Switzerland’s Lump-Sum Taxation and How It Affects US Citizens

Switzerland has long been considered a tax haven due to its low tax rates, special taxing regimes, and privacy policies. Many US citizens have relocated to Switzerland to take advantage of these provisions. The question that lingers is how effective Switzerland tax savings techniques are for US citizens living there. So, let’s examine the effects of Switzerland’s lump-sum taxation on expats.

What Is Switzerland’s Lump-Sum Taxation?

What exactly is lump-sum taxation, and what does it do for expats? Before we get into the details, let’s review the default system of taxation in Switzerland. Like most countries that impose a tax on residents, Switzerland imposes a tax on worldwide income. Switzerland also imposes a wealth tax. Switzerland’s lump-sum taxation replaced the worldwide default taxation and based the resident’s income tax on living expenses. Residents can take advantage of lump-sum taxation if they don’t have employment or self-employment income derived from Switzerland. On top of this, the tax resident can negotiate their tax rate, so it’s possible to achieve a minimal amount of tax in Switzerland.

How Does Lump-Sum Taxation Compare to the American System of Taxation?

Now let’s look at how the US imposes income tax on its citizens. The US uses citizenship-based taxation, so you are subject to income tax on worldwide income regardless of the country where the income is earned. To alleviate burdens of double taxation, the US has entered tax treaties with many countries and has tax provisions such as the foreign tax credit and Foreign Earned Income Exclusion. These provisions are all designed to protect the US’s right to tax its citizens without creating a burden on them. In short, the US doesn’t even consider how another country imposes a tax. So, paying a low tax rate in Switzerland would do nothing to reduce the US burden.

Let’s look at a simple example. Let assume that you have 100 USD of interest income derived from Switzerland, and your US tax rate is 35%. On the 100 USD, you pay 5 USD to Switzerland using the lump-sum taxation method. Your US income tax is 35 USD, and the US will credit you 5 USD for the tax paid Switzerland, so your overall tax rate remains 35%. If the interest were derived from the US, then under Switzerland’s lump-sum taxation, there would be no tax on the 100 USD in Switzerland so the US income tax would be 35 USD. In both cases, the overall tax rate is 35%, and there are no savings provided by lump taxation.

The Effect on Expats

In closing, the US imposes tax on worldwide income, and the method of taxation in a foreign country does nothing to change that. US expats that are shopping for lower tax rates need to know that the only way to obtain is by taking advantage of provisions within the US tax code, such as all of the credits, deductions, and exclusions that are available to them. The US government is aggressively targeting tax havens and US citizens trying to avoid tax, so it is not simple for expats to find a low-tax location to live.

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