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Last Updated: Tuesday, 30 January 2007, 18:33 GMT
Swiss low-tax policy irks EU
By Imogen Foulkes
BBC News, Bern

Johnny Hallyday
There is anger in France at Johnny Hallyday's move to Switzerland
Switzerland's decentralised taxation system is causing irritation among its European Union neighbours.

The row was triggered by the decision, late last year, of the French rock star Johnny Hallyday to leave France and take up residence in the Swiss Alpine resort of Gstaad.

Hallyday, who has complained publicly about the high taxes in France, will now pay tax not on his multi-million-dollar income, but on the value of the fairly modest chalet he has built himself in Gstaad.

All he has to do in return is promise to live in the chalet for at least six months of each year.

In France, where Hallyday is a national icon, there is anger. Advisers to the French presidential candidate Segolene Royal have accused Switzerland of "looting" its neighbours.

Many high-earning celebrities, among them Charles Aznavour, Michael Schumacher and Tina Turner already live in Switzerland for tax reasons, and it is rumoured that the British pop star James Blunt will be the next to arrive.

'Unfair subsidies'

But aside from the irritation over the loss of celebrity tax income, Switzerland's neighbours have a more serious concern.

We are profiting from the mistakes of our neighbours
Stefan Kux, Zurich's
head of economic development

Swiss cantons are allowed to set their own taxes and many are now engaging in an internal corporate tax-cutting competition.

Canton Obwalden, in central Switzerland, slashed its corporate tax rate to just 6.6% at the start of 2006; it attracted 376 new companies in just 11 months.

The European Commission has warned that this may constitute an unfair subsidy under the European Free Trade Agreement.

"Talk to any tax expert," said Michael Reiterer, the commission's new ambassador to Switzerland.

"This is recognised as a subsidy. And there we think Switzerland should think a bit whether behaviour which is clearly outlawed in the EU is the best policy to follow in such a close relationship between two partners."

It is true that foreign businesses are beating a path to Switzerland's door, primarily to Zurich.

Its overall tax rate of 21% is not the lowest in Europe, but still far lower than Switzerland's immediate neighbours Germany, France, Italy and Austria.

Zurich 'grateful'

Google, Kraft and IBM have all chosen Zurich as their European headquarters. Google is set to expand its Zurich office this year from around 300 staff to 1,600, making it the biggest Google office outside the United States.

A building on the Opfikon research park near Zurich, to which US giant Kraft plans to relocate several hundred employees
Kraft plans to relocate hundreds of employees to Opfikon near Zurich

Stefan Kux, head of economic development for Zurich, is not the least bit worried by the complaints from Brussels, in fact he sees them as quite positive.

"We are profiting from the mistakes of our neighbours," he explained. "They are making economic promotion for us for free, everyone now knows that Switzerland has an excellent tax system, so I'm very grateful."

Switzerland is not in the European Union, nevertheless it does need good trade relations with the EU, and has spent 10 long years negotiating a set of complicated bilateral deals.

No-one now wants a row with Brussels, but within the Swiss government there is little patience with Europe's objections over tax.

"The Swiss position is on very safe ground," insisted Adrian Sollberger, spokesman for Switzerland's office of European policy.

"We do not have an agreement to harmonise taxes, none whatsoever, so by definition there cannot be any infringement of any agreement between Switzerland and the EU."

Quality of life

Many in Switzerland suspect that the complaints are inspired by a more basic emotion than any real legal concerns; jealousy that the little country which refused to join the European Union should now be doing so well.

Zurich city centre (file image)
Quality of life is cited as another reason for Zurich's popularity

Stefan Kux points out that Zurich, which regularly tops international quality of life surveys, has far more to offer than competitive tax rates.

"We are Big Apple big city and at the same time Long Island lifestyle," he said. "It's a very small city, we have a lot of multinational companies, but in five minutes you are in the countryside.

"You can't find that in London, or Frankfurt or Shanghai. And I think this mixture of the mountains and the business, good quality of life, I think that's the uniqueness of Switzerland."

That point of view is supported by Randy Knaflic, head of human resources for Google in Zurich.

"It is true that the corporate tax, and the personal tax rates, are big advantages," he admits. "Especially when you're recruiting a computer scientist who's been paying 40 or 50% tax in one of the neighbouring countries."

"But the comparison I make is living nine years in New York City," he continued. "In New York I had a wonderful apartment, but in the morning I'd wake up and look out the window and wave to my neighbour. Here I wake up and look out and I see the Alps."

But Brussels' quarrel is not with Switzerland's quality of life but with its tax system, and there the EU has made it clear it expects some compromise.

So far, the Swiss government will not budge; ministers say they view an attack on the tax system as an attack on Swiss sovereignty.

The row is sure to simmer on. Meanwhile the businesses and the celebrities just keep on coming.

Hallyday exile row gets political
18 Dec 06 |  Entertainment
Kraft 'plans to move European HQ'
04 Jan 07 |  Business
EU finally signs Swiss tax deal
19 May 04 |  Business

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