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Private clients

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. Private Client Relocation/Tax Competition. UK Resident Non-domiciled – and –

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Private clients

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  1. Private clients Swiss tax issues IFA Bilateral Meeting United Kingdom / Switzerland London 11 May 2012 Hans Koch - Baker & McKenzie ZurichPaul Whitehead - Berwin Leighton Paisner LLP Doc No. 23464756

  2. Private Client Relocation/Tax Competition UK Resident Non-domiciled – and – Swiss Lump Sum/Forfait Taxation

  3. I. Introduction

  4. II. Basics

  5. 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”)

  6. 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

  7. 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

  8. Basics – the UK : the Remittance Basis • Residence – uncertainty – statutory test – from 6 April 2013 • Domicile – origin – dependence – choice

  9. 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”

  10. 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

  11. III. Pre-immigrationPlanning & Trusts

  12. 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?

  13. 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%).

  14. 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.

  15. 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)

  16. 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

  17. 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

  18. Pre-Immigration Planning and Trusts – the UK • Difficulties with the Remittance Basis - Mixed Fund rules • Solutions • Capital and Income Accounts • Life Policies • Trusts and Companies

  19. Pre-Immigration Planning and Trusts – the UK Capital Distribution Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Settlor Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Non-UK Trust Beneficiary Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Interest free loan Repayments (Max 5% p.a.) Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Non-UK Co. Loan repayment Surrenders (Max 5% p.a.) Premium Premium Premium Premium Premium Premium Premium Premium Premium Life Policy Life Policy

  20. Pre-Immigration Planning and Trusts – the UKUK Property • Trust/Company/Property Structure • Budget 2012 - 15% SDLT on properties over £2 million acquired by a company - CGT on sale - Annual charge - Solutions?

  21. Pre-Immigration Planning and Trusts - Businesses • Control and management • Branch/PE in the UK • Remuneration

  22. IV. Inheritance/Estate Taxes And Successions/Wills

  23. 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.

  24. 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

  25. Tools For Wealth Preservation • inheritance/nuptial contracts • life interest/ususfruct • donations inter vivos • trusts • foundations/corporations • fiduciary structures • life insurance policies • secondary heirs

  26. Inheritance/Estate Taxes – the UKInheritance Tax • Domicile • Deemed domicile • 2 tier test • 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

  27. Inheritance/Estate Taxes – the UKInheritance Tax • Domiciled/Deemed domiciled - Worldwide assets • Not domiciled/deemed domiciled - UK assets only

  28. Inheritance/Estate Taxes – the UKInheritance Tax Planning • UK assets • Company • Debt • Life assurance • Long term residents • Trust

  29. Succession/Wills – the UK • Succession - Situs of assets - Domicile • Planning - Will in jurisdiction of domicile - Will in jurisdiction of assets - Trust

  30. V. Summary And Further Questions

  31. 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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