The New Haven for Businesses
from Around the Globe
Today's comment is by Bob Bauman, Legal Counsel, Senior writer and offshore expert for The Sovereign Society.
Dear A-Letter Reader,
If you've been reading our A-Letters for a while, you already know that we often champion tax competition between nations. That's because tax competition keeps taxes low and government spending lower.
Now one old-world money haven is putting tax competition into action. And if you own your own business, this one nation could help you slash your company's tax liability to rates of 0% - 4%.
I'm talking about our #1 asset haven: Switzerland.
Some Swiss policymakers have changed the Swiss cantonal tax codes to make Switzerland even more attractive to foreign businesses. (Each of the 26 Swiss cantons or provinces set their own tax rates.)
Along with these extra tax incentives, Switzerland already has the largest number of double tax avoidance treaties with other nations. Under these treaties, Switzerland gives you credit for corporate taxes you pay in another country against the corporate Swiss taxes you owe. So essentially you get a tax break if you're already paying taxes in another country.
This emerging tax haven trend has attracted a major increase of new companies to Switzerland in the past two years. According to a recent study by an Israeli tax expert, 40,000 new companies were established in Switzerland in 2007. An impressive third of these companies were foreign firms. Many of Switzerland's 26 cantons have seen the numbers of their registered companies jump by more than 50%.
These numbers increased because Switzerland's tax code provides opportunities for foreigners seeking ways to reduce their tax bills. Switzerland's location in Central Europe and its foreigner friendly tax code make this country an ideal location for trading, holding and financial companies. Thousands of multinational companies have their headquarters in Switzerland.
Furious Competition =
Lower Taxes for Your Corporation
The individual Swiss cantons regularly compete to attract foreign investment and businesses. These cantons (provinces) compete because each one has the power to set its own income and corporate tax levels under Swiss law. In recent years, there has been a race to slash taxes, and many cantons are cutting taxes lower than ever. That's one of the many reasons why foreigners have decided to set up shop there.
If you use a Swiss corporation, you can cut your company's tax liability to a rate of 0% to 4% on income with some careful tax planning. That's the lowest tax level in Europe.
Howls of Protest Over the Low Swiss Taxes
This tax-competing tactic has drawn howls of official protest from Switzerland's high-tax neighbors. These critics include welfare states like France and Germany and busybody groups like the European Union (EU) and the Organization for Economic and Community Development (OECD). They whine and complain that low Swiss taxes amount to "unfair tax competition."
Of course, the politicians in these whining nations rarely consider lowering their own taxes to keep business at home.
The Swiss government has consistently rejected and ignored such complaints. They look at these protests as an attempt to infringe on Swiss sovereignty. Switzerland is not a member of the EU although it cooperates with Brussels on financial and some economic matters.
How the Unsung Canton Finally Made it on the Map
For example, one Swiss canton, Obwalden is neither big nor famous. The local government tried to attract foreign business to Obwalden by lowering tax rates for the rich. This strategy generated nationwide headlines, but was ruled out by the federal constitutional court.
Forced back to the drawing board, the Obwalden government found a less controversial plan. Policymakers created an ultra-low, flat-rate tax that took effect on January 1 this year. They slashed the corporate tax rate to 6.6%, and then cut rates further to 6% after the New Year. The continuing lower corporate tax competition among cantons led to a fivefold increase in the number of new companies setting up in both 2006 and 2007.
Critics and Champions of Low Taxes
These low taxes have attracted attention beyond Switzerland's borders. The EU has taken issue with its most prominent non-member. The EU busybodies argue that Switzerland's lower cantonal taxes put EU companies at a disadvantage.
For Hans-Rudolf Merz, Switzerland's finance minister, defends the system. He says cantonal tax competition is at the very heart of Switzerland's federal system and its unique referendum-based, direct democracy.
Proponents argue that allowing cantons, and even individual towns and villages, to set their own rates stimulates competition. It also keeps taxes down by boosting efficiency.
British business leaders complain that the rise in capital gains tax from 10 to 18%, which takes effect there in April, is being seized upon by countries keen to lure companies to their jurisdictions. The Brits say Swiss tax authorities are approaching London-based private equity firms more and more to draw business to Switzerland.
Executives at Bridgepoint, Permira and Cinven funds say they were aware of Swiss cantons approaching their companies and other private equity firms.
Meanwhile, I say: Good for Switzerland for finding ways to draw investment from abroad! And for you, it means lower corporate taxes if you ever find it beneficial to move your business to Switzerland.
BOB BAUMAN, Legal Counsel
P.S. For those who want to know more about the many advantages of Switzerland, look for the forthcoming publication of my new book, Swiss Money Secrets, due out next month.
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