The Norwegian Ministry of Finance confirmed that individuals under the modified lump-sum taxation in Switzerland are considered Swiss tax residents per the respective Double Taxation Agreement (DTA), provided that other conditions of treaty residency are met. This change allows Norwegian immigrants to consider the lump-sum taxation option, when moving to Switzerland.
Until now, there have been different interpretations of the Double Taxation Agreement between Switzerland and Norway (“DTA”) regarding the tax residency of individuals living in Switzerland who are subject to lump-sum taxation. From a Norwegian tax perspective, it has been questioned whether such individuals qualify as residents in Switzerland according to the DTA. The Norwegian Ministry of Finance has now accepted that a person under the modified lump-sum taxation in Switzerland is a tax resident in Switzerland under the DTA (Artikkel 4: Skatteavtalen mellom Norge og Sveits – skatteavtalebosted og «modified lump-sum»-beskatning - regjeringen.no). This of course under the assumption that the other conditions of treaty residency (i.e. having a home at disposal, center of vital interest, habitual abode etc.) are met.
According to Article 4(4) of the DTA, a person is generally not considered a resident in a contracting state if he/she is not subject to tax in the state of residency “on all income from the other contracting state, which is generally taxable under the tax laws of the first mentioned state”.
Until now, the treaty position of Norway has been that a person taxed based on a lump-sum agreement in Switzerland falls within this provision and would not be considered a tax resident in Switzerland under the DTA. Therefore, people moving from Norway to Switzerland have typically opted for ordinary taxation to avoid risks (see also our blog post on May 16, 2023, Switzerland remains attractive for Norwegians - KPMG Switzerland).
Modified lump-sum taxation
In Switzerland, individuals taxed based on a lump sum are required to submit a so-called “control calculation” with the annual Swiss tax return. For the control calculation, all income derived from Swiss sources, as well as all assets located in Switzerland at their value on 31 December need to be considered. If the sum of the control calculation (i.e. total Swiss sourced income / total assets located in Switzerland) exceeds the determined lump-sum figures, the values of the control calculation are considered to be the tax basis. Otherwise, the individual is taxed based on the figures agreed in the tax ruling.
In the double tax treaties with some countries, including Norway, a so-called modified lump-sum taxation is agreed (see Article 4(4) of the DTA). In these cases, all income from sources of the other country must be included in the control calculation for the lump-sum taxpayer to be considered a resident under the double taxation treaty to claim benefits from it.
In its statement of practice of 30 June 2023, the Norwegian Ministry of Finance has changed its position on modified lump-sum taxation and treaty residency under Article 4(4) of the DTA. Given that the control calculation includes income from sources in Norway insofar as they are taxable in Switzerland under ordinary rules and the higher of the control calculation and the agreed amount is used as the tax basis in Switzerland, the Ministry of Finance recognizes that a person living in Switzerland taxed according to the modified lump-sum taxation is deemed to be a resident in Switzerland under the tax treaty. This of course under the assumption that other conditions of treaty residency are met as stated above.
As a result of the new statement of practice, the modified lump-sum taxation can be an attractive alternative for Norwegian immigrants and should at least be considered. Of course, the specific circumstances and objectives of the individual must be analyzed to find the optimal setup.