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The Private Wealth& Private Client Review
The Private Wealth and Private Client Review Reproduced with permission from Law Business Research Ltd.
This article was first published in The Private Wealth and Private Client Review - Edition 3
(published in September 2014 – editor John Riches).
For further information please [email protected]
The Private Wealth & Private Client
Review
Law Business Research
Third Edition
Editor
John Riches
The Private Wealth& Private Client Review
The Private Wealth and Private Client Review
Reproduced with permission from Law Business Research Ltd.This article was first published in The Private Wealth and Private Client Review -
Edition 3(published in September 2014 – editor John Riches).
For further information please [email protected]
The Private Wealth & Private Client
Review
Third Edition
EditorJohn Riches
Law Business Research Ltd
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iii
Editor’s Preface ..................................................................................................viiJohn Riches
Chapter 1 EU DEVELOPMENTS .............................................................1Richard Frimston
Chapter 2 THE FOREIGN ACCOUNT TAX COMPLIANCE ACT ......8Henry Christensen III and Toni Ann Kruse
Chapter 3 NOTES ON THE TAXATION OF WORKS OF ART IN THE UNITED KINGDOM ..............................................21
Ruth Cornett
Chapter 4 OECD DEVELOPMENTS .....................................................28George Hodgson
Chapter 5 ARGENTINA ...........................................................................35Juan McEwan
Chapter 6 AUSTRIA .................................................................................43Martin Ulrich Fischer
Chapter 7 BELGIUM ................................................................................54Anton van Zantbeek and Ann Maelfait
Chapter 8 BERMUDA ..............................................................................68Alec R Anderson
Chapter 9 BRAZIL ....................................................................................80Humberto de Haro Sanches
CONTENTS
iv
Contents
Chapter 10 BRITISH VIRGIN ISLANDS .................................................92Andrew Miller
Chapter 11 CANADA ...............................................................................104Margaret R O’Sullivan and Claudia A Sgro
Chapter 12 CAYMAN ISLANDS ..............................................................123Andrew Miller
Chapter 13 CHINA ...................................................................................131Hao Wang
Chapter 14 CYPRUS .................................................................................139Elias Neocleous and Philippos Aristotelous
Chapter 15 FRANCE ................................................................................150Line-Alexa Glotin
Chapter 16 GERMANY ............................................................................159Andreas Richter and Anna Katharina Gollan
Chapter 17 GUERNSEY ...........................................................................167William Simpson
Chapter 18 HONG KONG ......................................................................180Ian Devereux and Silvia On
Chapter 19 INDIA ....................................................................................189Abhinav Harlalka and Shreya Rao
Chapter 20 IRELAND...............................................................................204Nora Lillis and Carol Hogan
Chapter 21 ISRAEL ...................................................................................218Alon Kaplan, Ran Artzi, Lyat Eyal, Eyal Sando and Hagi Elmekiesse
v
Contents
Chapter 22 ITALY .....................................................................................233Nicola Saccardo
Chapter 23 JAPAN ....................................................................................244Atsushi Oishi and Makoto Sakai
Chapter 24 LIECHTENSTEIN ................................................................255Markus Summer and Hasan Inetas
Chapter 25 LUXEMBOURG ....................................................................270Simone Retter
Chapter 26 NETHERLANDS ..................................................................285Dirk-Jan Maasland, Frank Deurvorst and Wouter Verstijnen
Chapter 27 NEW ZEALAND ...................................................................296Geoffrey Cone
Chapter 28 PANAMA ................................................................................308Luis G Manzanares
Chapter 29 RUSSIA ...................................................................................318Kira Egorova, Ekaterina Vasina and Elena Golovina
Chapter 30 SINGAPORE .........................................................................331Sim Bock Eng
Chapter 31 SOUTH AFRICA ...................................................................346Hymie Reuvin Levin and Gwynneth Louise Rowe
Chapter 32 SPAIN .....................................................................................358Pablo Alarcón
Chapter 33 SWITZERLAND ...................................................................367Mark Barmes, Julien Perrin and Floran Ponce
vi
Contents
Chapter 34 UKRAINE ..............................................................................380Alina Plyushch and Dmytro Riabikin
Chapter 35 UNITED ARAB EMIRATES .................................................392Amjad Ali Khan and Abdus Samad
Chapter 36 UNITED KINGDOM ...........................................................398Christopher Groves
Chapter 37 UNITED STATES .................................................................410Basil Zirinis, Katherine DeMamiel, Elizabeth Kubanik and Susan Song
Appendix 1 ABOUT THE AUTHORS .....................................................429
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ...449
vii
EDITOR’S PREFACE
The scope and tone for my introductory remarks this year is set by referencing a combination of Henry Christensen and George Hodgson’s articles. We all know that the Foreign Account Tax Compliance Act (FATCA) was a unilateral attempt by the United States to obtain information on the non‑US financial interests of US citizen taxpayers. The response of other Organisation for Economic Co‑operation and Development (OECD) countries has transformed from an initial stance of reticence and scepticism to one where FATCA has become the catalyst for the Common Reporting Standard (CRS). The publication in February 2014 by the OECD of the document entitled ‘Standard for Automatic Exchange of Financial Account Information Common Reporting Standard’1 paves the way for comprehensive disclosure on cross‑border financial interests by individuals and related entities, and automatic exchange of that information by participating states from 2016. It is therefore worth pausing at this particular point in time to seek to discern what the aggregate effects of FATCA and CRS will be. Some may be less obvious than others.
Greater transparencyStarting with the obvious, it is apparent that for the families who are tax compliant with cross‑border interests, and us as their advisers, greater transparency will create a different context within which planning is undertaken. We have become accustomed in more recent years to a ‘self‑assessment’ paradigm where the burden of disclosure fell on individual taxpayers, who disclosed matters that they considered to be germane to the assessment of their tax affairs. In the post‑FATCA/CRS world, this paradigm will change. Revenue authorities will be receiving significant amounts of spontaneous information about taxpayers’ foreign financial interests through FATCA and CRS. Much of this
1 www.oecd.org/tax/exchange‑of‑tax‑information/Automatic‑Exchange‑Financial‑Account‑Information‑Common‑Reporting‑Standard.pdf.
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information may duplicate data that has already been filed directly with the relevant individual’s domestic tax authority, but nonetheless it is likely to create an environment in which more cross‑checking of such data is undertaken, especially where it relates to entities such as trusts and foundations of which the individual is a beneficiary. This places a greater onus on advisers to ensure that our clients’ tax filings are scrupulously accurate, as the overall trend seems set to be one in which revenue authorities are likely to adopt a less forgiving attitude to innocent mistakes.
Scrupulous compliance and record-keepingIt is also apparent that the maintenance of appropriate records will become more important. Tax authorities may not audit an individual’s tax affairs for a number of years after these new initiatives take effect. When an audit occurs, it is likely to be important to be able to demonstrate that the structure did report the taxpayer’s interest in relevant cases and to link this with the individual’s personal tax filings where relevant.
SubstanceA second, if less direct, consequence of transparency is the importance of ensuring that trusts, foundations and companies that are organised and resident in a particular jurisdiction have the appropriate substance there that can be demonstrated should the need arise. In a more transparent environment, the connections that exist between individuals as ‘ultimate beneficial owners’ and entities located in different jurisdictions will be more apparent. The policy thrust of seeking to identify not only settlors but those exercising oversight in a fiduciary capacity (such as protectors and enforcers) and those seen as ‘exercising effective control’ will mean that tax and regulatory authorities may be disposed to satisfy themselves that the operations of entities that are located in specific jurisdictions are being genuinely conducted there and that there are no ‘short cuts’ that are capable of generating a different tax analysis.
Anticipating this type of change, it would be prudent for those engaged in managing those entities to be in a position to demonstrate appropriate ‘mind and management’. In this context, it will be critical to ensure that there is consistency between formal board or meeting minutes and informal communications with beneficial owners, properly conducted meetings held at the right time and sufficient time given for reflection before decisions are taken. This could be a good time to stress test substance given the enhanced likelihood of tax audits in future.
Scope for simplificationThere may be instances where there is a ‘silver lining’ to the increased reporting burden. There is a basic precept of all planning that suggests that where one is in doubt, it is always better if possible to establish a simpler structure with fewer layers. The principal justification for this approach is that consequential changes are always more complex in structures where one has more ‘moving parts’ to address. When establishing new structures therefore, it may be that as advisers we will tend to be more sceptical about the value of the use of underlying companies and choose to hold assets, for example, directly at the level of the trust or foundation. Where existing compliant structures are concerned, both advisers and families may also be less inclined in future to embrace ‘complexity’ and prefer to concentrate on being able to demonstrate the substance of
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those layers that are required to execute the relevant planning objective. In this context it should not be forgotten that a key issue that creates greater complexity is the need to demonstrate the movement of value between layers in a structure, whether by way of loan repayment, dividend or appointment. It is also critical to note that where one is looking for flexibility and portability, a simpler structure is one that can be effectively ‘lighter on its feet’ should the need for change arise. This is not least demonstrated in the context of the requirement to provide comprehensive customer due diligence on the entire structure to relevant financial institutions or service providers.
Risk of confusionThere is undoubtedly going to be a scope for very significant confusion to arise with the advent of the new rules. For instance, the test of where an entity is deemed to be resident for the purposes of FATCA/CRS may well generate different outcomes. Some structures may be dual resident by being deemed to be resident in the country of incorporation as well as in the country of effective operation, and the initial stance of authorities at this point may be to prefer duplicate reporting where an entity falls to be treated as resident in more than one jurisdiction.
Another term open to significant ambiguity is that of ‘any other natural person exercising ultimate effective control over the trust’ referred to in the CRS definitions at Section VIII in the context of ‘Controlling Persons’.2 It is very uncertain at this stage how this phrase would be interpreted in the context of complex fiduciary structures. Is it, for instance, invoked by the use of reserved power trusts that may give administrative powers such as those relating to investment to a third party other than the settlor, or is it mainly intended to apply to dispositive powers? Will it apply to governance powers that allow a third party to intervene to hire and fire protectors, who can in turn appoint and remove trustees?
There are bound to be ‘teething problems’ of this nature, where both tax authorities and service providers will need clarity. What is essential is an ongoing engagement with policymakers that provides practical and usable guidance that minimises ambiguity.
Reporting profile of different fiduciary structuresAt this early stage in the development of guidance on FATCA and CRS disclosure on entities, it is interesting to note that discretionary structures would appear to have a much lower reporting profile than those which revolve around the existence of fixed income interests. While there is no available CRS guidance in the public domain, there is analogous guidance in draft that has been published in the context of both FATCA and the United Kingdom’s intergovernmental agreements (IGAs) with its Crown Dependencies (CDs) and certain of its Overseas Territories.3
2 www.oecd.org/tax/exchange‑of‑tax‑information/Automatic‑Exchange‑Financial‑Account‑Information‑Common‑Reporting‑Standard.pdf
3 Draft CD Guidance was published in January 2014, while the Cayman Islands published its own draft guidance in May 2014
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Specifically for trusts requirements to disclose information as a beneficiary will, in the case of a trust where an individual has an income interest, oblige, currently, a filing of underlying capital values of fiduciary assets while, in the case of discretionary trusts, the guidance directs that the disclosure should be limited to distributions made in the relevant year (this extract has been taken from the draft CD Guidance on FATCA and the United Kingdom IGAs issued on 31 January 2014):4
The total value of the assets of the trust must be consistent with that used by the trustees for valuation purposes and should be based on a recognised accounting standard. Listed securities should be valued at the appropriate market. The Equity Interest attributable to the settlor of any settlor interested trust is the whole value of the trust. Where a settlor is excluded from the trust, the Equity Interest can be considered to be nil but will still be a Financial Account and hence reportable. The Equity Interest of a beneficiary that is entitled to mandatory distributions (directly or indirectly) from a trust will be the net present value of amounts payable in the future and should be measured on a recognised actuarial basis. It is recognised that this may be difficult and expensive to calculate in which case it is permitted to use the accounting net asset value of the assets in which the beneficiary has an interest. For a discretionary trust, the Equity Interest attributable to a beneficiary in receipt of a distribution will be the amount of the distribution made in the relevant reporting year.
The strongly contrasting nature of the level of disclosure required here may cause families and their advisers to reflect carefully on the merits of continuing with fixed interest structures.
As a separate matter, it is notable that settlor‑interested structures are similarly ones where full disclosure of capital values on an annual basis will be required. It may be that in this environment settlors may choose to ring‑fence their interests to a smaller portion of overall value on the basis that their personal financial needs will not require them to have access to the entire capital value of an ongoing structure.
Profile of fiduciariesAn inevitable consequence of the new rules for trusts will be a requirement to give greater disclosure about fiduciaries involved. This is implicit in the Financial Action Task Force guidance on fiduciary holding structures (see recommendation 25).5 Where those acting, in particular, as protectors are required to provide information to authorities, families may wish to reflect on the merits of involving family friends or indeed close relatives in this capacity given that, in some cases, the inference that will be drawn by revenue authorities will be less positive than in circumstances where an independent third party is serving in this specific role.
4 www.gov.gg/CHttpHandler.ashx?id=86124&p=0.5 www.fatf‑gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.
pdf.
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It will be interesting to see what will happen if the only nexus between a fiduciary holding structure and another jurisdiction is a resident protector with no other role. Will the protector’s status be required to be reported on an otherwise nil return?
Tax transparent entitiesAnother possible consequence of the changes might be to favour structures that have legal substance but are accepted by authorities as tax transparent. In particular, the use of partnership entities may become more popular because of their ability to insulate fiduciaries from certain legal risks that arise from the direct ownership of assets in the same way as corporate entities, without generating the additional complexity of further ‘layers’.
Public registersIn a European Union context, there is significant political support for certain information on trusts to be made public.6 This has been linked to initiatives in the United Kingdom to make public beneficial owners of companies.7 There are strong arguments that can be made to oppose trust registers, not least in the context of exposing vulnerable individuals to risk if the existence of trusts in which they are named beneficiaries falls into the public domain. What is clear though is that the imminent arrival of automatic exchange of information on a global basis under CRS and FATCA will mean that the information relevant to trusts and similar entities will be available to tax and regulatory authorities, which will have the capacity to create registers of their own. Thus the only open issue that remains is whether such information is confidential and only available to competent authorities or whether some will be placed in the public domain.
In summary, we are on the threshold of a new environment that is bound to generate a significant amount of change. Clients will be looking to us as advisers to do our best to help them plan effectively in this new environment.
John RichesRMW Law LLPLondonSeptember 2014
6 www.europarl.europa.eu/news/en/news‑room/content/20140307IPR38110/html/Parliament‑toughens‑up‑anti‑money‑laundering‑rules.
7 www.gov.uk/government/uploads/system/uploads/attachment_data/file/304297/bis‑14‑672‑transparency‑and‑trust‑consultation‑response.pdf.
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Chapter 33
SWITZERLAND
Mark Barmes, Julien Perrin and Floran Ponce1
I INTRODUCTION
Switzerland has long been an attractive destination for wealthy individuals and families. Many reasons can be advanced for this: neutrality and political stability; its status as a safe haven; its central location within Europe; its reputation for high service standards; its role as a key player in the custody and management of private wealth; and its system of taxation and bank secrecy.
Since the turn of the century and the growth of globalisation, Switzerland has been faced with a new world order and accelerating internal and external demands for change. Recurrent incidents of data theft in banks, the well-publicised litigation in the United States involving UBS, the financial crisis and ever-increasing multilateral demands for automatic exchange of information have contributed to produce a breathtaking rate of change.
In this context, the Swiss government has at times seemed overwhelmed. The current uncertainty created by the multiple changes under consideration or being negotiated is probably the predominant reason. However, if one pauses to look at all that is being done, it is notable that the quintessential Swiss characteristics of democracy, negotiation and healthy obstinacy are producing answers to many of the uncertainties. Switzerland continues – some would say stubbornly – to insist on prohibiting the use of stolen data, requiring due process and speciality in information exchange and the promotion of international standards.
1 Mark Barmes is a partner and Julien Perrin and Floran Ponce are senior associates at Lenz & Staehelin.
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II TAX
i The federal tax system
Switzerland is a federal state consisting of 26 cantons. Income tax is levied at the federal, cantonal and municipal levels, while wealth tax and gift and estate tax are levied at the cantonal and municipal levels only. The cantons are competent to assess and collect most direct taxes, including federal income tax.
The rules for assessment of income and wealth are widely harmonised by federal law. Consequently, the cantons impose cantonal tax using the same basis as for the federal tax, except for certain minor rules (e.g., social deductions). The cantons are competent to set their tax rates, and the municipalities generally set their tax rate by reference to the cantonal tax rate.2
Switzerland is not a low-tax jurisdiction for ordinary taxpayers. Switzerland may nevertheless be fiscally attractive for high-net-worth individuals because it offers low tax rates in certain municipalities, an exemption from capital gains on moveable assets and reduced taxation of dividends.
The other advantages are the well-established ruling practice that allows individuals and businesses alike to discuss in advance the tax treatment of certain transactions or structures and the lump-sum tax regime for foreigners who do not engage in any gainful activity.
ii Personal taxation
Income taxSwitzerland taxes Swiss residents on their worldwide income except for income derived from a foreign trade or business or real estate located abroad. Non-residents are taxable if they own businesses or real property in Switzerland, or if they receive employment income from a Swiss employer or director fees from a Swiss company.
Capital gains exemptionsCapital gains on moveable assets such as shares in companies or works of art are not taxed if the gain results from the sale of private assets as opposed to business assets. Business assets are assets that are related to a business located in Switzerland.3
2 Tax rates are generally progressive. The maximum federal tax rate is 11.5 per cent, and maximum cantonal and municipal tax rates vary between 7.1 per cent (canton of Schwyz) and 34.5 per cent (canton of Geneva). The overall income tax rate can thus be comprised between 18.6 and 46 per cent. Similarly, the maximum wealth tax rates vary between 0.1 per cent (canton of Schwyz) and 1 per cent (canton of Geneva). The tax rates are generally higher in the French-speaking part of Switzerland and in the urban areas (Zurich, Basel, Bern, Lausanne, Geneva).
3 The concept of business has, however, been interpreted extensively by the cantonal tax administrations and the Swiss Supreme Court. They consider an independent business activity may exist where a taxpayer acts in a professional manner, for instance, by systematically trading in securities. This extensive interpretation led to uncertainty, and safe-haven rules have been published by the Swiss Federal Tax Administration.
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Capital gains on real property located in Switzerland are exempt from federal income tax if the property is part of an individual’s non-business or private assets. Such gains are subject to a cantonal and municipal property gains tax. The applicable tax rate varies greatly depending on the canton and on the duration of the holding of the property. Rates generally vary between zero per cent for very long holding periods and 30 per cent, but can be as high as 60 per cent in the case of a short holding period.
Dividend taxationDividends from qualifying participations of at least 10 per cent are more favourably taxed. For federal income tax, a 40 per cent tax relief is granted for participations held as private assets so that only 60 per cent of the dividend income is subject to taxation. The incentives granted at cantonal level vary from canton to canton.4
Wealth taxCantons and municipalities levy wealth taxes on worldwide net assets,5 except for real estate abroad. The majority of the cantons apply progressive tax rates and maximum rates vary between 0.15 and 1 per cent.6 In the cantons that have high wealth tax rates, wealth tax can have a significant impact on the overall tax burden, and tax structuring or pre-entry tax planning is sometimes advisable.
Lump sumThe ‘lump sum’ or ‘flat’ tax system in Switzerland opens the possibility for foreign citizens resident in Switzerland to pay their taxes based on a lump sum, subject to certain minimum criteria.
Foreign citizens who come to live in Switzerland for the first time (or after an absence of 10 years) and who do not engage in any gainful activity in Switzerland will, upon request, be taxed on a lump-sum basis for cantonal and communal income, net wealth and federal income tax purposes. A limited professional activity can be carried on outside Switzerland.
Under the lump-sum arrangement, tax is levied on the basis of a deemed income based on the annual living expenses incurred in Switzerland and abroad by the taxpayer and his or her family.7
4 Most cantons apply a relief similar or comparable to the federal tax relief, but certain cantons apply a reduced tax rate on the dividend income with a reduction that can be as high as 75 per cent (canton of Schwyz) or 80 per cent (canton of Glarus) and result in a tax rate on the dividend income of 9.9 per cent (canton of Schwyz).
5 Market value of the assets minus debt.6 Certain cantons allow further deductions. Recently, certain cantons have also introduced
a ‘wealth tax shield’ to reduce the wealth tax payable by individuals who have a proportionally low taxable income.
7 At present, such annual expenditure figure may not be less than five times the annual rent paid for the main accommodation occupied by the taxpayer and his or her family, or, if the taxpayer owns his or her own accommodation, five times the deemed rental value of that property.
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The tax due on the agreed tax base is calculated on the basis of the ordinary income and net wealth tax rates applicable to that amount.
In any event, the tax due must not be less than the taxes determined in a ‘control calculation’ under which certain specific Swiss-sourced items (e.g., income and wealth from real estate situated in Switzerland or securities issued by companies domiciled in Switzerland) are aggregated. The ultimate tax payable is the higher amount determined by the control calculation and the agreed flat tax. The lump sum tax system applies only to income and net wealth tax, not to inheritance taxes.
The lump sum tax system is currently subject to political discussion. The canton of Zurich and four other cantons have abolished the lump sum tax system for cantonal and municipal taxes, and other cantons have tightened their conditions. Recently, the federal parliament approved new legislation increasing the minimum amount of taxable income to seven times (instead of five) the rental value (or the rent paid, respectively), with a minimum tax base for federal tax of 400,000 Swiss francs. This legislation will enter into force in 2016. An initiative from left-wing parties calling for the abolition of the system was submitted on 19 October 2012, and will be subject to a vote by the Swiss people on 30 November 2014.
Withholding taxSwitzerland applies a withholding tax of 35 per cent on dividends, interest from bonds issued by Swiss residents and interest paid by Swiss banks. This tax is fully refunded to residents who declare their income in their tax return, and can also be partially or totally refunded to foreign residents subject to international tax treaties. Because of this withholding tax, tax planning is often needed for foreign-resident individuals who wish to incorporate holding structures in Switzerland.
iii Gift and estate tax
At the federal level, there is no gift and estate tax, but at the cantonal level, gift and estate tax is levied by most cantons, with the exception of the canton of Schwyz. Tax jurisdiction normally lies with the canton of the last domicile of the deceased, respectively the donor. Where the deceased has his or her final domicile in Switzerland, the entire worldwide estate, with the exception of foreign real property and assets belonging to a foreign permanent establishment, is subject to Swiss estate tax. Swiss real property and Swiss businesses that are the subject matter of a gift or a bequest can give rise to Swiss gift and estate tax even if the donor or the deceased was not Swiss domiciled.
The scope of the gift and estate tax varies greatly among cantons. The surviving spouse is exempt from estate and gift taxes in all cantons. All cantons, except Vaud, Neuchâtel and Lucerne, exempt gifts and bequests between parents and direct descendants. The tax rates on gifts and bequests, which are generally progressive, vary
In practice, the actual tax basis is determined by an advance ruling from the tax administration of the canton in which the individual wishes to take up residence. In the majority of cantons there is a practical minimum tax base (threshold) or an amount of tax, even if the expenses as determined above are less than this amount.
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greatly depending on the relationship between the parties and the canton. The tax rate may be as high as 55 per cent in the event of a gift or bequest to an unrelated person.
An initiative by left-wing parties calling for the introduction of a federal gift and estate tax on estates and gifts worth more than 2 million Swiss francs has been lodged and will have to be voted on. According to this initiative, estate tax would be levied on the estate of individuals domiciled in Switzerland at the time of death or whose estate was opened in Switzerland. Gift tax would be due at a rate of 20 per cent if the donor were resident in Switzerland.
iv Exchange of information, withholding tax on banking assets and FATCA
Until March 2009, Switzerland’s treaty network did not provide for exchange of information to internationally agreed standards, as information exchange was generally limited to exchange for the purposes of the application of the treaty. In some treaties with OECD and EU Member States, Switzerland also provided for exchange of information in cases of tax fraud and acts of similar gravity. Subsequent requests for administrative assistance from the US Internal Revenue Service (IRS) directed against clients of UBS and Credit Suisse were based on a provision of this nature. These requests from the IRS led to several court cases and the Federal Tribunal ultimately confirmed that group requests are permitted under the 1996 treaty with the United States provided that the facts were described in sufficient detail so as to provide grounds for suspicion of tax fraud and enable the identification of the taxpayers involved. This decision had a considerable impact, and banks participating in the US programme aiming at regularising the past are expected to soon deliver client data to the IRS in application of the 1996 treaty.
On 13 March 2009, the international standard on information exchange for tax purposes was adopted by Switzerland, and the country has moved rapidly to update its bilateral treaties.8
On 14 June 2013, the Federal Council declared that it would contribute actively to the development of a global standard for the automatic exchange of information within the framework of the OECD. The requirements to be contained in the standard were that there should be one global standard applicable to all financial centres, that the exchanged information should be used solely for the agreed purpose, that it should be exchanged reciprocally and that the beneficial owners of structures should be identified. On 21 May 2014, the Federal Council adopted draft negotiation mandates for introducing the new standard to be issued by the OECD with partner states and to incorporate, where appropriate, issues of regularisation of the past and market access for Swiss financial institutions. Switzerland also became the 58th country to sign the multilateral Convention on Mutual Administrative Assistance in Tax Matters on 15 October 2013. The Convention provides for all possible forms of administrative cooperation between states in the assessment and collection of taxes. This cooperation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims.
8 As of 1 July 2014, there were 46 treaties with the international standard in force.
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After the change in its information exchange policy in 2009, Switzerland entered into tax cooperation or ‘Rubik’ agreements with the United Kingdom, Germany and Austria as part of a global strategy aimed at regularising the tax situation of foreign clients with undeclared banking assets in the near term and setting up a tax compliance policy that is considered equivalent to the exchange of information in the long term. The agreement with Germany was ultimately not ratified. The agreements with the United Kingdom and Austria entered into force on 1 January 2013.
The agreements provide for a one-off withholding tax (to settle the past) as well as an ongoing anonymous withholding tax.
As an alternative to the anonymous withholding tax deduction, the banking relationship may – with the consent of the client – be disclosed to the Swiss Federal Tax Administration, which will forward the relevant information to the tax authorities in the country of residence.
The Rubik agreements faced resistance from the European Commission, and new negotiations are unlikely following the recent declaration by the Federal Council that Switzerland would progressively move towards automatic exchange of information.
Following the enactment of the Foreign Account Tax Compliance Act (FATCA), Switzerland decided to implement Model 2, which means that Swiss financial institutions will disclose account details directly to the IRS with the consent of the US clients. The agreement between the United States of America and Switzerland for Cooperation to Facilitate the Implementation of FATCA was signed on 14 February 2013, and Swiss implementing legislation entered into force on 30 June 2014. Therefore, it was somewhat surprising that, on 21 May 2014, the Federal Council announced its proposal for a further draft mandate for negotiations with the US to switch to Model 1 and automatic exchange of information. This mandate still has to be adopted by the Federal Council after consultation of the interested parties.
III SUCCESSION
The Swiss inheritance law system is based upon the idea that the community of heirs (community) steps into the deceased’s shoes immediately upon his or her death.9 The assets and liabilities of the deceased vest automatically in the community; the heirs becoming joint owners of the deceased’s estate and joint debtors of the deceased’s debts. The appointment of a testamentary executor (through testamentary provision) or of an official administrator (through a court decision) is possible, but such person will not be considered to be the owner of the assets of the estate, but merely as limiting the heirs’ possession of such assets until partition.
Even though Switzerland recognises testamentary freedom to a certain extent, Swiss successions are based upon a system of statutory devolution of the estate (in the absence of a will) allowing the testator to modify such system to a certain extent by will, but also limiting testamentary freedom by protecting some of the statutory heirs with forced heirship rights. The primary heirs are the descendants,10 together with the
9 Article 560 of the Swiss Civil Code (SCC); ‘le mort saisit le vif ’.10 Article 457(1) of the SCC.
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surviving spouse or registered partner.11 In the presence of descendants, the surviving spouse or registered partner is entitled to 50 per cent of the estate (the descendants having to share the other 50 per cent per capita). In the absence of descendants, the parents (or their descendants)12 will be heirs (if there is a surviving spouse or registered partner, the latter will be entitled to 75 per cent of the estate13).
Some of the statutory heirs are protected by forced heirship rights. Descendants are entitled to a compulsory share of 75 per cent of their intestate entitlement;14 a surviving spouse or registered partner and parents are protected up to 50 per cent of their intestate share;15 other statutory heirs are not protected. The portion of the estate that is not encompassed by the compulsory shares can be freely disposed of by the testator and is usually called the freely disposable share.16
Forced heirship rights may also protect the heirs against inter vivos acts, in particular revocable transfers and transfers made within five years of the time of death, as well as transfers made with the object of depriving the heirs of their protected rights.17
The heirs may leave the infringing testamentary provision or inter vivos transfer unchallenged. The protection merely entitles them to claim their rights (either by asserting a claim against the will or against the holder of the assets within a certain time limit and provided that certain conditions are met) or to oppose the delivery of assets held by the community to the person benefiting from a testamentary provision.18
By testamentary provision, the testator may designate given persons as heirs,19 entitle others to legacies,20 appoint an executor,21 set up a foundation,22 or request an heir or a legatee to do something.23 The question of whether a testamentary trust could validly be set up within the framework of a succession governed by Swiss inheritance law is disputed, even if the current trend seems to be favouring such a possibility.24
11 Article 462(1) of the SCC.12 Article 458 of the SCC.13 Article 462(2) of the SCC.14 Article 471(1) of the SCC.15 Article 471(2–3) of the SCC.16 Article 470 of the SCC. In the presence of a surviving spouse or registered partner and of
descendants, the compulsory share of the surviving spouse or registered partner will amount to 25 per cent of the estate (50 per cent of 50 per cent) and the compulsory share of the descendants will globally amount to 37.5 per cent of the estate (50 per cent of 75 per cent); the freely disposable share will in such cases amount to 37.5 per cent of the estate.
17 Article 522 et seq. of the SCC.18 Article 533 of the SCC.19 Article 483 of the SCC.20 Article 484 of the SCC.21 Article 517 of the SCC.22 Article 493 of the SCC.23 Article 482 of the SCC.24 Perrin J, ‘The recognition of trusts and their use in estate planning under continental laws’, in
Yearbook of Private International Law, Volume 10 (2008), pp. 626 et seq., pp. 654–655, and
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Besides the unilateral will, which has (under Swiss domestic law) to be written entirely by hand or executed in front of a notary public (and, to a very limited extent, can be made orally25), Swiss inheritance law also recognises the possibility of entering into inheritance agreements (to be executed before a notary public). By such an agreement, it is possible for a testator to obtain, for example, the consent of a protected heir to a waiver of his or her full compulsory share (either gratuitously or in exchange for some compensation).
Swiss inheritance law has been largely unchanged since the entry into force, in 1912, of the SCC; however, with the entry into force, in 2007, of the Federal Act on Registered Partnership, the registered partner has been granted the same rights in inheritance law matters as the surviving spouse.26 Further, Article 492a of the SCC, introduced in 2013, allows a testator to determine the destination of any assets remaining out of the share of a durably incapacitated heir of the testator without risk of infringing the incapacitated heir’s compulsory share.
Even though not directly classed as inheritance law, it is important to mention that a revision of the rules on adult protection entered into force in 2013.27
The Swiss conflict of laws rules seek to ensure, as far as possible, the principle of unity of succession. With this objective in mind, the foremost connecting factor in inheritance matters is the place where the deceased had his or her final domicile.28
The Swiss courts generally have jurisdiction and apply Swiss law to the whole estate of a person whose final domicile was in Switzerland.29 Some exceptions exist, in particular, in relation to real estate located in countries claiming to have exclusive jurisdiction over immoveable assets;30 the devolution of the estate of Swiss nationals domiciled outside Switzerland who make the appropriate election;31 or assets located in Switzerland, where no foreign authority deals with them.32
quoted references.25 Article 498 et seq. of the SCC.26 Articles 462 and 471 of the SCC.27 The revision introduced new planning tools in relation to incapacitated persons. In particular,
Articles 360 to 369 of the SCC now provide for the ‘advance care directive’ (mandat pour cause d’inaptitude), enabling a person with capacity to instruct a natural person or legal entity to take responsibility for his or her personal care or the management of his or her assets, or to act as his or her legal agent in the event that he or she is no longer capable of judgement. Articles 370 to 373 of the SCC foresee the possibility for a person with capacity to specify in a patient decree which medical procedures he or she agrees or does not agree to in the event that he or she is no longer capable of judgement.
28 Within the Swiss meaning (see Article 20 of the Swiss Private International Law Act (SPILA) for a definition of domicile: ‘the place where a person resides with the intention of settling’), which is closer to the English notion of permanent residence than to the English notion of domicile.
29 Articles 86(1) and 90(1) of SPILA.30 Article 86(2) of SPILA.31 Article 87(2) of SPILA.32 Articles 87(1) and 88 of SPILA.
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Further, Swiss conflict of laws rules enable foreigners (who do not have Swiss nationality at the date of death) with final domicile in Switzerland to submit the devolution of their estate to their national law.33 This avoids the application of Swiss law, notably possible limitations on the creation of testamentary trusts and forced heirship rights.
As regards persons with their final domicile outside Switzerland, Swiss law34 looks to the law designated by the rules of conflicts of the deceased’s final domicile.35
In the event that the deceased was married or bound by a registered partnership, the patrimonial relations between the spouses or registered partners first have to be liquidated to establish what is part of the deceased’s estate.
In this regard, even if marriage or registered partnerships generally have very limited effects on the powers of each spouse or registered partner to dispose of his or her assets during the marriage, some rules governing liquidation will need to be taken into account at the end of the marriage or registered partnership.
If the spouses have not entered into any matrimonial agreement, the ordinary Swiss property regime of participation in acquired property (ordinary regime) applies.36 In this case, each spouse will be entitled to a monetary claim against the other, amounting to half the net value of the assets acquired for consideration during the marriage (in particular, earnings from work and business assets, but not including assets owned prior to marriage or received through gift or inheritance thereafter).
By matrimonial agreement, spouses can adopt one of two other property regimes (the segregation of assets regime and the community property regime), or modify (to a limited extent) the ordinary regime. Rules are very similar as regards registered partners, except that the default regime is the segregation of assets regime.37
In the event that the ordinary regime applies (which is the case for the vast majority of married couples in Switzerland), spouses remain to a very large extent free to deal with their assets as they wish.38 This being said, to avoid a situation where one spouse could deprive the other from his or her expectancies to half the net value of the assets acquired for consideration during the marriage, Swiss law contains protective provisions allowing – provided certain conditions are met – the taking into account of assets given away by a spouse without consideration in the calculation of the other spouse’s entitlements at the time the regime is liquidated.39 If the assets at that time are not sufficient to cover the spouse’s claim, it might even be possible in certain cases for the assigned spouse to claim assets from the person having received or benefited from the assets.40 According to a recent Supreme Court decision, this clawback mechanism may be applicable to trusts
33 Article 90(2) of SPILA.34 Article 91(1) of SPILA.35 Swiss law admits renvoi both in the form of remission and of transmission.36 Articles 181 and 196 et seq. of the SCC.37 Article 18 et seq. of the Federal Act on Registered Partnership.38 Article 201(1) of the SCC.39 Articles 208 and 214 of the SCC.40 Article 220 of the SCC.
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set up by one of the spouses, and may even entitle the other spouse to obtain a freezing of the trust assets.
In international situations, it should be noted that Swiss matrimonial law will apply to the patrimonial relationships between spouses and registered partners who are domiciled in Switzerland, unless they have chosen another applicable law (among their national laws) or are bound by a matrimonial contract.41
IV WEALTH STRUCTURING AND REGULATION
In Switzerland, one must always distinguish between domestic and international situations.In purely domestic planning, the use of vehicles is less common except for the
very wealthy and for foreign investments. For example, when investing in foreign real estate, local advice may guide the investor towards a company, trust or foundation.
For the many foreigners who hold assets in Swiss banks, it is common that they might select either a trust or foundation, perhaps associated with a company that holds the banking relationship. This is – by some margin – the most significant market segment for the private wealth management sector in Switzerland.
One of the key features of present day Switzerland is that, except for charitable structures, the trust or foundation that is used will not be Swiss. In this context, Switzerland has ratified and introduced the Hague Trusts Convention42 into law, thereby providing the basis for recognising trusts (as defined in the Convention) in Switzerland.
This has created a hospitable environment for trustees who wish to act as a trustee in or from Switzerland. Foreign foundations will be recognised and may be used but, as with companies, care must be taken to manage the potential tax consequences.
Both the private foundation or the trust will help the client administer his or her personal wealth and business assets efficiently and effectively during his or her lifetime and through to the next generations. In practice, the private foundation and the trust are not so different in their effects. They do, however, differ significantly in their structure and management. Unlike a trust, a foundation is an incorporated body that will come into existence upon the deposit or registration of its constitutional documents.
The key advantages of both vehicles are clear. A foundation is a vehicle created to exercise ownership and management rights. The appeal of the foundation is that, in the same way as a company, it possesses separate legal personality and operates like a company, but it does not have any shares. The foundation can also fulfil the same purposes as a trust with respect to asset protection and estate planning.
41 Articles 52 to 55 of SPILA. This results in a change of the law applicable to the patrimonial relationships at the time the spouses or registered partners move to Switzerland, and this with retroactive effect to the beginning of the marriage (Article 55(1) of SPILA). In the absence of an agreement to the contrary, this means that the ordinary regime applies to newly arrived married couples (and the segregation of assets regime to registered partners).
42 The Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition entered into force on 1 July 2007 in Switzerland: www.hcch.net/index_en.php?act=conventions.text&cid=59.
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A discretionary trust’s main features are its capacity to protect assets and its capacity to provide a flexible arrangement for the distribution of income and capital among a wide range of beneficiaries. The great merit of the discretionary trust is its flexibility and, therefore, capacity to adapt to changing family circumstances, taxes and regulation.
The most appropriate structure will be dictated by several factors including how comfortable the client feels with either one.
i Taxation
TrustsSwiss tax laws do not have specific rules regarding trusts, but the cantonal and federal tax authorities have issued administrative regulations regarding the taxation of trusts. Under these rules there is no taxation of a trust as such, or of the trustee in connection with the trust’s assets. Therefore, taxes, if any, are levied at the level of the settlor of a trust or at the level of the beneficiaries. For purposes of taxation, the authorities differentiate between revocable trusts, irrevocable discretionary trusts and irrevocable fixed interest trusts. Trusts may easily be considered revocable under the rules in place. Revocable trusts are disregarded for Swiss tax purposes. Irrevocable discretionary trusts are recognised unless they have been settled by a settlor who was a Swiss tax resident at the time of the establishment of the trust and they are hence often used as a component of pre-entry tax planning.
FoundationsAs foundations have legal personality, foundations are themselves subject to profit tax and capital tax to the extent they are resident in Switzerland for tax purposes. Although foundations may be subject to a separate regime of taxation, as a holding company or a mixed company if the conditions are fulfilled, tax rules applicable to foundations established in Switzerland are a clear obstacle to the use of Swiss foundations in an asset-structuring context. Foundations whose assets are applied for charitable purposes are exempt from taxes and are hence often used in Switzerland.
ii Applicable anti-money laundering regime
The Swiss Anti-Money Laundering Act (AMLA)43 applies to all financial intermediaries who, on a professional basis, accept assets belonging to third parties.
Trustees and directors of foundations or offshore companies who conduct their business in Switzerland, regardless of the law governing the trust or foundation or the location of the assets, are Swiss financial intermediaries and subject to the provisions of AMLA. Whether the protector of a trust falls within the definition of financial intermediary depends on his or her powers.
As mentioned earlier, Switzerland is a committed partner to the task of elaborating international standards. It was the co-chair of the working group tasked with the latest
43 Federal Act of 10 October 1997 on combating money laundering and terrorist financing in the financial sector.
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revision of the Financial Action Task Force (FATF)44 recommendations45 approved in 2012. Early in 2013, the government confirmed its intention to rapidly implement the revised guidelines into Swiss law. Accordingly, subject to completing the usual legislative process for introducing new laws, the AMLA will be amended and other consequential changes will be made to Swiss laws. The change that is attracting the most attention is the introduction of one or more tax offences that would also be punishable under the heading of money laundering and should give rise to a suspicious transaction report to the Swiss Money Laundering Reporting Office if suspected by a Swiss financial intermediary.
The Swiss Association of Trust Companies (SATC) was established in 2007. Its purpose is to engage in the development of trustee activities in Switzerland and to help ensure a high level of quality, integrity and adherence to professional and ethical standards in trust businesses in Switzerland. The SATC imposes certain requirements on its members.46 On 31 May 2012, the SATC issued a white paper in which it promotes the introduction of a system of compulsory licensing of trust companies. For the time being, however, trustees do not require a licence, although they must be registered and regulated with a self-regulatory organisation or the Swiss Financial Market Supervisory Authority (FINMA) under AMLA.
Historically, only banks, insurance companies, financial intermediaries active in the field of collective investment schemes (e.g., fund management companies), securities dealers and stock exchanges have been subject to a licensing obligation in Switzerland. Asset managers, except in limited cases when acting as the manager of a Swiss fund, were not required to be licensed unless the asset managers had custody of client assets. This is all set to change. In the fund sector, Swiss managers of non-Swiss funds are now subject to a licensing requirement. This legal reform is embodied in a revision of the Federal Act on collective investment schemes. The revision was driven by the EU’s Alternative Investment Fund Managers Directive and it entered into force on 1 March 2013. Further, Swiss and foreign asset managers of Swiss pension funds must be duly supervised.
In addition, on 27 June 2014, the Federal Council submitted the draft Federal Act on Financial Services as well as the draft Federal Act on Financial Institutions to a consultation process. The consultation process will end on 17 October 2014. The draft Federal Act on Financial Services embodies rules of conduct, which are largely inspired by EU standards, and in particular the Markets in Financial Instruments Directive. This draft also provides for a new registration requirement applicable to non-Swiss financial services providers who render services in Switzerland on a cross-border basis. Investment
44 The FATF is an inter-governmental body that sets standards, and develops and promotes policies to combat money laundering and terrorist financing.
45 ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – the FATF Recommendations’, www.fatf-gafi.org/recommendations.
46 Its members must have adequate professional indemnity coverage and minimum educational and professional experience thresholds for senior managers acting within Switzerland. A further requirement is that all members of the SATC have adopted adequate internal processes and controls, such as the four eyes principle, meaning that trustee decisions require the approval of at least two qualified trust officers.
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advisers may be subjected to a registration requirement. The draft Federal Act on Financial Institutions provides for the harmonisation of the licensing requirement of financial institutions. Under this draft, all Swiss asset managers will become regulated. Asset managers, who are currently managing the portfolios of investors deposited with custodian banks, will be supervised by FINMA or perhaps by another organisation, depending on the outcome of the legislative process. Both drafts are silent on the status of trustees. It is expected that both the draft Federal Act on Financial Services and the draft Federal Act on Financial Institutions will be subject to lengthy discussions during the consultation process, as well as during the enactment procedure before the two chambers of the Parliament.
V CONCLUSIONS AND OUTLOOK
As can be seen from the above, Switzerland is currently undergoing rapid and profound change.
In 2009, Switzerland adopted the OECD international standard for the exchange of information under tax treaties, a move heralded as the end of banking secrecy and tax avoidance for people holding undeclared funds in Swiss banks.
In late 2012, the government announced the details of its white money strategy and identified the areas of asset management, pension funds and capital markets as those with significant growth potential. To help in this regard, the government plans to base its financial market policy on strengthening competitiveness, combating abuses and improving the framework, with quality, stability and integrity as its key objectives.
In a report published on 29 November 2013, the Federal Council abandoned the proposal to make it obligatory to require a client to certify tax compliance. However, the adoption of the FATF 2012 revisions, and notably the extension of the due diligence obligations in the context of the risk-based approach, have led some banks to request declarations from account holders certifying the tax-compliant nature of the account-holding structure. Tax conformity and being in a position to provide satisfactory due diligence confirmations will no doubt be important factors when establishing a wealth management relationship in Switzerland.
In the short to medium term, the uncertainty that accompanies change and the complexity and cost that goes hand-in-hand with such profound changes is affecting the whole wealth-management industry. The government’s ambition to close Switzerland to undeclared funds and develop a strong financial services sector is clear.
At different times, the features that make Switzerland attractive have had varying importance. It should be clear to all concerned that Switzerland will be less secretive in the future. It is certainly not a tax-neutral jurisdiction, but there are still many reasons why it remains the home to individuals of significant wealth and a key player in the custody and management of private wealth. There is every reason for being confident that its management of the important changes now being considered worldwide will only serve to reinforce its attraction.
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ABOUT THE AUTHORS
MARK BARMESLenz & StaehelinMark Barmes leads the private client group of Lenz & Staehelin in Geneva. He advises individuals and trustees on all aspects of wealth planning in both international and domestic contexts. He particularly assists foreign private clients and trustees to establish themselves in Switzerland and to resolve disagreements. He is on the board of Swiss trustee companies and contributes actively in the field of wealth planning in Switzerland through membership and lecturing for the Society of Trust and Estate Practitioners and as a member of the Regulation and Compliance Technical Committee of the Swiss Association of Trust Companies.
JULIEN PERRINLenz & StaehelinJulien Perrin’s practice focuses on litigation and arbitration as well as on issues related to trusts and estate planning. He is the author of several publications regarding trusts, international private law, litigation and arbitration. Dr Perrin works as a senior associate in the Lausanne office.
FLORAN PONCELenz & StaehelinFloran Ponce is a senior associate and certified tax expert in the tax team of Lenz & Staehelin in Geneva. He practises Swiss and international taxation and advises both individuals and corporate entities.
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LENZ & STAEHELIN30 route de Chêne1211 Geneva 17SwitzerlandTel: +41 58 450 70 00Fax: +41 58 450 70 [email protected]
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