Location Zug: At the Top, but the Lead Is Narrowing
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Location Zug: At the Top, but the Lead Is Narrowing

Zug is a successful canton. According to the new regional study by Credit Suisse, one of Zug's main competitive advantages, its low corporate taxes, is likely to fade over the next few years. Rival locations will catch up. The canton of Zug is also running a budget deficit, and eating into its reserves.

Most attractive – but competitors not far behind

The canton of Zug offers tremendous advantages for businesses and has led the Credit Suisse locational quality rankings for many years. Zug's two economic regions are also highly placed in the ranking list of Switzerland's 110 economic regions: The Lorzenebene/Ennetsee region is positioned in second place behind the city of Zurich, while the Zug region of Berggemeinden lies ninth. The strong appeal of the canton of Zug is evident across all of the criteria included in the Credit Suisse Locational Quality Indicator (LQI): The tax burden on private individuals and companies is low, skilled and highly qualified personnel are easily available, while access to the metropolitan areas of Zurich and Lucerne is well above average thanks to short journey times.

Zug defends its top spot, but competitors catch up

Zug defends its top spot, but competitors catch up

Locational quality indicator (LQI), synthetic index, CH = 0, comparison of 2016 and 2020

Source: Credit Suisse

Corporate Tax Reform III: Zug's Tax Appeal Is Fading

On February 12, Swiss voters will decide whether to approve the Corporate Tax Reform III. At the same time, the system of privileged taxation for companies that generate the lion's share of their income abroad is expected to be abolished. To maintain its tax appeal despite the disappearance of these tax privileges, the canton of Zug wishes to reduce its already low corporate income tax from the current 14.6 percent to about 12 percent. Having the lowest corporate taxes of any canton would propel Zug from sixth place to the top position. However, rival locations such as the cantons of Vaud, Basel-Stadt, Geneva, and others are also planning big tax cuts. Corporate tax rates will therefore converge to some extent, and the canton of Zug's appeal in terms of corporate taxes will fade.

Tax reform: Zug also aiming for first place for legal entities in future

Tax reform: Zug also aiming for first place for legal entities in future

Total burden* from earnings and capital taxes (federal, cantonal, municipal), as a percentage of net profit, 2016, after the announced reductions in earnings tax

Source: TaxWare, cantons, Credit Suisse

*Average burden before taxes for a company with capital of CHF 2 m and net profit between CHF 80,000 and CHF 1,040,000

Zug Defending Its Leading Position on Personal Taxation

Zug is the canton with the most attractive tax regime for natural persons, regardless of income level. Wealthy taxpayers are significantly overrepresented in the canton. Average net income per taxpayer in the canton of Zug grew more than 21 percent between 2003 and 2013 – a significantly faster rate than the Swiss average (9 percent). Tax receipts from individuals likewise grew at an above-average rate. Zug is also attractive to very wealthy taxpayers: Of the 278,746 asset millionaires in Switzerland (5 percent of taxpayers), an above-average number (12 percent of taxpayers) have settled in the canton of Zug. Only in the canton of Schwyz is the figure slightly higher. Increasing mobility and the separation between place of work and place of residence make tax advantages for natural persons a more important factor – particularly for mobile, wealthy individuals. The canton of Zug is perfectly positioned in competitive terms.

Virtually No Structural Risks in Sector Portfolio

Zug's appeal as a location for corporate headquarters and service-sector companies is undented. The strongest growth can be seen in Zug-West, driven by the high-tech industry. The dominant sector within the canton is the wholesale trade, which employs one in seven people. Alongside commodity trading the trade in pharmaceutical products is of great significance. Life sciences are equally important: With an extremely high proportion of value-added, they account for around 8 percent of the total. In Zug, most of these jobs are in the pharmaceuticals, biotechnology, and medical technology sectors. Our analysis of the opportunities and risks reveals that the larger sectors in the canton of Zug offer stable or even strong growth potential. We estimate that IT service providers have the greatest potential. Sectors with excessive risk include the retail trade and catering.

Boosted by Crypto Valley

The city of Zug is home to a large number of fintech companies that are specialized in encryption technology; hence the fact that Zug is dubbed "Crypto Valley." The density of IT service providers in the canton of Zug is the highest in Switzerland when measured as a percentage of total employees: 3.9 percent of Zug employees work for an IT service provider, compared with a Swiss average of 2.0 percent. Zug now plays a pioneering role in digital currencies and encryption technology. The fact that Zug is a suitable location for these companies is first of all down to the canton's attractive tax regime. Second, Zug is considered one of Switzerland's most innovative locations; it is close to the Swiss financial center in Zurich, has an excellent infrastructure, and offers access to highly qualified specialists.

Highest value creation on Lake Zug

Highest value creation on Lake Zug

GDP per employee, in CHF 1,000, 2014

Source: SFSO, Credit Suisse

A Financially Attractive Place to Live: Low Taxes, High Prices

An important factor in choosing a place to live is its degree of financial attractiveness. Specifically, how much income is left over after deducting all costs, e.g. accommodation, taxes, health insurance, and commuting? For a broadly defined medium-income household, disposable income in the canton of Zug comes in at just above the Swiss average. According to the economists at Credit Suisse, however, Zug lies in only 19th position among the cantons in terms of the RDI (Regional Disposable Income) indicator. Although the canton has lower non-discretionary taxes than any other canton, life in Zug is expensive overall. This is mainly due to high real estate prices. The most affordable place to live in the canton is the municipality of Menzingen; the most expensive municipalities are Walchwil and the city of Zug, where housing costs are more than 60 percent higher. The canton of Zug is generally an attractive place to live, as shown by the rapid growth in population. For some years now, more and more people have been relocating to Zug from other cantons than vice versa.

Cantonal Finances: Growing Tensions

The canton of Zug has been in the red since 2013. Every year it spends around CHF 100 million more than it raises, and its ample reserves of around CHF 900 million currently will dwindle to CHF 200 million by 2020 if no action is taken. Flatlining tax receipts, rising payments to the national fiscal equalization scheme, plus major investments, are weighing on the budget. An austerity package was rejected at the referendum stage. Even Zug will need to steer a new course between the conflicting objectives of a low tax burden and a high level of service provision. Despite the gloomy clouds, the situation for Zug's budget is not yet dramatic. The canton has virtually no debt. If its financial assets are taken into account, it actually has a sizable level of net assets. In other words it will be able to live off the reserves it has built up in the meager years that are likely to lie ahead. Thanks to its high locational quality, the canton is well positioned to compete internationally and against other cantons in order to attract corporate as well as private taxpayers.