Swiss Tax Play Lures Business

Cantons Compete With Lower Rates to Land New Headquarters

By DEBORAH BALL And CASSELL BRYAN-LOW

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. More here.