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Lump sum taxation in Switzerland – impact of Brexit

  • Hugues Salomé, Partner |

For more than a century, the so-called lump-sum taxation regime has contributed to Switzerland’s attractiveness as a place of residence for High Net Worth Individuals. While EU/EFTA nationals may take up residence in Switzerland based on the bilateral Agreement on the Free Movement of Persons, non-EU/EFTA citizens are subject to the more restrictive requirements set by the Swiss immigration rules. For those who plan on claiming the application of the lump-sum taxation regime, this is often associated with an additional tax burden. This issue may arise for UK citizens as soon as the Brexit transitory period expires, that is on 31 December 2020.

The lump-sum taxation regime

Under the lump-sum taxation regime, non-Swiss nationals who do not pursue a gainful activity may elect to pay income and net wealth taxes by reference to a lump-sum amount and not on the basis of their effective income and wealth. The regime applies to the federal income tax but is currently also offered by most Swiss cantons.

The tax payable based on the lump sum tax regime depends on various factors such as the cost of living, the rent paid for the Swiss primary residence (resp. the rental value of such real estate) etc. As well for federal tax and cantonal/communal tax purposes minimal lump sum tax factors are applicable. Based on these minimal factors the yearly tax burden amounts in general to CHF 120’000 to CHF 160’000.

In essence, the main benefit of the lump-sum taxation regime is to allow foreign nationals to avail of a significant reduction of Swiss income and net wealth taxes on their foreign assets and income while, at the same time, keeping the disposal of these items.

Taking up residence in Switzerland

On the basis of the Agreement on the Free Movement of Persons of 21 June 1999, EU/EFTA nationals without a gainful activity may become Swiss residents if they have adequate financial resources to cover their cost of living in Switzerland. In addition, they must also conclude a Swiss health insurance policy.

The immigration of non-EU/EFTA citizens is, on the other hand, subject to the stricter conditions that are set by the federal law on immigration. If they are above 55, they indeed have on top of the above-mentioned requirements to evidence close ties to Switzerland, in addition to adequate financial resources. Furthermore, failing such ties or in case they are younger than 55, immigration may be possible only on the basis of the so-called "preponderant cantonal fiscal interest", subject to previous negotiations with cantonal immigration authorities.

To satisfy this condition, the lump-sum income tax base of non-EU/EFTA citizens will need to be set at a higher amount than it would be under the usual rules. Therefore, compared to a EU/EFTA citizen, a non-EU/EFTA lump-sum taxpayer taking up residence on the basis of "fiscal interest" may end up paying an additional tax burden that may amount to the above mentioned minimal amount or even a multiple thereof.

Impact of Brexit for UK citizens

Following Brexit, the Agreement on the Free Movement of Persons will no longer apply between Switzerland and the United Kingdom. This agreement will, however, remain applicable for the transition period during which the UK still has the status of an EU Member State.

The UK and the EU agreed that this transition period shall in principle end on 31 December 2020. Subject to a possible extension or to a bilateral agreement, UK citizens wishing to retire in Switzerland as from 1 January 2021 will therefore need to comply with the Swiss standard immigration rules that are applicable to non-EU/EFTA citizens. At this stage, whether or not the bilateral agreement which the Swiss and UK governments are currently negotiating in the field of immigration will address the case of retired persons remains uncertain.

Hence, to get the best lump sum tax deal, UK citizens contemplating to retire in Switzerland and to claim the application of the lump-sum tax regime should have transferred their residence ideally by the end of 2020.

While tax matters are not necessarily the only or even the main trigger for a transfer of residence, this issue shall nonetheless be taken into consideration in this context.

Possible extension of the Brexit transition period

As a result of Brexit, the EU and the UK must now define the features of their future relationship. In order to avoid falling into a no deal situation, a future agreement needs to be fully concluded no later than by 31 December 2020. Completing such negotiations within that time frame would be a challenge in normal circumstances, but it is even more so in view of COVID-19.

On 30 March, the European People’s party issued a statement to urge the UK government to extend the Brexit transition period. While the UK government confirmed on 6th April its commitment to maintain the 31 December 2020 deadline, discussions are still going on. If at all and pursuant to art. 132(1) of the Withdrawal Agreement, an extension should be agreed upon before 1st July 2020.

What about entrepreneurs?

Due to its effectiveness and limited reporting requirements, the lump sum taxation regime is often the preferred tax planning alternative for non-Swiss High Net Worth Individuals wishing to take up residence in Switzerland. The availability of this regime is, however, subject to certain conditions, such as the prohibition from carrying any gainful activity on Swiss soil. It can therefore in principle not apply to entrepreneurs who wish to keep an executive function within their business.

There are a number of alternative tax planning options under the ordinary tax regime. These may include inter alia step up restructurings, placing assets on trust or other measures to segregate the ownership of assets in a tax efficient manner. The anticipated tax consequences of these measures and how they should be implemented shall of course be carefully examined from a Swiss and UK standpoint.

From an immigration perspective and until 31 December 2020, UK entrepreneurs wishing to take up residence and work in Switzerland may rely on the provisions of the Agreement on the Free Movement of Persons of 21 June 1999. Furthermore, the Swiss and UK governments are also in the process of negotiating an agreement in the field of immigration, which should apply thereafter. This agreement will also cover the acquired rights of UK nationals who will move to Switzerland as from 1st January 2021.

Process

To be a success, a transfer of residence should be carefully planned. UK nationals contemplating to transfer their residence to Switzerland should therefore

  • seek advice on tax planning options available to them and on anticipated tax consequences from both a Swiss and UK standpoint in light of their specific circumstances;
  • address possible estate planning concerns and define pre-immigration measures (placing assets on trust, revisiting ownership structures, draft or update wills, etc.);
  • preparing and submitting ruling requests to secure the application of the lump-sum tax regime as well as the consequences in Switzerland of additional tax and estate planning measures;
  • prepare residency permit applications and gather relevant documents in that respect;
  • start collecting information on accommodation and, if needed, schooling.

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