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Troubling times for low-tax tradition in Switzerland's Zug

Frank Bienewald | LightRocket | Getty Images

The government in the tiny Swiss canton of Zug has been forced to admit the previously unthinkable: its famously low tax rates, which have attracted a host of companies and celebrities, may have to rise.

Facing a series of financial blows — including the effects of a strong Swiss franc — the local government has announced a financial plan to slash the deficit over the next four years, including a possible tax increase.

"In the past 30 to 40 years, the canton of Zug has never systematically increased its taxes," Peter Hegglin, finance director, told the Financial Times. A "slight adjustment upwards" could be absorbed without endangering Zug's competitiveness.

Zug, a short train ride from Zürich, with a population of only 120,000, had been one of the most aggressive tax-cutters among Switzerland's 26 cantons, which compete with each other on fiscal policy.

"This couldn't go on for ever. It is perhaps reaching the bottom," said Daniel Kalt, chief economist in Switzerland at UBS.

A single taxpayer without children in Zug will pay a maximum income tax rate of 22.9 per cent this year, according to KPMG — significantly lower than in any of the main European economies. In Scandinavia, comparable personal tax rates can exceed 50 per cent.

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Companies in Zug will pay a maximum rate of 14.6 per cent this year, according to KPMG. But the canton still faces strong competition from Ireland, which has lured international companies with even lower rates.

Glencore, the mining and commodities trader, which has been badly affected by falling global commodity prices, is among the prominent companies based in Zug.

Mr Hegglin said no decision had been taken on whether corporate or personal tax rates might be increased. So far, Zug has plugged deficits partly by raiding reserves, but its finances have been weakened by the stuttering local economy.

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Swiss exporters have been hit this year by a strong franc, which leapt sharply higher on January 15 when the Swiss National Bank abandoned its attempts to cap its value against the euro. Meanwhile, below-zero interest rates imposed by the SNB have added to economic uncertainty — as has Switzerland's confrontation with the EU over immigration rules, says Mr Hegglin.

So far, Zug was just "thinking out loud", said Peter Uebelhart, head of tax at KPMG Switzerland. Even if it increased taxes, the canton would remain attractive for businesses. He added: "I don't think it is a reason to be nervous."

One Zug resident said: "It is not like things are incredibly dire and there is a massive hole in the finances. I'm not expecting a big increase in my tax bill."