneva or Basle, have relatively high taxes, as do some predominantly rural areas such as the Jura.
But there are marked disparities. A handful of cantons have used ultra-low taxation to attract wealthy individuals to stimulate economic growth. Among the best known are Zug and Schwyz, both not far from Zurich. Most recently, Obwalden, a small, mountainous canton near Lucerne, slashed tax rates to match its low-tax rivals.
The cantonal levy is complemented by a local tax, calculated as a percentage of the cantonal level. Again, rates vary dramatically, even between communities in the same canton. For example, in the canton of Zurich, Switzerland’s most populous, local tax ranges from roughly 70 per cent of the cantonal rate in the wealthy and relatively low-tax towns and villages along Lake Zurich’s so-called Gold Coast, to more than 120 per cent in poorer and much more financially stretched communities in the hinterland.
The local and communal taxes are capped by a federal tax, payable separately and at a different time of the year, that rises gently to peak at 11.5 per cent for the highest incomes.
Although three levels of taxation might sound expensive, personal taxes in Switzerland are relatively modest compared with much of Europe. Rates in the ultra-low-tax cantons can be as low as 16 per cent. Even “average” cantons tend to charge less than elsewhere in Europe, thanks to the cantonal tax competition that the Swiss say encourages cantons and local administrations to maximise efficiency.
Swiss tax, in spite of the country’s relatively high prices, is also attractive enough to entice thousands of foreigners to take up residency each year. But, for the very wealthy with no income generated in Switzerland, there is an additional allure: the chance to strike one-off deals with individual cantons and communities.
Data are seldom published, but 4,000 foreigners are estimated to benefit from such arrangements. Their ranks include sports stars such as former Formula 1 driver Michael Schumacher and entertainers such as singer Phil Collins. Others are rich entrepreneurs who have chosen to take up residence or seek retirement in Switzerland after making their fortunes elsewhere.
Under the deals, foreigners agree to pay a fixed amount of tax, usually based on a multiple of estimated outgoings. Five times annual rental, or the equivalent rental value of an owned home, is a rule of thumb. Figures published last year revealed that the average amount paid under such arrangements was SFr75,000 a year – though again figures vary widely.
In total, such expatriates contributed SFr390m to federal, cantonal and local budgets, making them a welcome addition to the nation’s tax pool.