Low tax regimes in two Swiss cantons have been deemed unconstitutional in a ruling by the Swiss Federal Court. Switzerland’s highest court decided that Canton Obwalden's degressive tax system aimed at attracting wealthy residents, is contrary to federal tax policy.

The court said that degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance. Obwalden is effectively a test case for another canton with a similar tax system.

Obwalden adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent. Switzerland's 26 cantons each have their own tax systems and can set their own levels.

It was introduced in 2006 following a cantonal vote as a way of boosting the fortunes of Obwalden, one of the poorest cantons located in Switzerland's mountainous centre.

The case came in response to a case brought by Communist parliamentarian Josef Zisyadis – who moved to Obwalden to oppose the tax charges - along with three other Obwalden residents, who argued that degressive tax was unconstitutional.

This view was shared by the court's judges. It also means that canton Schaffhausen, the only other canton to have degressive tariffs, should also amend its tax rules. The Obwalden cantonal government said in a short statement that it would now look into measures to find constitutionally compatible tax rates and that it would present a proposal to the cantonal parliament on the issue.

The finance ministry said that the court's decision would neither change the system of tax competition between the cantons nor encourage tax harmonisation.

It emphasised that federalism and tax competition were essential parts of Swiss identity that also made the country more attractive for foreign companies.

But it added that the government had always rejected the degressive model. In December 2005, 86 per cent of Obwalden's citizens voted in favour of the degressive tax system. It came into force on 1 January, 2006. The canton also introduced a corporation tax of 6.6% and a drop in property tax of at least 30 per cent.