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Finance • Legal Tax Reduction

How Switzerland’s Lump-Sum Tax Works for Low Taxes

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Did you know Darth Vader’s cousin lives in Switzerland and drives a cab? He’s called ‘Taxi Vader’.

Around 40 years ago, a report commissioned by the US Treasury office described Switzerland as ‘the prototype of the modern tax haven’. Since then, various reforms have closed any glaring tax loopholes and forced the sharing of tax information between international partners and jurisdictions.

Switzerland isn’t a tax haven anymore, but it’s still a country where you pay lower taxes if you structure things properly. Why? Because it has a lump-sum scheme and if you’re wealthy you can go there and maintain flexibility over your tax affairs with a single tax payment each year.

Perhaps we should say ‘very’ wealthy because you’ll need assets of around (Swiss Francs) CHF10 million to get through the front door. Neutral, developed and respected, Switzerland has been a safe haven for the world’s wealthy for centuries. 

Cue another joke: A man walks into a Swiss bank and the clerk asks him, ‘How much do you want to deposit?’ The man whispers ‘three million’ in reply. ‘You don’t have to whisper,’ says the clerk, ‘in Switzerland, poverty isn’t a crime.’

Joking aside, Switzerland is one of the wealthiest countries in the world though, in truth, there are less expensive programs available. However, what you get in return for your initial investment of time and money here is a very high quality of life in a hyper-developed country with many services explicitly geared towards high-net-worth individuals. 

Living in Switzerland

Living in Switzerland

There’s no doubt that Switzerland is one of the most expensive places in the world to live. But if you’re wealthy and want all the benefits Switzerland offers, you can move there to take advantage of its high-value resident program. Many European countries have introduced measures to attract wealthy foreigners, but Switzerland was one of the first places to embrace such an approach.

However, before we talk about the program in more detail, ask yourself why you would want to live in Switzerland. Some people compare this neutral country to Germany because the Swiss are very polite, knowledgeable and reliable; plus, they share a border and a language.

But that’s where the similarities end. Switzerland is a very unique place with four official languages: German, French, Italian and Rhaeto-Romanic. Depending on the area you’re in, you’ll encounter not only a different language but likely come across different ways of living. Linguistic and cultural diversity are long and much-cherished traditions in Switzerland.

The majority of the population lives in the German-speaking part of Switzerland. ‘Hochdeutsch’ (High German) is the official language in these areas, but each region retains its unique cultural quirks. So, before deciding to move to Switzerland, it will pay to research which region best suits your needs. 

Switzerland’s Lump-Sum Tax Program

Switzerland invented the modern lump-sum tax program, where you pay a certain amount of tax on locally sourced income but won’t be taxed on any income earned overseas.

The Swiss State is made up of 26 local Swiss cantons (small, confederated units) and Swiss federal tax law is uniform throughout the country. But each canton has its own individual laws relating to cantonal taxes. Some of those offer tax incentives to foreigners, such as paying a tax amount based on a multiple of your living expenses.

The process is more straightforward than it sounds. You must estimate your annual living expenses in Switzerland and these must be somewhere close to half a million Swiss Francs per year. The lump-sum tax you pay is calculated using the total annual cost-of-living expenses incurred by you and your dependants in Switzerland and abroad.

These expenses can relate to household charges, entertainment costs, health insurance, school fees, payments to staff – pretty much anything counts as long as you pay for it in Switzerland.

Once you submit your estimate, it will take four to six weeks for the authorities to provide a tax certificate stipulating how much you need to pay each year. It’s vital to estimate your expenses sensibly in this submission because the authorities won’t revisit this stage. The amount of expenses you detail will be the basis of the lump-sum payment for the entirety of your stay in Switzerland. 

Obviously, the portion of your income made in Switzerland is subject to ordinary taxes there. But one of the best aspects of the lump-sum scheme is that you don’t have to submit any annual statements or report your income or assets. 

In essence, Switzerland is a high-tax country with tax exemptions for wealthy foreigners. To be accepted on the lump-sum tax program, you must have a minimum taxable income of the following:

  • EU citizen – CHF400,000 
  • Non-EU citizen – CHF1 million.

Lump-sum taxation is expenditure-based for foreigners domiciled in Switzerland but not gainfully employed there. As mentioned above, the duration is five years and can be extended every five years.

To benefit from the lump-sum taxation regime, certain conditions apply: 

  • You must be a non-Swiss citizen
  • You must intend to stay there permanently
  • You must not have income derived in Switzerland.

Applicants are required to live in the canton they select and, while there is no fixed time you should spend in the country, it’s advisable to spend six months per year there, as a long absence may create problems.

Don’t worry, there’s plenty to do.

For example, you could visit the alpine wonderland of Jungfraujoch. Known as the ‘Top of Europe’, Jungfraujoch is surrounded by glaciers and eternal snow. Home to the world’s highest railway station, you can use it as a jumping-off spot for a hike across the glaciers or a final destination for relaxing in cloud-topping restaurants and bars.

The high Alps are also popular for outdoor adventures and are one of the most famous mountain destinations in the European Union. On the northern side of the Alps is the huge and very deep Lake Geneva, but this isn’t the only large lake in the country. Lake Constance touches the borders of Germany, Austria and Switzerland, making it a notable landmark location.

Do you consider a day spent indulging in some of the best chocolateries and patisseries in the world a fruitful use of your time? If so, then let your sweet tooth guide you on a three-hour chocolate-tasting tour in Geneva or a chocolate-walking tour of Zurich. From climbing to hiking or water sports to coffee drinking, Switzerland has something for everyone.

More good news for married couples: moving to Switzerland with your spouse is relatively easy because married couples are treated as one taxpayer. Bear in mind that neither of you is permitted gainful activity in Switzerland – though if you consider eating chocolate a gainful activity, you’re in the right place.

Taxable Income in Switzerland 

Taxable Income in Switzerland 

Whatever lifestyle decisions you make, you must estimate their annual cost and bundle them with your living expenses as taxable income. Generally, your worldwide expenses should amount to at least seven times the housing costs.

These worldwide living expenses are treated as taxable income:

  • Housing costs (including heating, cleaning, and garden maintenance)
  • Costs of clothing and food
  • Schooling for children
  • Leisure time costs (expenses for hobbies, sports activities, and holidays)
  • Cars, boats, yachts
  • All other expenses are linked to living costs.

You’ll need a lawyer to prepare your proposed lifestyle expenses to be realistic and convincing while remaining profitable. The Swiss tax authorities don’t typically audit these lifestyle expenses as long as they are logical and reasonable. 

There’s also a duty to report income from Swiss real estate and securities issued by a company in Switzerland, along with any dividend and interest income from these assets. Precious metal deposits, royalties and pensions held in Switzerland must also be reported.

The only foreign income you have to disclose is that for which you claim a partial or total relief based on a double taxation agreement. Capital gains realised when selling real estate are subject to a cantonal tax, whereas capital gains from a private wealth asset are exempt from income tax.

Capital Gains from Cryptocurrency

Switzerland has been among the world’s most crypto-friendly countries for some time now. For private crypto investors, there’s a difference between tax-free capital gains from private investing and taxable gains from self-employed trading in Switzerland.

Here, safe-haven rules qualify capital gains as tax-free if the following conditions are met:

  • Holding period of at least six months
  • Trading turnover smaller than five times the holding at the start of the tax period
  • Capital gains are smaller than 50% of the total income in the respective tax period
  • No debt financing
  • Derivatives are solely used for hedging.

Each canton has different tax treatments, each individually determining whether crypto transactions are considered self-employed activity. 

Getting Residence in Switzerland

Getting Residence in Switzerland

There are two ways for non-EU and non-European Economic Area (EEA) nationals to get residence in Switzerland. The first is through the lump-sum taxation scheme we’ve discussed, while the second is through a start-up.

If you’re 55 or over, the lump-sum tax regime can be combined with a retirement status to further lower your tax base. 

There are no special tax savings under the ‘Starting a Business’ option. Taxes on worldwide income apply at ordinary Swiss rates. To qualify, you must be an essential company worker – like the CEO, CFO or head research analyst. It gets even trickier because it must be proven that no EU, EEA or Swiss citizen can do the job.

The start-up must contribute to the canton’s economic development, so the investment should be considerable, around CHF1,000,000 and be based on something ‘innovative’. Traditional businesses would usually not qualify here.

After 12 years of permanent residence, three of which must occur within the five years prior to the request, you can apply to become a naturalised Swiss Citizen. If you are an EU or European Free Trade Association (EFTA) national, you can apply for permanent residence or citizenship after five years.

How Switzerland Works for Low Taxes

The bottom line is this: You will have one amount of tax that you agree to pay every year. Other costs will include personal insurance and, depending on the canton you live in, a local wealth tax which is typically very low. 

You won’t need to worry about your company structure so long as you’re not managing it from Switzerland, as that may be considered as the business being permanently established there. There are no rules about which worldwide jurisdiction a company is incorporated in. 

To demonstrate the range of tax savings available under the lump-sum scheme, let’s take the example of a US citizen with a US$10 million income. 

With an income of US$10 million, our US citizen would pay around US$3.6 million in taxes in the US. However, in French-speaking cantons in Switzerland, using the taxpayer’s lifestyle expenses as a surrogate tax base, the minimum taxable amount for non-EU citizens is CHF1,000,000 (US$1.1 million). 

Once the tax base has been determined like this, the CHF1,000,000 is subject to ordinary tax rates, which vary from canton to canton. However, in some cantons, the income and wealth taxation for this amount can be as low as 17.6%. This would result in a tax of CHF176,000 or approximately US$200,000. 

If you’re a citizen of an EU or EEA country and meet the requirements, you can move to Switzerland and pay half the amount of tax because the minimum taxable amount is reduced to CHF400,000.  

Let’s say you renounce your US citizenship and move to Switzerland or another EU country like Ireland or Malta after becoming a citizen. If you obtained your Maltese citizenship through a €750,000 donation, then you can go to Switzerland, have access to the rest of Europe and pay half the amount in tax by being an EU citizen.  With the return on the initial investment on the Maltese passport donation, in the form of lower taxes, you could break even in as little as three years.

Going to Switzerland is easier if you’re European and a bit more involved if you’re a non-EU citizen. In either case, Switzerland offers abundant potential to pay lower taxes, have a high-quality lifestyle and leverage a world-class infrastructure. 

If you’re a high-net-worth person, there are clear advantages to living in Switzerland. By having a base there, you can protect and grow your wealth, enjoy a beneficial lifestyle and access excellent travel opportunities.

It does require proper planning, though.

This is where Nomad Capitalist comes in. We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. You’ll keep more of your own money, create new wealth faster and be protected from whatever happens in just three steps. Discover how we do things here

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