Investments in Switzerland: Low Tax Burden in Interregional and International Comparison

Despite the latest tax reforms in Germany and France, Switzerland continues to offer advantageous tax conditions in comparison to its neighbours. This is the finding of a study carried out by the Centre for European Economic Research (ZEW), Mannheim, on behalf of the International Benchmark forum, the BAK Basel Economics AG.

The tax burden in all three Swiss cantons is considered lower than that in the neighbouring regions, Southern Germany and Eastern France, as well as in the three most powerful OECD countries.

As part of a new, comprehensive study carried out using methods from King and Fullerton, ZEW calculated the effective tax rates in 11 Swiss cantons, in 53 regions in Bavaria and Baden-Württemberg and in 6 French departments in Alsace and Lorraine. To enable comparison, the tax burdens in Great Britain, in the Netherlands and in the USA (California) were also calculated. Effective tax burdens were calculated by considering the tax rates which would apply to an additional investment made in each of the given locations.  ZEW considered all relevant tax systems, types of taxation, measurement systems and tax tariffs valid in 2001. Taxes enforced on a federal state, on a national and on a municipal level were considered. A separate tax burden was calculated on the firm level, and an overall tax burden was calculated taking taxation of shareholders into account. A differentiation was made between qualified investments and portfolio investments.

The results show that in the extended alp regions the effective tax rates tend to be either very high or very low (see table). The extreme variation in the tax burden is primarily due to the national tax laws. On firm level, as well as in the case of qualified investments on the overall level, the tax burden in the 11 Swiss cantons is lower than in all other regions. In contrast, the French departments have the highest effective tax rates. German regions remain in the midrange. Even the abolishment of commercial tax in Germany or the professional tax in France would not be sufficient to reduce the tax burdens in the French and German locations to the levels seen in Switzerland. Only in the case of portfolio investments is the German tax burden on the same overall level as the burden in Switzerland.

The interregional differences seen have two main causes. Firstly, the tax on profit in Switzerland is significantly lower than in Germany and France. Secondly, tax rates in Switzerland and Germany are primarily income-dependent, whilst in France, tax rates which are not determined by income levels have the greatest impact on the overall tax burden.

Switzerland also comes off well in an international comparison. As the table shows, the effective tax rates in the three comparison countries are higher than those in Switzerland. Following tax reforms the tax burden in Germany may be now similar to that in the USA, but as before, investments made in the Netherlands and in Great Britain remain less heavily taxed. Despite tax reforms, France is unable to reduce its tax burden on investments to the same level as other countries.

The tax advantage offered by Switzerland was also confirmed by looking at the international investments made by German investors using capital from a German parent company and investing in a subsidiary company located in Switzerland. The calculations were carried out for each of the 53 possible German locations for parent companies investing in each of the 11 Swiss cantons. The results indicate that from a tax point of view, it is better for a German investor to invest in a subsidiary in any of the Swiss cantons, than it is to invest in the parent compay located in Germany.

Contact

Dr. Gerd Gutekunst , E-mail: gutekunst@zew.de

Prof.  Dr. Robert Schwager, E-mail: schwager@zew.de