For years Lake Geneva has been a popular location for very wealthy foreigners living in Switzerland, and this looks set to remain the case thanks to a decision by the Swiss parliament. Members of the Swiss National Council have just voted down a proposal that would have put an end to the country's foreigner-friendly system of lump-sum taxation.

Wealthy foreigners residing in Switzerland such as Formula One champion Michael Schumacher or Ingvar Kamprad, the founder of the furniture store Ikea, have benefited greatly from this scheme and will probably continue to do so.
But the scheme's Swiss critics have pledged to take the issue beyond the Alpine country's borders and raise the issue at a European level.

"Schumacher is profiting from all of the advantages our wonderful country has to offer, but he pays just a tenth of the tax that a Swiss citizen would do," the Social Democrat member of parliament, Susanne Leutenegger Oberholzer complains.
"That is unfair to his country of birth, Germany," says Oberholzer who has promised to take the matter to other European nations more likely to frown at tax avoidance.

Under the lump-sum scheme foreign residents pay tax not on their real income, but on their expenditure in Switzerland. In practice, a person's annual rent is taken as an approximation of their spending. For example, a foreigner who rents a villa for the equivalent of 130,000 euros a year is calculated to have a taxable income of 650,000 euros - five times the annual rent. Michael Schumacher's estimated taxable income is 1.3 million euros. However, his total wealth is thought to be in the region of 517 million euros.

There are about 4,000 super-rich foreigners availing of this scheme in Switzerland which replaces normal income tax or wealth tax with a levy on their spending. Not everyone can pay tax under the scheme which is limited to people residing in Switzerland for the first time or after an absence of at least 10 years and who do not work.

The Swiss tax authorities usually decide applications case-by-case. Philippe Kenel, tax lawyer and supporter of the scheme, says many of the foreigners who decide to retire to Switzerland and avail of the scheme have made a career abroad or built up a company. "They have already paid a lot of tax in their home countries," he says. Kenel says the lump-sum taxation scheme has encouraged people to settle in Switzerland who might never have considered living in the country despite its beautiful landscape and lakes.

Fulvio Pelli, president of the centre-right Free Democratic Party, says the scheme is a success because it has raised the number of taxpayers living in the country. Taxation is a major issue for the liberal parties who want to keep Switzerland a country of high prices but low taxation. Value added tax is 7.6 per cent. They want to relieve indirect taxation on wealth, insurance, homeowners and businesses as, compared to other countries, Switzerland's citizens pay many direct taxes.

Switzerland has a federal tax system, and the cantons have a major say in determining how much tax is paid. This has led to wide differences in tax rates between the individual cantons. However, the Swiss people appear satisfied with this decentralized tax system and have given it their approval - just as they agreed to the lump-sum tax for the super-rich.

[Expatica/ Heinz-Peter Dietrich, dpa, 2008]