Over the past few years, many have been questioning Switzerland’s status as a Tax Haven, with new rules and regulations being set in place. However, the situation is ever-changing, and we could even see a canton (region) in Switzerland snatching the title of lowest corporate tax rates from Hong Kong. With regulators from the EU keeping a close eye on Tax Havens, there have been reforms introduced over the past few years that have endangered Switzerland’s title as a Tax Haven.
Why is Switzerland considered a Tax Haven?
Switzerland has been considered a Tax Haven for many years now, as their taxation is low for foreign corporations as well as for individual income taxation. Before 2019, some corporations were getting away with paying rates as little as 5 per cent whereas domestic corporations would expect to see taxation rates of anywhere between 13-24 per cent. Many of the wealthiest corporations and individuals were able to pay a lump sum to the government that would allow them to forgo paying taxes.
Unlike many other countries considered Tax Havens, Switzerland does not offer 0 per cent taxation rates, however, they are still favoured worldwide as a destination for low tax rates. Nonetheless, it is debated whether or not the alternatives to Switzerland as Tax Havens in other parts of Europe more profitable to invest in as they have more straightforward rules and regulations as well as lower tax rates in general as they are not being tightly regulated.
Will Switzerland continue to be considered as a Tax Haven?
In 2019, Switzerland introduced reforms for its tax system, especially targeting corporate taxation. As mentioned before, some corporations were able to pay tax rates a low as 5 per cent, but this was abolished in 2019. To compensate for that, a patent box was introduced that could reduce tax rates up to 90 per cent but still is in line with OECD (Organisation for Economic Co-operation and Development) standards. National interest deduction and R&D super reduction were also introduced as compensation for the rise in corporate taxation rates.
As each canton in Switzerland can govern its own tax rates, they are still changing all the time. It is predicted that by 2025, a canton called Nidwalden will have a lower corporate tax rate than Hong Kong, where the current lowest corporate tax rates currently are. Last year, new reforms on taxation were introduced yet again this time lessening tax burdens for corporations across all cantons (regions). We could likely see corporation tax rates drop nationally to 13.5 per cent by 2025 according to a taxation index by BAK Economics.
Even now, despite the tax reforms introduced in 2019, the taxation rates for individuals and corporations remain relatively low. In a report released by PwC in 2020 income tax for those earning over £600,000 is relatively low at 11.5 per cent. For corporations, “the overall approximate range of the maximum CIT rate on profit for federal, cantonal and communal taxes is between 11.9% and 21.6%.” Also, from January last year, there was an increase in the minimum taxation of dividend income for individuals.
Conclusion
Although many are turning to other Tax Havens for lower tax rates, Switzerland is still a popular location for investors. Regulators have intervened over the years but taxation rates for both corporations and individuals remain low and are on track to lowering even more in future years to come. Whether Switzerland should be referred to as a Tax Haven is still debated, as there are other destinations with lower or even just 0 per cent taxation. But with the predictions for certain cantons to reach lower tax rates than Hong Kong in the future, there could be even more drastic changes to come.
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