Personal Finance

Why is Switzerland considered a tax haven?

Switzerland remains among the top tax havens due to lower taxes on foreign companies and individuals. Although Switzerland is no longer a place to “hide money” due to pressure from the US and the European Union (EU), it still offers the wealthy some perks to live and save.

key takeaways

  • The European country, Switzerland, is considered an international tax haven due to low tax rates and privacy laws.
  • However, this image may be exaggerated as only very wealthy individuals or corporations can afford their normal taxes.
  • In addition, the country’s once-respected privacy laws have been weakened due to pressure from the European Union and the United States.

Taxes: The Big Draw

Contrary to popular belief, Switzerland does not allow foreigners to live and bank on its territory tax-free. The wealthy, however, have a lower option of a lump sum payment that they can deposit in domestic banks, and the government considers them to have paid the tax. For simplicity, the government calculates the amount of tax owed by foreigners as seven times their monthly rent. The country also taxes families rather than individuals, which simplifies and sometimes reduces taxes for wealthy couples.

For the wealthy, this low tax level is seen as an unparalleled benefit of living in Switzerland. It is important to note that these tax benefits do not apply to individuals moving to Switzerland for employment purposes.

There are many reasons for foreign companies to set up an office in Switzerland. The central government provides significant tax breaks for companies that hold 10% of other companies. Specifically, the government reduces the amount of profit tax payable by a company based on the number of shares the company owns. As a result, shell companies often operate in Switzerland to take advantage of low or no taxes.

Financial Privacy on Thin Ice

Swiss financial institutions have a long history of mastering the secrets of the wealthy, dating back to French kings in the early 18th century. In addition, Swiss banks, under pressure from militant groups and nation-states, insisted on revealing the secrets of accounts created by members of the Nazi regime during World War II. However, in response to the 2008 global financial crisis, Swiss banks had to bow to pressure from the United States and the European Union to disclose the financial secrets of wealthy account holders.

Switzerland is a signatory to the Foreign Account Tax Compliance Act, commonly known as FATCA, which requires Swiss banks to disclose information about U.S. account holders or face penalties.The country signed a similar agreement with the EU, effectively ending the privacy of EU-Swiss bank account holders.Despite these fundamental changes, Switzerland remains in the top three in the 2020 Financial Secrecy Index.

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