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Zug was once one of Switzerland's poorest cantons, consisting of small dairy farms and two factories, until officials drastically rewrote its fortunes by inventing so-called holdings taxation in the late 1940s. That law, still in effect, allows Zug-registered companies to pay taxes only on income generated in Switzerland precious little, for many of them. Zug's tax system seems tailor-made for trading companies, which buy vast quantities of oil, gas and minerals items dug or drilled from the earth thousands of miles away and then sell them to customers around the world, profiting on the margin those trades generate. On paper, Zug taxes foreign companies 8.8%. But Neidhart says companies can deduct those taxes from their Swiss federal taxes of 8.5%, making their business nearly tax-free.
So what's in it for Switzerland? Even without paying taxes, each company boosts the country's GDP by about $78 million a year, according to Business Network Switzerland in Zurich. Not surprisingly, Zug voters reject all attempts to increase corporate taxes, despite political arguments that Zug's laws boost profits at the expense of the poor nations where those companies operate. "Many of these companies get tax deductions there too because those countries want to attract Swiss companies," Gisler says. "The darned thing about it is that it is perfectly legal."
But how long can it stay legal? In 2007 the European Commission in Brussels accused Swiss cantons like Zug of giving illegal state aid through giant corporate tax breaks. Switzerland, not an E.U. member, has stonewalled Europe's attempts to resolve the dispute. U.S. and E.U. politicians have vowed to crack down on tax havens in order to recoup billions in lost revenue. Both Transocean and Weatherford which have saved billions by moving their headquarters out of the U.S. decamped to Zug from the Cayman Islands as U.S. officials began tightening rules over Caribbean tax havens.
So far, Switzerland is resisting calls to change its tax rules, but under relentless pressure from the U.S., it has loosened its rules on banking secrecy, which protect American tax cheats. In Zug, officials admit they are feeling the heat. Last August, in a rare move against a foreign firm, Zug blocked Transocean from a planned cash distribution to shareholders most of whom were in the U.S. "We decided no," Neidhart says. "The company has huge legal claims against it, and we cannot allow shareholders to take away capital before the judges rule on those cases."
Should taxes increase in Zug, the town has another draw: secrecy. Zug is tight-lipped, even for Switzerland. Tax records are confidential; Neidhart says even he has no access to them. At Zug's documentation center, funded by local groups critical of Zug's tax system, archivists track Zug-registered companies by scouring newspapers because many public records are closed. That privacy can make it difficult to figure out a company's real activities or even who owns it. In 2008 a Norwegian newspaper described how Norway's state-owned energy company StatoilHydro had joined with Gazprom and France's Total to form Shtokman Development AG in order to explore a giant gas field in the Barents Sea. StatoilHydro sent about $32 million to the new company's address a P.O. box in Zug. "There will probably be around 100 billion kroner (about $17 billion) flowing through the company accounts by 2013," the newspaper wrote. "It would have been nice to know who is going to lead it." Statoil says Zug was Gazprom's choice for pipeline company Nord Stream's headquarters and that the company's taxes will be paid in Russia.
In 2009, Global Witness, an anticorruption organization in London that investigates corporations, found that a Zug gas company called RosGas AG had tried to take over Hungary's largest independent gas supplier, Emfesz, which was headquartered at the address of a mobile-phone company in Zug. And last March, the group found that Angola's state-owned oil company Sonangol had partnered with a mysterious Zug company called Exem Holding, whose ownership was unknown. The one-page company document in Zug's registry lists a Swiss attorney and a Paris-based financier named Konema Mwenenge as directors. Mwenenge told Global Witness he had a "professional" relationship with the son-in-law of Angolan President José Eduardo dos Santos. But Zug's tight secrecy meant that Global Witness was unable to conclude whether Exem Holding was a legitimate entity or a shell, says Diarmid O'Sullivan, who researches energy companies for the organization. "In a lot of these cases, you run into a wall when you get to Zug," he says. "It goes into a black hole. "
At least for now. With U.S. and European officials moving in on tax havens, Zug's role as a favorite bolt-hole for traders is not assured. Yet many already there might be loath to leave the bucolic lakeside town even if taxes slowly rise. That includes Nord Stream, which set up shop in Zug during the bitter winter of 2005. Five years on, the company sits in a modern office complex near Neidhart's office, above a traders' watering hole called Amaldobar the perfect place for a pan-European operation, perhaps. "The pipeline will pass through the waters of five different countries, so the place to be is a country which is not part of it," says Nord Stream spokesman Frank Dudley. "We chose neutral ground." Neutral, yes. And profitable and secretive too.