Private clients
Swiss tax issues
IFA Bilateral Meeting
United Kingdom / Switzerland
London
11 May 2012
Hans Koch - Baker & McKenzie Zurich
Paul Whitehead - Berwin Leighton Paisner LLP
Doc No. 23464756
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Private Client Relocation/Tax
Competition
UK Resident Non-domiciled
– and –
Swiss Lump Sum/Forfait Taxation
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I.
Introduction
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II. Basics
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Switzerland – Forfait/Lump Sum
Taxation Regime
• Available for foreigners upon their first immigration to
Switzerland
• Only if they are not exercising any professional or
business activity in Switzerland
• Tax basis: the effective costs of living (subject to
negotiation)
• Resulting tax basis is subject to ordinary tax rates
• Business abroad remains permissible (to be confirmed)
• Under certain DTC lump sum taxation is not recognized:
in that case income sourced in the treaty state must be
fully taxed in Switzerland in order to benefit from DTC
protection (“modified lump sum taxation”)
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Switzerland – Forfait/Lump Sum
Taxation Regime
• Only a part of an individual‘s income and wealth are
effectively taken into consideration
• Typically interesting for wealthy individuals who earn
passive income and who are not actively engaged in a
business (dividends, interest, rental income, etc)
• Lump sum taxation is always based on an advance tax
ruling which deals with the details of the specific case
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Switzerland – Forfait/Lump Sum
Taxation Regime
• The system is currently under political pressure: 3
cantons (Zurich, Schaffhausen, Appenzell Ausserrhoden)
have abolished the system, 3 have introduced stricter
requirements (Thurgau, St.Gallen, Lucerne), in at least 5
cantons there are proposals to abolish or modify the
system (Aargau, Basel-Land, Basel-Stadt, Bern, Geneva,
Zug). A proposal to abolish the system is also pending
on the federal level (applicable to all Switzerland)
• An introduction of stricter requirements for all cantons is
expected (on the federal level) : minimum taxable
income would be CHF 400‘000 or 7 times the annual
rental income value
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Basics – the UK : the Remittance Basis
• Residence – uncertainty
– statutory test – from 6 April 2013
• Domicile
– origin
– dependence
– choice
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Basics : the Remittance Basis
• Resident/Non-domiciliary “remittance basis user”:- Income Tax
– UK source – taxed
– Non-UK source – not taxed unless remitted
- Capital Gains
– Disposal of UK assets – taxed
– Disposal of Non-UK assets – not taxed unless
remitted
- New “Business Investment Relief”
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Basics : the Remittance Basis
• From 2008 – Remittance Basis Charge
– 1st 7 tax years – free
– 8-12 tax years - £30,000
– 13 tax years onwards - £50,000
• Can choose each tax year whether to pay
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III. Pre-immigration
Planning & Trusts
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Switzerland – Taxation of Trusts
• In principle, trusts are an unknown concept in Swiss domestic law,
yet they are recognized (Hague convention)
• Swiss authorities frequently struggle about how to deal with trusts
• Problems can typically arise:
• Regarding income, wealth and gift taxation,
• Regarding estate planning or
• Regarding the acquisition of Swiss real estate by a trust
• Decisive question: whom should the income and the principal of a
trust be allocated to?
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Switzerland – Taxation of Trusts
• Setting up a revocable trust:
– Should be seen as a tax neutral operation: The settlor keeps full
economic control. He therefore remains taxable for income and
wealth tax purposes “as if there were not trust”.
• Setting up an irrevocable fixed interest trust:
– Not tax neutral. The beneficiaries derive the full benefit, they are
considered the economic owners for tax purposes and become
taxable. Setting up such trust can also lead to gift tax
consequences if beneficiaries are not exempt (e.g. spouse, direct
descendants)!
• Setting up an irrevocable discretionary trust:
– Not tax neutral. Similar as a donation to a third party, potentially
triggering full unrelated party gift taxation (e.g. Zurich: 36%).
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Switzerland – Taxation of Trusts
• A specific trust should always be discussed in advance
with the tax authorities (advance tax ruling).
• Trusts are seldom set up to optimize Swiss taxes – but
one wants to make sure no harm is done either!
• The Swiss tax authorities fully accept to deal with trusts,
but they welcome appropriate explanations and
interpretation of the trust.
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Pre-Immigration steps (i)
• Definition of Revocable under Circular of the Swiss Tax Conference
on the Taxation of Trusts (retaining the possibility of power of
interest)
– This may offer opportunities for non-Swiss resident settlors with
CH resident beneficiaries
– Careful planning requested for immigrants
• Wash out of income and gains during lifetime of settlor to ensure
inheritance and gift taxation at time of distribution to beneficiary
• Inheritance and gift taxation is Cantonal (unless new legislation will
be introduced in 2014 or later)
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Pre-Immigration steps (ii)
• Private Ruling on Cantonal/Federal income, net wealth , inheritance
and gift taxation requested to ensure that the goals of the
interposition of a trust are achieved
– Careful drafting of trust documentation requested, e.g., addition
of beneficiaries who are not related to settlor being resident in
Switzerland at time of death may trigger a high inheritance tax
exposure (up to 50% and more)
– For private ruling tax authorities request to see trust deed, other
trust documentation and letter of wishes
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Pre-Immigration Planning and Trusts –
the UK
Aims :
- (i) Maximise tax free amounts in UK, using the
remittance basis
- (ii) Protect from Inheritance Tax
- (iii) Avoid/minimise business profits being taxed in UK
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Pre-Immigration Planning and Trusts –
the UK
• Difficulties with the Remittance Basis
- Mixed Fund rules
• Solutions
1.Capital and Income Accounts
2.Life Policies
3.Trusts and Companies
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Pre-Immigration Planning and Trusts –
the UK
Interest free
loan
Settlor
Capital
Distribution
Non-UK
Trust
Interest
free loan
Beneficiary
Repayments
(Max 5% p.a.)
Non-UK
Co.
Loan
repayment
Premium
Surrenders
(Max 5% p.a.)
Life Policy
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Pre-Immigration Planning
and Trusts – the UK
UK Property
• Trust/Company/Property Structure
• Budget 2012
15% SDLT on properties over £2 million acquired by
a company
CGT on sale
Annual charge
Solutions?
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Pre-Immigration Planning and Trusts Businesses
• Control and management
• Branch/PE in the UK
• Remuneration
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IV. Inheritance/Estate Taxes
And Successions/Wills
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Swiss forced heirship concept
• Forced heirship claims under Swiss law
– 1/4 for spouse
– 3/8 for issue
– (1/8 – 1/2 for parents)
• At least 3/8 freely disposable.
• Potential claw back.
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Possibility to Elect Law to Govern
Estate for Swiss Residents
•
•
•
•
Only for non Swiss nationals
Scope of elected law?
Coordination of inheritance/matrimonial property law
Recognition outside of Swiss probate
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Tools For Wealth Preservation
•
•
•
•
•
•
•
•
inheritance/nuptial contracts
life interest/usus fruct
donations inter vivos
trusts
foundations/corporations
fiduciary structures
life insurance policies
secondary heirs
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Inheritance/Estate Taxes – the UK
Inheritance Tax
•
Domicile
•
Deemed domicile
-
2 tier test
(i)
UK tax resident in any part of 17 out of a continuous
period of 20 tax years; or
(ii) actually domiciled in the UK in the last three years
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Inheritance/Estate Taxes – the UK
Inheritance Tax
• Domiciled/Deemed domiciled
-
Worldwide assets
• Not domiciled/deemed domiciled
-
UK assets only
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Inheritance/Estate Taxes – the UK
Inheritance Tax Planning
• UK assets
- Company
- Debt
- Life assurance
• Long term residents
- Trust
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Succession/Wills – the UK
• Succession
Situs of assets
-
Domicile
• Planning
Will in jurisdiction of domicile
-
Will in jurisdiction of assets
-
Trust
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V. Summary And Further
Questions
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Private Client Relocation/
Tax Competition
This document provides a general summary only and is not intended to be comprehensive.
Specific legal advice should always be sought in relation to the particular facts of a given
situation.
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