Is Luxembourg richer than Switzerland?

The Grand Duchy of Luxembourg and Switzerland are two European countries with developed economies and reliable financial systems. Switzerland has long been synonymous with wealth, reliability, and stability. However, in recent years, Luxembourg has taken over this leadership and topped several of the rankings of the wealthiest countries in Europe. So, which of the two countries is richer?

How is the wealth of a country determined?

As a rule, most economists use the gross domestic product (GDP) as the key indicator for determining the level of well-being in Luxembourg, Switzerland, and other countries. Various wealth ratings and rankings of the wealthiest countries in Europe and beyond are usually based on the level of GDP.

GDP shows the total value of all products and services produced and sold in the country over a specific period (usually one year). It includes only finished goods – final products, leaving out the costs of the materials used for their production. The main idea is to ensure the indicator is undistorted and avoid recalculating the data several times. This type of gross domestic product is called nominal.

In addition, when determining GDP, economists also consider the level of inflation. The gross domestic product adjusted according to inflation is commonly referred to as real GDP. Economic analysts widely use real GDP to determine the following:

• dynamics of the economic activity of the country;

• investment decisions;
• the local policies regarding economic development.

GDP includes the total of private consumption, gross private investment, public investment, and government spending, along with exports and imports. We should also note that the number of inhabitants of the country has a significant impact on the level of GDP. As a rule, the larger the population, the higher its GDP because all people participate both in the production and consumption of goods. 

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Another problem economists face when calculating GDP is the distortion of Real gross domestic product caused by a country’s tax regime. States that offer businesses favorable tax conditions and benefits (for example, Switzerland and Luxembourg) attract significant financial assets.

At the same time, such assets exist in the form of cash flows circulated by enterprises through the country. They are not part of the real income received by the state as a result of the internal economic activity of its inhabitants. Luxembourg and Switzerland are well-known as important world financial centers with fairly loyal tax policies. It seems inevitable that financial and investment activities affect their GDP indicators.

Therefore, many experts criticize the very approach of assessing the wealth of Luxembourg, Switzerland, and any other country based only on their GDP figures. To conduct a more adequate analysis of the wealth of a country, economists must track the dynamics of the gross national product (GNP). This indicator is similar to the gross domestic product since it also shows the value of all goods and services that a country has created in a year or another period. However, there are some significant dissimilarities between these indicators.

The main difference between GDP and GNP is that the products included the gross domestic product have to originate within the country’s geographic boundaries. For example, even if there are foreign enterprises in Luxembourg, their products are still embraced by the calculation of the GDP of the Duchy.

When it comes to determining the GNP of Luxembourg, Switzerland, and other countries, the calculations certainly include the activities performed by the citizens of the country and local companies. However, at the same time, this approach covers the investments and income received as a result of the economic activities of expats and other citizens outside the country. That is, GDP determines the total output of the activities within the national economy; GNP, on the other hand, shows the value of all economic activities performed by the entire population of the country.

GDP per capita is another yardstick that has become a widely accepted way to measure the economic well-being of a country. It is calculated by dividing the GDP by the total population. Economists use this indicator, along with the Real and Nominal GDPs, to analyze the economic power and development of a country.

Calculating the Gross domestic product per capita is necessary for the government of any country to understand the distribution of wealth among the population. This figure indicates the following:

• if the state prospers and develops economically;
• if the country is a comfortable place to live;
• if the needs of the population are met.

Generally, small countries that are rich and well-developed have higher per capita incomes. It is easier for modest-sized countries to get higher GDP figures since the total wealth is divided among a smaller number of people (unlike in the larger, more densely populated states). It is applicable to both Switzerland and Luxembourg. However, we should point out that GDP per capita does not directly correspond to the average wages of people who live in a certain country.

Those planning to move to the Swiss Confederation and intending to obtain a residence permit in this country might find the following article interesting: European Citizenship by Descent: New Opportunities in 2023.

Positions of Switzerland and Luxembourg in the World Bank ranking

One reliable source you can rely on to determine which country is wealthier is the World Bank ranking. The World Bank is an international organization, part of the UN, designed to finance projects that contribute to the economic development of member countries.

The World Bank annually analyzes countries based on GDP per capita and purchasing power parity (PPP). It publishes an annual ranking of the most prosperous states. The Grand Duchy of Luxembourg has occupied the top position on this list for several consecutive years, overtaking not only Switzerland but also Ireland, the United States, Singapore, and other developed economies.

According to The World Bank ranking in 2022, the top five countries in terms of GDP per capita were:

1. Grand Duchy of Luxembourg ($127,673)
2. Republic of Ireland ($102,217)
3. Norway ($92,646)
4. Switzerland ($92,434)
5. Qatar ($82,887). 

In the ranking by PPP, the first five places were as follows:

1. Luxembourg ($141,587)
2. Republic of Singapore ($131,426)
3. Ireland ($131,034)
4. Qatar ($113,675)
5. Switzerland ($84,469).

The economic performance of Luxembourg is significantly better than that of Switzerland. The gap between the GDP per capita in these countries is more than 45 thousand US dollars, and the difference between the PPP indicators is more than 55,000 USD. Therefore, we can conclude that Luxembourg is much richer than Switzerland.

However, we should also remember that GDP per capita does not show the actual distribution of income received by the citizens of a given country (since it is calculated as a mean average). Many more factors than simply the volume of production and the rate at which it may increase influence the standard of living in Switzerland and Luxembourg. According to statistics, the average cost of living in Switzerland is slightly higher than in Luxembourg, which means that, on average, people spend more money on food, rent, and other goods/services.

Key economic features of Luxembourg and Switzerland

you are considering the prospect of starting a company in Europe, and if your choice is between Switzerland and Luxembourg, it is necessary to regard some economic peculiarities of each of these countries.

Luxembourg and Switzerland are considered attractive business locations for international companies. That is because both Luxembourg and Switzerland possess the following qualities:

• a high level of economic development (as evidenced by GDP per capita indicators);
• advantageous geographical location;
• the opportunity to enter the global and European markets;
• favorable conditions for non-resident business;
• comfortable tax climate and the possibility of getting some tax benefits;
• reliable financial and banking systems.

A brief overview of the Swiss economy

One of the reasons for the wealth and popularity of Switzerland is its economic and political stability, as well as its reputation for being almost always politically neutral. Inflation in Switzerland is 1.9%, which is considered one of the lowest rates in the world. The unemployment rate is also comparatively low (in March 2023, the rate was 4.16%). 

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In addition, in 2023, Switzerland ranked second in the index of economic freedom. This marker indicates that the Swiss economy is open to non-resident businesses and direct foreign investments. It is also worth noting that Switzerland has low levels of corruption and bureaucracy – it is among the ten least corrupt countries.

Switzerland includes 26 cantons – regions characterized by a high degree of autonomy in developing tax and legal policies. The attractive tax system of the country and its popularity for foreign business are rooted in the very essence of cantonal autonomy. Each Swiss canton adopts its own regulations and tax regimes, which reflect the different political priorities of the local authorities. As a result, some cantons can offer quite a favorable investment climate for foreign entrepreneurs.

The tax regime existing in each canton of Switzerland is determined by the voters, the parliament, and the government. Switzerland levies direct federal income tax at a flat rate of 8.5%.

In addition to the direct federal income tax, each Swiss canton applies cantonal and communal income and capital taxes at different rates. Thus, the tax burden will vary depending on which region you decide to register a Swiss company. For some cantonal and communal taxes, there is a progressive scale. The canton of Zug offers foreign investors the lowest financial burden in Switzerland.

It is worth noting that Zug is often referred to as the Swiss crypto valley because the region is home to many fintech companies, startups, and crypto businesses.

Switzerland also has a well-developed banking infrastructure. One of the main advantages of Swiss banking is an extremely high level of confidentiality. For this reason, when opening an account in Switzerland you can be sure that transaction data will not be available to third parties or the public. 

Here you may find some relevant information: Switzerland: a tax haven in the middle of Europe.

Most noteworthy facts about the Luxembourg economy

Luxembourg is a small country on the European continent characterized by economic and political stability. The GDP in Luxembourg increases annually, allowing the jurisdiction to take first place in the rankings of the wealthiest countries both in Europe and worldwide. According to the index of economic freedom in 2023, Luxembourg ranked seventh with a score of 78.4 out of 100 points. That confirms the high degree of openness of the Luxembourg economy.

The unemployment rate in April 2023 was recorded at 4.9%, which put Luxembourg just one step above the ten countries in the European Union with the lowest employment levels. In terms of fighting corruption, Luxembourg ranked tenth among the 180 countries in Transparency International’s index.

The Grand Duchy of Luxembourg is a recognized European attraction point for investment funds and wealth management. It is also an influential financial center and one of the key players in the insurance and reinsurance markets. Finance and investment make up the solid foundation of the economic activity in Luxembourg. These areas of industry contribute a significant part of Luxembourg’s GDP.

Following are the most profitable sectors of the Luxembourg economy:

• finances and insurance (25.1%);
• wholesale and retail trade, transport, and various services (14.9%);
• education, health, and welfare (17.5%).

you might be particularly interested in one of our articles. It covers the benefits of doing business in Luxembourg, the most noteworthy economic features, and the peculiarities of the legal climate of this country. You can read about all these factors here.

Many international banks, large conglomerates, and technological giants have chosen Luxembourg to host their headquarters and expand their markets. One of Luxembourg’s main advantages lies in its highly competitive tax system.

Luxembourg has a reputation as a tax haven, despite its tax system undergoing a long reform anticipated to bring it into accord with international standards and pan-European principles. However, tax rates in Luxembourg are still an order of magnitude lower than in other countries of the European Union.

The standard VAT rate is 17%, and the corporate tax depends on the amount of taxable income. For example, for an income equal to or below 175,000 Euros the tax rate is 15% in Luxembourg. Companies are also subject to an additional solidarity tax of 7% and a municipal business tax of 6.75%.

Luxembourg has become home to many startups and fintech companies. The government of this country is interested in the development of innovation. It actively encourages the growth of the startup ecosystem. Companies operating in Luxembourg in such market sectors as cryptocurrencies, innovation, IT, or modern financial technologies can enjoy special conditions and various government programs and grants.

You can read more about the startup ecosystem and the peculiarities of launching a startup in Luxembourg in this article.

Which is better for registering a company: Luxembourg or Switzerland?

The company registration procedures in Luxembourg and Switzerland are quite similar. The legislation of both Luxembourg and the Swiss Confederation allows non-residents to create a business and make direct foreign investments in the country.

In both countries, the most popular and common form of enterprise is the limited liability company. In Luxembourg, this type of company is called Société à Responsabilité Limitée (SARL), and in Switzerland, it is abbreviated as GmbH (Gesellschaft mit beschränkter Haftung), which is German for “a limited liability company”.

Following are the conditions one must meet to set up a company in Luxembourg:

• one shareholder (corporate shareholders are allowed);
• appointing at least one director of any residency;
• contributing the minimum authorized capital;
• a registered address in Luxembourg.

Here are the requirements for registering a company in Switzerland:

• one or more shareholders;
• appointing one or more directors, one of whom must be resident in Switzerland;
• contributing the minimum authorized capital, which must be paid in full at the time of registration;
• a registered office in Switzerland;
• a local registered agent who will receive official regulatory notices must be appointed.

A minimum share capital requirement for a SARL is EUR 12,000 in Luxembourg and CHF 20,000 in Switzerland. 

The second most popular company form in Switzerland, the joint-stock company (SA), is mainly used for medium and large enterprises. Registering a corporation in Switzerland is possible if there are at least three shareholders and an initial capital contribution of 100,000 Swiss francs.

Creating a joint stock company in Luxembourg involves the payment of a minimum share capital of 31,000 Euros. In addition, the owner needs to appoint at least three directors and provide regulators with proof of having a registered office in Luxembourg.

Choosing a country for registering a company abroad depends on your business goals. You can get more information about the requirements for registering a company in Switzerland and Luxembourg and business regulations in these countries as part of a personal consultation with one of our experts. To make an appointment for a consultation, e-mail your request to info@offshore-pro.info.

Conclusion

Switzerland and the Grand Duchy of Luxembourg are rightfully seen as some of the wealthiest countries in the world. Their legal regimes, tax policies, and financial systems allow them to attract significant capital flow and actively develop their economy. At the same time, according to the World Bank, Luxembourg is still richer than Switzerland in terms of GDP per capita.

Luxembourg is a developed country whose government is taking various measures to stimulate the economy, diversify financial flows to the state, and encourage innovation. Experts predict that in the coming years, the Duchy will further increase its development pace, and the country’s GDP will be gradually growing even despite the global world crises caused by COVID-19 and various geopolitical processes in Europe.

However, it is crucial to understand that many factors affect GDP. This indicator does not demonstrate the actual standard of living of all the people in the country and their real financial situations. This economic measurement only assesses the power and economic capabilities of the country as a whole.

Would you like to open a bank account in Luxembourg or Switzerland? Please, send your request to our specialists right now at info@offshore-pro.info! Our specialist experts will advise you on all issues and provide legal support at all stages of opening an account and registering a business in Luxembourg, Switzerland, or other European countries.  

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