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Residence in Switzerland for investors - the 2 realistic ways for non-Europeans

Matterhorn, Switzerland

When I search on Google or Yandex for the term "residence permit Switzerland", I regularly get hundreds of hits from websites, which promise me the heaven on earth. I must only show enough money to be eligible for the special Swiss tax regime of lump-sum taxation, pay a fixed amount of taxes every year, and I can live freely and happily in Switzerland for ever. In this manner or the like, advertisements in the internet suggest that you only must sign a contract with this agency or that consultant, and your residence permit will follow automatically.

The reality, however, looks quite different. The Swiss method of "taxation according to expenses", or short "lump-sum taxation", which I last year covered in my much-read essay on the Swiss income tax system <https://prian.ru/pub/37735.html> , and the way to get a permanent Swiss residence permit are in no way related to each other. Both are governed by different laws, follow different procedures and are handled by different authorities in the Swiss cantons.

It is a big misbelief to think that an application for lump-sum taxation will automatically result in a residence permit, and any person or firm who says like this gives grossly misleading informations. But luckily there are realistic options for a wealthly Russian to obtain a permanent residence permit in Switzerland, and I will discuss these options in this essay in more detail.

To understand the rules and procedures for immigration and taxation correctly, it is important to know how Switzerland is organized politically. The Swiss Confederation, that is the federal state, is comprised of 26 individual cantons, which differ considerably in size, climate, lifestyle, language spoken and economic power. The Swiss cantons enjoy a very high degree of autonomy, even more than the Russian Federal Republics.

While the general rules about taxes and immigration are set by federal laws, which are binding for all, each single canton has a wide discretion on how to apply these general rules in practice. As I explained in my previous article, this leads to large differences in the tax rates between the cantons, and the same holds true on how the immigration laws are handled in reality.

 

Under Swiss laws, a Russian citizen (and also a citizen of Belarus, the Ukraine and all other states which are not members of the European Union or the EFTA-zone) is considered as a so-called "third-country national" and does not benefit from the generous regulations of the "Agreement on the Free Movement of Persons" between Switzerland and the EU.

The conditions, under which a third-country national could get a permanent residence permit for Switzerland are layed down in the Swiss "Federal Law on Foreigners and Integration" ("Bundesgesetz über die Ausländerinnen und Ausländer und über die Integration", short: AIG). And these conditions are quite strict.

Unless you are a world-famous artist, a respected medical professor or a sought-after aerospace engineer with a work contract from a Swiss high-tech company, there are only two ways for a wealthy Russian with a realistic chance of success. And both ways involve some kind of investment or economic activity inside Switzerland.

You must understand that Switzerland is not a classical immigration country like Canada or Australia. Nor does Switzerland need cash, like maybe Cyprus, Malta or Portugal. In fact, Switzerland has the lowest negative central bank interest rate in the world with -0,75% (Russia: +6,25%), and nobody in a Swiss immigration office will be impressed if you come with 10 million Euros simply to deposit it at a bank.

However, Switzerland welcomes investors, who invest in real economic activities and useful projects. If your investment is regarded as being of "special economic benefit" ("besonderer volkswirtschaftlicher Nutzen"), you can even expect active support from the Swiss authorities, both for the project itself and for your residence permit. And herein lays the key for a Russian person wishing to relocate to Switzerland!

Now lets look on the paragraphs, and see what this means in reality. The Federal Law on Foreigners and Integration (AIG) explicitly states the following two exception rules, under which a Russian willing to invest in Switzerland may apply for a residence permit:

  1. As a qualified self-employed manager, if "this is in the interests of the economy as a whole" (AIG Chapter 5, Section 1, Article 19.a literally), and the person is an investor or entrepreneur "who maintain existing jobs or create new jobs" (AIG Chapter 5, Section 1, Article 23.3.a).

  2. If the person does not exercise any kind of managerial role, but is considered by the canton of desired residence as a person of "important public interest" ("wichtiges öffentliches Interesse", AIG Chapter 5, Section 3, Article 30.b).

Please note that these two rules are mutually exclusive! You can only use rule No.1 OR No.2, but not both together.

 

There are no formal rules on how to define "important public interest" or "the interests of the economy as a whole". Also the law does not state, how many and what quality of jobs shall be created or preserved. All this depends on the individual assessment by the immigration authorities of the canton, in which you want to take residence. But in general, there are the following guidelines:

  1. The investment should be not only simply profitable, but improve the economic structure of the region and provide long-term benefits for the region. In a small alpine village, this might be a hotel investment elevating the destination from average to superior class. In high-tech cantons like Zug or Aargau, a biotech or IT start-up might qualify as important, and in rural areas with a large workforce of low-skilled workers, a production company for furniture might be welcomed.

  2. Also the number of jobs depends on each individual case. In boom regions like Zurich, Zug or Geneva, higher qualified jobs will be required (because higher wages result in higher tax payments per employee). In another canton with less employment opportunities, the rescue of a distressed company and the perservation of workers' jobs might be regarded as economically important.

  3. Last but not least, the canton wants to profit from the taxes generated by the investment, like corporate profit tax and salary taxes, and by the income tax of the investor itself. The Swiss "Federal Decree on Residence and Employment" ("Verordnung über Zulassung, Aufenthalt und Erwerbstätigkeit", short VZAE) explicitly states in Article 32.1.c "substantial financial interests of the canton" ("erhebliche kantonale fiskalische Interessen") as one of the four reasons, under which the above exception rule No.2 may be applied. This point will be of crucial importance, if you intend to apply for lump-sum taxation later on.

To be a self-employed manager in the sense of rule No.1 does not mean that you have to engage in the daily business operations of your company. It is enough that you carry the economic risk of your investment, that means you either founded the company or bought it from its previous owner, and that you control the strategy and the major decisions of it. If the company is a stock company ("Aktiengesellschaft" AG, the most popular legal form for Swiss corporations and comparable to a Russian OAO), then the position of chairman of the board ("Verwaltungsratspräsident") would fit perfectly. The actual business is run by the chief executive officer (CEO), which in this case would be an employee of the company.

It should be noted that in Switzerland, also hotel investments of a certain size are incorporated as a stock company, with the investor or his trustee sitting on the board, and the hotelier acting as the CEO. This depicts the well-proven investment model, which consists of a holding company, which owns and leases the real-estate assets, and an operating company, which rents the real-estate prop­erty and does the actual business of running the hotel.

 

The way which you chose to apply for residence permit then directly influences the way of income taxation in Switzerland, once you will have got your permit. If you decided for rule No.1, the lump-sum tax option is excluded. The lump-sum taxation scheme does not allow that you are economically active in Switzerland, neither self-employed nor as a an employee of a company. However, you may receive dividends and similar benefits from Swiss companies which you own or control.

If you want lump-sum taxation as a must, then only rule No.2 will work, and you must negotiate with the cantonal office of immigration, which decides on your residence permit, that they will rate you as a person of "important public interest". In my first essay, I wrote that lump-sum may make sense for an UHNWI (= Ultra-High Net Worth Individual, with at least 30 Mio. EUR of investable assets), and main income from foreign sources. To be honest, there have been cases that foreigners were granted a residence permit simply based on their lump-sum tax payments. According to official data of the Swiss State Secretary of Migration, in 2018 of total of 44 such permits have been issued - for all of Switzerland. Out of these 44, 3 permits (in words: Three!) went to Russians.

There are no official numbers, but according to our informations, these deals involved pure lump-sum tax payments in the range of 1 to 2 million Swiss Francs, each year now and in the future. However, if you would invest in the canton of residence, the fiscal benefit would be calculated by the sum of your lump-sum payments plus the tax income generated by your investment. By this, your personal tax load will be considerably lower.

Whether to opt for lump-sum taxation or for the standard taxation method (which, by the way, also allows for a lot of tax optimization strategies), depends strongly on your personal situation and the structure of your worldwide assets and income.

Especially there are two caveats:

First, if the taxpayer will request a total or partial refund of foreign payed taxes under a DTA (double taxation agreement). This may happen, if your receive dividends or interest payments from foreign sources, and these payments are subject to foreign withholding taxes. In this case, the Swiss tax authorities will apply a special, little-known tool called "Kontrollrechnung" (= Cross-Checking Calculation) during the process of lump-sum application, in order to determine the "just" amount of lump-sum tax.

This means that in certain cases, if the taxpayer has considerable assets (especially income from securities and dividends) taxed by foreign jurisdictions, it might be even more advantageous to choose the Swiss standard taxation scheme, under which a refund of foreign taxes is possible without negative side effects!

Second, if the taxpayer is married or lives in a permanent partnership, also the spouse must not work or exert any business activities in Switzerland. If one partner of the couple does active business in Switzerland, both will be subject to standard taxation.

 

Now, having learned about the legal basics and got some insider's information, we will look at the best practice for a wealthy Russian to relocate to Switzerland successfully:

  • Make up your mind, in which regions of Switzerland you might want to live. All of Switzerland is beautiful, clean and safe, but there are big differences in lifestyle, climate, economy and infrastructure. If you plan to travel a lot to overseas or to Russia, then a location not far from Switzerland's two large airports, Zurich and Geneva, will be suitable. If you prefer nature and calmness, then a nice village in the Alps or at one of Switzerland's numerous lakes might fit. Remember that your residence permit will be granted by the cantonal authorities, not by the federal state. And should you opt for lump-sum taxation, you can't simply move to another canton later on. The lump-sum agreement is valid only for the one canton where you closed it. Another canton might regard your case totally different, or even doesn't offer lump-sum taxation at all (like e.g. Zurich and Basel).

  • To have a realistic chance of success, you must offer the canton of your preference some form of active investment. You are free to choose what you like, as long as it meets the above mentioned criteria: economic usefulness, jobs, taxes. Depending on your funds and your appetite for risk, this might be a commercial real-estate project, a private equity investment or even a venture capital funding of a start-up company. However, simply buying a private villa, no matter how expensive, will definitely not be enough.

  • Prepare a professional business plan for your project, if possible with two or three different variants. This document is later on very important for the negotiations with the canton. If you have already active businesses outside of Switzerland, it might be advantageous to connect these businesses to your new Swiss company, such as a holding company or an international trading house. For examples, look at Gazprom and their North Stream AG, or the East Metals AG of Evraz Group, both domiciled in canton Zug... From this point at latest, you should ensure the support from Swiss investment experts, who have know-how in this kind of business and the experience on how to negotiate successfully with the Swiss authorities.

  • As said at the beginning, two different cantonal authorities will be involved in process: The "Office for Migration" ("Amt für Migration"), which decides on your residence permit, and the "Department of Finances" ("Finanzdepartement"), which is responsible for taxes and will decide about your lump-sum taxation. As the decisions of both authorities are closely connected to each other, negotiating with each party alone will be a tedious and time-consuming process, and might even result in contradictionary decisions.

  • Luckily, for investors we have in Switzerland a streamlined and very efficient method, which gives all parties involved the opportunity do discuss all aspects of the project, including the question of residence permit, in an open and cooperative manner. In Switzerland, every canton and every region has an official institution or administrative department, which is responsible for promoting economic development and attracting investors. In large cantons, these are specialized legal entities of its own, in smaller towns or villages it is the job of the mayor to care about these matters. The first, and most important, step is to convince this institution about your investment. Because they are the ones who will judge on the economic benefits of your project, and they have the political connections inside the cantonal administration to make your case working.

  • If your plans are considered positive, the investment department will invite all other parties involved, namely the tax office and the immigration office, for a series of round-table meetings with the investor. During this meetings, the project will be discussed in great detail, until a final solution is reached. The big advantage of this procedure is that each party may voice its opinion in an informal way, different options can be analyzed, and neccessary changes or amendments are possible without a lot of official paperwork. For the investor, this is a one-stop-shopping, without the need to run from one department to the next. For the cantonal administration, this also saves a lot of time and efforts, without the neccessity of internal follow-up inquiries.

  • The result of this process is a so-called "binding preliminary decision", we call it "Ruling", which states how the authorities will decide, when the official applications by the investor will be filed finally. It is important to know that such a ruling is binding for the authorities, especially for the tax office, as long as the investor presented correct data for his case and didn't change anything later on. The instrument of ruling is unique to Switzerland, and especially designed for corporations and wealthy individuals to clarify complex affairs of investment and taxation.

  • Once you've got a positive ruling, you can file your documents and safely begin to implement your investment project and start your relocation. All further legal steps will be simply formalities, there should be no more unpleasant surprises.

 

Remains the final question: How much money must be invested, and how long will it take for a final decision? Well, also here there are no absolute numbers. But from my experience as an investment manager, a meanigful investment, which mets the criteria for a residence permit, starts at 10 to 15 million Swiss Francs, depending on the project and the canton. In general, I can say, the bigger the better! But please keep in mind that your money is not a "gift to the state". In fact, you get ownership (and hopefully profits) of an economic enterprise in one of the most stable and successful jurisdictions of the world. Something, which tenthousands of wealthy persons worldwide would like to do, even without a residence permit. And the time? I remember one project in canton Lucerne, a small high-tech IT company with a brilliant business model, where even all permits were ready in less than 3 weeks. Normally, you should calculate approximately 3 to 4 months, until all negotiations are completed and a positive ruling is achieved.

The form of taxation should not be the primary concern, as there is no fixed rule of perference and it depends strongly on the individual situation of the taxpayer. Even for very wealthy individuals, the Swiss standard taxation scheme, combined with clever use of tax optimization, might be more advantageous than the lump-sum tax under certain conditions. The big advantage of the process outlined above is that this topic can be discussed openly and freely during the round-table meetings, and the investor will get a definite ruling, based on which he than can make his final decision.

With a good investment idea, a professional preparation and a competent partner, there are excellent chances also for a Russian national to obtain a permant residence permit in Switzerland for himself and his or her immediate family. If you have specific questions or want additional informations on this topic, please feel free to contact me via the contact form. I'll be glad to answer.

17.12.19

 

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