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. Recent studies show that as much as $2.5 trillion in wealth is held within Switzerland’s borders.

Key Takeaways

  • The European nation of Switzerland is considered to be an international tax haven due to low tax levels and privacy laws.
  • This image, however, may be overstated since only very wealthy individuals or corporations can afford to buy their way out of normal taxes.
  • Furthermore, the country's once heralded privacy laws have been weakened through pressure by the EU and US.

Taxation: The Big Draw

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 five 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. Approximately 30% of Fortune 500 companies have operations in the country. The national government offers significant tax breaks to companies that hold 20% 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. In Switzerland, cantons are similar to states, and cantons levy no taxes on holding corporations. As such, shell corporations often set up operations in Switzerland to take advantage of low or no taxation.

Financial Privacy on Thin Ice

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 maintains the top position on the Financial Secrecy Index in 2018.