1. Stricter Rules for the Lump Sum Taxation in Berne

Last weekend the people in the canton of Berne voted on whether to abolish the lump sum taxation. With a majority of two thirds wanting to keep lump sum taxation the canton continues to preserve the same system. Significantly, with an overwhelming majority of 92% the community of Saanen (which includes Gstaad where lump sum taxation has a strong economic impact) clearly rejected the proposal of abolishing lump sum taxation.

Nevertheless, the rules will be redefined with an accepted counterproposal setting forth stricter rules for the calculation of the taxable basis. These rules follow the proposal of the Swiss Federation regarding federal taxes and this solution has been duly accepted by 53% of the voters in Berne. The basis for taxation will increase substantially to seven times the rental value with a new minimum taxable income of CHF 400,000. At the moment, approximately 230 people in Berne are said to benefit from the lump sum taxation.

Contrary to the cantons of Basle City and Basle Land, where the lump sum taxation was recently abolished (see below), the canton of Berne has a much more important presence of foreigners benefiting from lump sum taxation and therefore the economic stake is by far more substantial.

2. Recent Developments in the Cantons and at Federal Level

Following the abolition of the lump sum taxation in Zurich during the year 2009, the cantons of Schaffhausen and Appenzell Outer Rhodes also voted in 2011 respectively 2012 to abolish lump sum taxation. Further, the big council of Basel City decided on 19 September 2012 to abolish lump sum taxation in 2014. The deadline is still officially open to present a referendum, however, it is not expected that such referendum will be presented. The canton of Basle Land voted this weekend and accepted the abolishment of the lump sum tax regime with a quote of 62%.

Thurgau, St. Gall, Lucerne and Glarus voted to keep the lump sum taxation. However, the first three cantons have introduced stricter rules to govern it.

The Swiss federal parliament has approved revisions for lump sum taxation at federal and cantonal level. A minor difference between the two chambers of the parliament, regarding a transition period for taxpayers’ currently benefitting from the tax privilege has been resolved. The following amendments will be implemented in the subsequent ways: For federal and cantonal tax purposes, the lump-sum tax base will be at least seven times the rental value of the individual’s own property, or seven times the rent paid to the landlord in Switzerland, or three times the costs for board and lodging. For federal tax purposes, the minimum tax base will be CHF 400,000. The lump sum tax will be increased within a period of 5 years. For cantonal tax purposes, the minimum tax base will be freely determined by the canton concerned. The cantons will have to levy a wealth tax. The cantons have to implement the new law within a period of 2 years. A transition period of 5 years will be granted to all individuals subject to lump sum taxation at the time when the new regulation enters into force.

The relevant amendments will be subject to final vote this Friday, 28 September 2012 by both chambers of the parliament.

3. The Initiative to Abolish Lump Sum Taxation

The alternative left wing is expected to submit a proposal to abolish lump sum taxation to the federal government in October 2012. The proposal has the title “An End to Tax Privileges for Millionaires”. The deadline for the collection of signatures expires on 19 October 2012. The process of collecting the necessary signatures was lengthy (it started in 2011) and also proved to be quite a challenge. However, due to the support of the socialists, the green party and the Federation of Trade Unions, only approx. 10,000 signatures were missing by mid September. Representatives of the socialist party are confident that the necessary total of 100,000 signatures will be collected by the deadline and that the proposal will be launched in due time. Even if the initiative is successful, a vote will be necessary to decide on this issue and this will take some time.

If the initiative is accepted, lump sum taxation will be abolished at federal and cantonal levels based on a new constitutional article, 127 paragraph 2 bis, stating that “Tax privileges for natural persons are illegal. The taxation according to the expenses is forbidden.” The initiative introduces a deadline of three years for the Federation to issue the corresponding implementing laws.

4. The Trends and What to Expect

A trend against lump sum taxation started with the abolition of the lump sum taxation in Zurich in 2009. Since then the voters in seven other cantons have debated on the same issue. In most of the respective cantons, the government and the parliament have attempted to save the lump sum taxation in the same manner as the federal government. It remains uncertain whether the efforts of the federal government will be sufficient to save the lump sum taxation on a long term basis as it is illustrated by the above-mentioned initiative for its abolition. However, substantial economic interests are at stake in certain cantons like Vaud, Geneva, Valais, Ticino and Grisons where there is a significant amount of lump sum tax payers. The results of the initiative are therefore difficult to predict.

The OECD recommended the abolition of the lump sum taxation in its Swiss country report in January 2012. The OECD’s recommendation should be relativized in view of the fact that several other EU jurisdictions have similar taxation methods, such as the UK resident non domiciled tax status. Of course, the situation could change, but it seems that if the lump sum taxation is abolished, this should come more from internal pressure rather than external and this internal pressure should not be ignored.

A further trend In connection with issues concerning lump sum taxation seems to be a shift in the attitude of the authorities in various cantons. They seem to be now controlling that persons domiciled in their cantons and benefiting from lump sum taxation also effectively have their centre of life interests there. Such controls could have as a result the revocation of residence permits in case of non compliance with the domiciliation rules.