Why Is Switzerland Considered a Tax Haven?

Switzerland remains high atop the list of preferred tax havens due to its low taxation of foreign corporations and individuals. Although Switzerland is no longer a place to "hide" money due to pressure from the United States and the European Union (EU), it still offers the wealthy some benefits for living and keeping their money there.

Low Tax Rates

Contrary to popular opinion, Switzerland does not allow foreign individuals to live and bank in its borders tax-free. However, wealthy individuals can pay a low, lump-sum option on the money they bank inside the country, and the government considers their taxes paid. To simplify matters, the government bases the amount of tax foreigners owe on seven times their monthly rent. The country also taxes households, rather than individuals, and this simplifies, and sometimes lowers, taxation for wealthy couples.

For the wealthy, this level of low taxation is viewed as an unparalleled benefit of living in Switzerland. It is important to note that these tax benefits are not available to individuals who relocate to Switzerland for employment purposes.

Foreign corporations have plenty of reasons to set up offices in Switzerland. The national government offers significant tax breaks to companies that hold 10% shares of other corporations. Specifically, the government reduces the amount of taxes a corporation owes on profit based on the number of shares it owns. As such, shell corporations often set up operations in Switzerland to take advantage of low or no taxation.

Favorable Tax Treaties

Switzerland has a network of bilateral tax treaties with other countries that often include provisions for reduced or eliminated withholding taxes on dividends, interest, and royalties. Switzerland has a number of agreements in place to ensure that individuals and companies are not subject to double taxation on their income. This is allowed because tax paid in one country can be offset against tax owed in another.

Switzerland also has free trade agreements with a number of countries. These agreements often include provisions to reduce or eliminate customs duties on goods and services, as well as provisions to facilitate trade and investment.

Strong Privacy

Swiss financial institutions have a deeply rooted history in holding the secrets of the wealthy, dating back to the French kings in the early 18th century. Further, Swiss banks held up under pressure from activist groups and nation-states to reveal the secrets of accounts created by members of the Nazi regime during World War II. However, in response to the global financial crisis of 2008, Swiss banks have caved to pressure from the United States and the European Union to reveal financial secrets of wealthy account holders.

Switzerland is a signatory to the Foreign Account Tax Compliance Act, commonly known as FATCA, which obligates Swiss banks to reveal information about U.S. account holders or face penalties. The country signed a similar agreement with the European Union, effectively ending privacy for EU Swiss bank account holders. In spite of these radical changes, Switzerland has long maintained a top position on the Financial Secrecy Index.

Stable Politics

Switzerland has a stable political environment and a reputation for political neutrality, which makes it an attractive destination for wealthy individuals and businesses seeking a safe haven for their assets. For those seeking to deploy or hold their capital in a foreign country, there is an additional geographical, geopolitical, or foreign risk. Countries with greater stability will be less likely to enact harsher legislation that may tie up or complicate retrieval of funds.

Active Wealth Management

Lastly, Switzerland has a robust wealth management network. Likely a result of the features mentioned above, it is relatively easy for those interested in deploying foreign tax strategies to find wealth management advisors in Switzerland. Not only are the pieces in place to enact strategies, there are often many advisors willing and capable in the region to help advise through those strategies.

The Bottom Line

Due to favorable tax legislation that allowed for greater security and privacy in banking, Switzerland became a tax haven where individuals could deploy tax avoidance strategies. Because of low rates, strong privacy, favorable tax treaties, stable politics, and easily accessible financial experts, Switzerland has become notorious for being a place to avoid taxes. However, the country has recently taken steps to walk back some of the benefits taxpayers have long enjoyed.