"Lump-Sum Taxation" vs "Resident but Non-Domiciled"

The lump-sum taxation system is an important instrument for Switzerland to attract high-net-worth-individuals. Similarly, Great Britain applies a simplified form of tax assessment on a remittance basis for persons with the tax status «resident but non-domiciled».

In the following these two tax systems shall be described in more detail and subsequently put in contrast in order to crystallise their corresponding advantages and disadvantages.

Lump-Sum Taxation in Switzerland

Taxation according to expense

The basis for assessment under the lump sum taxation regime is the personal annual expenses of the individual. However, by legislative amendment a new minimum tax base has been determined by the legislator on the federal as well as on the cantonal level.

US companies are considered to be very tax-affine and the US economic market naturally offers dimensions and a potential that Europe and especially Switzerland can hardly keep up with can. On the other hand, the US authorities are considered extremely strict on tax matters. In addition, Trump's tax plans are still associated with many uncertainties. How long will Trump remain in office? Will Trump even implement his tax reform and get it through Congress? Will tax cuts be possible and remain possible in the long term with the ever-increasing US government deficit?

In order to claim lump-sum taxation, Art. 14 DBG stipulates that the following cumulative conditions must be met conditions must be fulfilled:

• The natural person may not have Swiss citizenship;
• The natural person must have obtained unrestricted tax liability in Switzerland for the first time (or after an absence of 10 years); and
• The natural person may not carry out any gainful activity in Switzerland.

The taxable income under lump sum taxation shall correspond to at least 7 times the housing costs or for individuals residing in a hotel, 3 times of the costs for lodging and food. In any case a minimum tax base in the amount of CHF 400,000 is required for federal direct income tax purposes.  

All cantons which currently use the lump sum taxation regime for cantonal taxes must also determine a minimum tax base. The minimum tax base for income tax purposes as set by the cantons varies between CHF 400,000 and CHF 700,000. On the cantonal level the basis of assessment for wealth tax purposes must also be further clarified. Most cantons have determined 20 times the amount applicable to income tax as the assessment base for wealth tax purposes. As long as the taxable person has not reached the retirement age yet, then he or she must also pay social security contributions in Switzerland. Social security contributions for persons not employed in Switzerland are calculated based on the reported taxable wealth, which usually yields in the case of persons taxed on a lump sum to the maximum annual contribution for non-employed in the amount of CHF 23,900.

The taxable income must correspond at least to all income from Swiss sources (so-called «control calculation»). This includes especially Swiss real estate and income derived thereof and capital assets invested in Switzerland and income derived thereof. Capital assets fall within the control calculation when Swiss withholding tax is levied on them. Furthermore, all income generated from copyrights, patents and similar rights exploited in Switzerland as well as retirement pensions etc. from Swiss sources are also considered in the control calculation.

Individuals resident in Switzerland who pay taxes on a lump-sum basis are only deemed to be resident in Switzerland and can claim the treaty benefits of the Swiss double taxation agreements if the income is shown in the control statement. According to the double taxation agreements with Belgium, Germany, France, Italy, Canada, Austria, Norway and the USA, further conditions must be met for a person subject to lump-sum taxation to be able to claim treaty benefits. According to these double taxation agreements, an individual is only considered a resident of Switzerland if he or she actually pays tax in Switzerland on the income from the countries mentioned. This requirement is met if the taxpayer is treated as if all income from these states is subject to ordinary taxation and the general income tax rates in Switzerland (so-called modified lump-sum taxation).

Great Britain

Taxation on a remittance basis

The tax status on the remittance basis is granted if the taxpayer has proof of a foreign "domicile". The term "domicile" means the country from which the individual originally comes from, or where there is a proven intention to stay or return to. It seems obvious that it is easier for people to provide this proof if they are not born in the United Kingdom and do not hold its nationality. During the examination, particular attention is paid to the centre of life and to close relationships, such as, for example, the relationship between a child and its parents. The term "residence" roughly corresponds to the Swiss tax law concept of habitual residence.

Foreign income and assets of persons with "Resident but Non-Domiciled" tax status are not subject to UK income tax so long as they are not transferred to the United Kingdom. Income from sources in Great Britain is subject to ordinary taxation.

Persons who are taxed on the remittance basis can in principle only claim the double taxation agreements concluded by the United Kingdom if the corresponding income is transferred to the United Kingdom and is thus also properly taxed. Detailed provisions and variations of this rule can be found in the relevant double taxation agreements.

Tax burden in comparison

In the canton of Lucerne (municipality of Meggen), assuming the minimum assessment basis for income and wealth tax including social security contributions, the tax burden amounts to a total of approximately CHF 170,000.

The United Kingdom does not have such a minimum tax base. Rather, the Finance Act 2008 requires a lump sum levy of GBP 30,000 (known as a "remittance fee") if a taxpayer has claimed the special tax status for more than 7 years in the UK. The maximum amount of GBP 90,000 is payable when the taxpayer has been a "resident" of the United Kingdom for at least 17 years during the last 20 years.

In this context, it seems important to note that the marginal tax rate for top earners in Switzerland is on average about 10% lower. This is partly less than half compared to the UK.

Conclusion

In contrast to Switzerland, in the United Kingdom nationality plays no role in the application of the special tax regime. Furthermore, the person may pursue gainful employment in the United Kingdom without losing the special tax status. However, the income from gainful employment in the UK is taxed normally. In addition, the UK levies an obviously lower minimum tax compared to Switzerland. With regard to the applicability of double taxation agreements, the two systems are comparable.

However, the lump-sum taxation regime in Switzerland knows some considerable advantages. The relatively low marginal tax rate combined with the possibility to transfer capital assets and the income derived from it to Switzerland, without necessarily having to pay tax on it makes it an attractive alternative to the British regime. This is specifically true for persons that predominantly make their living from passive income abroad and at the same time wish to profit from the safe and highly developed financial centres in Switzerland.

Since Great Britain restricted the «resident but non-domiciled» status to 15 years from 2017 on, taxpayers in Great Britain will increasingly reassess their tax situation. Our comparison suggests, that Switzerland might be an excellent alternative for many of them.