Swiss Cantons Tax: Swiss Cantons Compete With Lower Tax Rates to Land New business Headquarters
ZUG, Switzerland -- Low taxes have long given Switzerland a strong hand in the battle to lure the operations of big multinational companies. Now, an intramural war is on in which individual Swiss states are competing harder to attract business.
Switzerland's states, known as cantons, are offering rock-bottom tax rates meant to tempt multinationals into establishing regional headquarters or other operations in their jurisdictions. In doing so, other cantons are trying to take business away from Zug, the Swiss canton that has mastered the game of attracting business to such a high degree that it is beginning to run out of space.
Since the 1960s, Zug has set the pace in persuading multinationals to set up shop, drawing names such as Johnson & Johnson, Burger King Holdings Inc. and Siemens AG.
As Zug now runs short on housing and office space, small cantons nearby are getting in on the act. "Zug made an extremely good decision years ago to have a competitive tax code," says Georges Meyer, a tax partner at PricewaterhouseCoopers in Zurich. "Now you see a trend of neighboring cantons trying to attract business too."
Switzerland as a whole is battling with countries such as Ireland, the Netherlands, the U.K. and Germany for a share of multinationals' business. While Switzerland's top research universities, efficient public sector and strong intellectual-property protection are attractive, its low tax rates are a huge draw.
Switzerland's federal corporate tax rate is just 8.5%. When average cantonal and municipal taxes are included, the average corporate tax rate in Switzerland is 21.2%, compared to about 30% for Germany and 25.5% for the Netherlands, according to KPMG.
But in Switzerland, the cantons — which enjoy far more autonomy than do U.S. states — are the main drivers in luring multinationals. Two-thirds of total taxes are levied by the cantons, which also have wide autonomy on social-security contributions, business permits, residency requirements and construction rules. As a result, the cantons take the lead in pitching for companies to come to Switzerland.
"Switzerland is such a popular choice for multinationals that it was high on our list from the start," says Rich Riley, senior vice president for Europe at Yahoo Inc., which established its European headquarters in the canton of Vaud in late 2008. "We looked at multiple countries and multiple cantons within Switzerland."
The battle for multinational business comes as companies have become savvier about relocating more activities to regional headquarters to lower their tax burdens. According to consultancy McKinsey & Co., Switzerland attracted more than 180 regional headquarters of large foreign companies between 1998 and 2008. In just the last several years, Kraft Foods Inc., Yahoo and Google Inc. have established European headquarters in Switzerland, and more than 150 U.S. companies now have a presence here.
In 2007, Zug attracted 1,600 new businesses. Last year, as many companies put relocation plans on hold due to cost-cutting, it drew only about half that, but Zug officials say they are satisfied, given the economic slump.
But Zug is a victim of its own success. International schools here are scrambling to expand to accommodate requests for new students, and housing and office space are in short supply.
"If someone says to me, I want to be here within a year with 500 people and I want space near the railway station, I can't do that," admits Hans Marti, head of Zug's economic promotion board.
Now other cantons are snapping at Zug's heels. Schaffhausen, a canton north of Zurich near the German border, halved its corporate tax to 16% in 2008 and is emphasizing the ready availability of private homes and the 30-minute journey to Zurich Airport.
Several years ago, consumer-goods giant Unilever set up a regional supply-chain division in Schaffhausen because it could no longer get the office space it needed in Zug, where it had previously housed part of that operation. Zug also lost out to Schaffhausen in attracting operations of Wal-Mart Stores Inc. because of space, says Mr. Marti.
A Wal-Mart spokesman declined to confirm that the company has decided to set up shop in Schaffhaussen yet, though the canton's promotional materials tout the retail giant's arrival there.
The cantons of Lucerne and Obwalden have also cut their tax rates. In 2006, Obwalden, south of Zug, cut its lowest corporate rate to 12.7%, undercutting Zug to introduce the lowest corporate rate in Switzerland. Obwalden built an industrial park last year, increased its marketing budget and improved the highway link to the Zurich airport. It has attracted 450 small companies for each of the last three years, netting 2,000 new jobs.
"We offer much lower real-estate prices than in Zug," says Knut Hackbarth, head of the economic promotion board for Obwalden. "That's what you get in exchange for being a quarter hour further away from Zurich than Zug."
Geneva, long a destination for big companies, has also been trying to draw some hedge funds with personal income-tax rates that are low compared to some other big cities outside Switzerland. London-based hedge-fund managers have been grumbling about the U.K.'s increase in the income-tax rate to 50% this year from 40% for those who earn more than £150,000 ($240,000) a year. By contrast, Geneva charges high-income earners about 35%.
While most hedge funds have opted to stay in London, at least two high-profile funds are opening offices in Geneva. BlueCrest Capital Management LLP, which has $17 billion under management, is moving about 50 of its 350 employees to Geneva, according to a person familiar with the matter. Brevan Howard Asset Management LLP, one of Europe's largest hedge funds, with $27 billion in assets, has secured office space in Geneva and plans to begin operating there this year. At least two of Brevan Howard's roughly 50 London-based partners are considering the move, according to a person familiar with the matter.