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Vote Highlights Swiss Tax Competition

May 2011 - Corporate & Commercial. Legal Developments by Hassans.

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By a slender majority, the Swiss canton Thurgau recently rejected an initiative seeking to abolish the controversial lump sum tax currently imposed on its wealthy foreign residents.

The special rule applied by cantons in Switzerland provides that wealthy foreigners not working in Switzerland are subject to a flat rate of tax (Pauschalsteuer) instead of income tax. Determined by the local authorities, the amount of the lump sum tax is typically based on at least five times living costs.

While agreeing to retain the tax, voters nevertheless adopted by 24,043 votes to 15,412 a counter proposal submitted by the Grand Council aiming at toughening the tax's provisions. Consequently, in future rich foreigners will be required to pay more tax in the canton.

Under current provisions, 127 super rich foreigners resident in Thurgau pay CHF11m (EUR8.9m) a year to the Swiss authorities as a result of the annual tax, corresponding on average to around CHF67,000 (EUR54,000) per person. Following a transitional period of three years, this sum will rise to around CHF150,000 (EUR121,000) per person annually.

Put forward by the Green Party and the Social Democrats, the latest initiative aiming to end disparities in tax treatment met with fierce criticism and opposition from supporters of the levy.

Supporters argued that such a move would merely result in an exodus of the super rich to other cantons in Switzerland and would lead not only to a significant shortfall in fiscal revenues, but prove damaging to domestic trade.

Yet although supporters of the tax can, for the time being at least, breathe a sigh of relief, the concerted attack against this increasingly unpopular method of taxation continues. Indeed, similar initiatives have been submitted in other cantons and are due to be put to the public vote shortly. Perhaps more worryingly, the left wing Alternative Left Party is currently seeking a nationwide vote on the issue.

Determined to avert a crisis, in response, the government has put forward recommendations that the flat rate tax be raised to seven times the rental value of properties, and that only people with an income of at least CHF400,000 would qualify for the tax break.

Following a people's vote in favour of an initiative designed to overturn the highly attractive flat tax privilege accorded to its wealthy foreigners, the levy was abolished from January 1, 2010 in Zurich, resulting in an exodus of the rich and famous. Many simply relocated to the neighbouring Swiss canton of Schwyz.

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