HNWI Migration: Swiss Lump-Sum Taxation As the Proverbial Usual Suspect

Given the post-COVID-19 pandemic period, which has seen HNWIs (high-net-worth individuals) on the move again, ongoing wars and conflicts in the world, as well as tax reforms in nearby countries, such as Portugal closing its non-habitual residence programme and the UK ending the non-domiciled regime, Switzerland remains a top five destination of choice. Millionaire migration has risen by almost 116% from 2013 to 2019 and is projected to set a record in 2024. Interestingly, the main drivers include political, financial and social stability, quality of life, privacy and security, excellent education and healthcare systems, as well as an appealing tax environment. Switzerland steadily ranks in the top 10 (currently ranked 7^th) of countries hosting HNWIs by checking all these boxes, and its 160-year-old lump-sum tax regime still proves very attractive.

The lump-sum taxation’s main feature is that, rather than imposing on taxpayers regarding their actual worldwide income and wealth, it is actually computed on their worldwide annual expenditures. Not only does this provide for greater privacy and less administrative burden, it mostly offers HNWIs a reduced and stable tax liability over time.

In a nutshell, the taxpayers’ standard of living must be estimated and agreed upon with the tax authorities. As such, this lump-sum amount serves as a yearly tax basis upon which ordinary income tax rates apply (which vary among Swiss cantons).

However, minimum thresholds apply. The minimum tax basis is currently CHF429,100 for federal income tax, and the rules vary for cantonal and municipal levels throughout the country. For example, in the canton of Geneva, the minimum basis equals the federal amount, but is increased by 10%. This implies an annual tax liability of roughly CHF150,000.

For non-EU citizens, the cantons prescribe a higher tax base, which again varies among the cantons. For instance, the canton of Geneva requires a minimal lump-sum basis of CHF750,000 for federal income tax, and CHF825,000 for cantonal and municipal taxes. This represents a yearly tax liability of around CHF340,000.

Further, the lump-sum amount may not be lower than seven times the taxpayers’ annual rent or rental value (if the property is owned).

Lastly, lump-sum taxpayers must report all Swiss-sourced and treaty-favoured income and assets. This so-called control calculation is carried out annually through the taxpayers’ tax return in which all Swiss-sourced income and assets must be listed, as well as income for which the taxpayers claim relief from foreign taxation based on a double taxation agreement concluded by Switzerland. If the income based on the control calculation is higher than the taxes owed on the lump-sum, the former will prevail.

Only foreigners establishing residence in Switzerland for the first time, or after an absence of at least ten years for those who resided in Switzerland in the past, may benefit from the lump-sum taxation. In addition, lump-sum taxpayers are prohibited from engaging in any gainful activity in Switzerland. Private management of the taxpayers’ own personal wealth is allowed. This is also true for professional activities outside Switzerland (save for some cantons), provided it can be demonstrated that they are genuinely carried out abroad. The right to this special tax regime expires when the taxpayers acquire Swiss nationality or take up a gainful activity in Switzerland.

Currently, the lump-sum tax regime is available in all cantons, except in the cantons of Zurich, Schaffhausen, Appenzell-Ausserrhoden, Basel-Stadt and Basel-Landschaft.

An application for lump-sum taxation needs to be filed before the tax authorities of the canton in which the taxpayers intend to reside. Personal and family status, professional background, financial situation, and the reasons for choosing Switzerland must be disclosed. A form which lists the worldwide expenditures of the taxpayers and their household, such as food, clothing, housing, personal staff, education, vacations, healthcare, cars, etc, must be attached to the application.

The application results in an agreement between the taxpayers and the local tax authorities stating the agreed lump-sum, which is to be renewed in some cantons after five years. The lump-sum taxation agreed upon needs to be renegotiated if the taxpayers’ circumstances change.

The Swiss lump-sum taxation was implemented in the 19^th century. Therefore, the Swiss authorities have substantial practice in granting tax rulings in relation to lump-sum taxation. Swiss tax rulings are legally binding and do confer the Swiss tax residents a high degree of legal certainty. The related proceedings are fairly simple, and an agreement may usually be reached more or less in three to four weeks depending on the canton in which the application is submitted. In addition to being a very competitive method of taxation, the lump-sum taxation is also a way of obtaining a Swiss residence permit for non-EU citizens.