Swiss Federal Council submits new draft law
20|2011on the lump-sum tax regime
On September 16, 2010, we informed our readers that the Swiss Federal Council had invited interested parties to comment on the proposed changes to the lump-sum taxation regime on federal tax level. Under this regime, foreign individuals who are not engaged in gainful activities in Switzerland may apply for a simplified tax assessment procedure – which usually leads to a significant reduction of the tax base.
Now that the consultation period had expired, the Swiss Federal Council submitted a draft law on the new rules for the lump-sum taxation regime to the parliament. The following measures shall help to increase the acceptance of the debatable instrument:
The basis for the income tax shall equal the annual rental value of the house or apartment in which the foreigner lives multiplied by seven (currently: by five)
Anyhow, the minimum tax base for federal tax purposes shall be CHF 400’000 (currently: no minimum) and the cantons shall be obliged to introduce also a minimum amount.
Existing rulings shall be grandfathered for a period of five years.
Two weeks ago, the Conference of the Financial Directors of the Cantons issued statistical data about the people benefitting from the lump-sum taxation regime. According to this, 5’445 individuals were taxed under this regime as per the end of 2010 which reflects an increase of 8.8% since 2008. The overall tax revenue rose by 15.6% to CHF 668m resulting in an average tax burden of roughly CHF 123’000. For 2010, the lowest tax burden to be paid by an individual under the lump-sum taxation regime amounted to CHF 10’000, the highest to almost CHF 12m.
The cantons of Vaud, Valais, Ticino and Geneva count for almost three quarters (4’025) of these individuals. Notably, the average tax burden in the cantons of Geneva (CHF 226’000) and Vaud (CHF 164’000) are among the highest in Switzerland.
On cantonal tax level, the canton of Zurich abolished this regime as per 2010. Similar political initiatives are pending in several other cantons.
1st July 2011
New UK Immigration Visa Rules
19|2011for Entrepreneurs and Investors
The UK Immigration Minister, in an effort to alter perceptions that the UK is no longer friendly to business, announced new immigration visa rules that are geared towards encouraging job-creating entrepreneurs and investors to immigrate to the UK. The so-called Tier 1 Visa holders will be permitted to settle in the UK more quickly than the previous five-year minimum and are allowed to spend up to 180 days, rather than 90 days, outside of the UK and still qualify for settling in the UK. Tier 1 investors who are investing GBP 5 million will be permitted to settle in three years whilst those investing GBP 10 million will be permitted to settle in two years. Tier 1 entrepreneurs will be able to take advantage of accelerated settling in the UK if they create 10 jobs or turn over GBP 5 million in a three-year period.
In addition, the UK government lowered the investment threshold for “high-potential businesses” to GBP 50’000 (funding from a reputable organization) to qualify for a Tier 1 visa while the standard investment for an entrepreneur remains at GBP 200’000. The Minister also created a new category of visitor visa for prospective entrepreneurs, who will be fast-tracked to Tier 1 Entrepreneur status once they receive funding whilst residing in the UK. Exceptional talents in the fields of science, arts and humanities may benefit from a pool of 1,000 Tier 1 visas per year.
While these are good news, investors and entrepreneurs should still remain aware that the new immigration rules do not impact the UK tax code and are advised to structure their affairs to accommodate UK taxation before they immigrate. Planning opportunities exist and should go hand-in-hand with the new immigration initiatives.
25th March 2011
OECD Committee on Fiscal Affairs Issues
18|2011Report on Aggressive Tax Planning
The OECD’s Committee on Fiscal Affairs (CFA) recently released a report on how the CFA believes aggressive tax planning can be identified and combated by member nations.
The OECD firmly believes that encouraging transparency via the use of techniques such as mandatory early disclosure, additional reporting, questionnaires, cooperative compliance, rulings and penalty-linked disclosure will encourage transnational business participants to stay away from aggressive tax planning schemes.
Keeping with the theme that transparency encourages both optimal tax revenues for governments and greater tax certainty for taxpayers, the OECD also lists two recommendations regarding aggressive tax planning for member states:
The first is that each country should utilize the technique that is best suited to each particular country’s needs and circumstances
The second is that member countries should continue to share information regarding the design and implementation of disclosure initiatives to introduce common best practices amongst OECD members
Once again, the overriding theme is that these recommendations should buttress governments’ tax take whilst increasing certainty amongst taxpayers. In our view, this report is a continuation of ongoing efforts of particular high-tax jurisdictions to challenge international structures that have been established on paper but are not “lived”. In other words, entrepreneurs may reconsider the group structure, if companies have been established that generate a significant part of the group’s profit but lack substance in the form of personnel on the ground performing real business activities.
Switzerland has responded to these OECD efforts by renegotiating various double tax treaties with important business partners in particular with a view to article 26 of the OECD model treaty about the exchange of information. Generally, the Swiss authorities agree to provide information also in cases of alleged tax evasion – not only in cases of alleged tax fraud – provided certain criteria are met.
10th February 2011
Switzerland Comes Out Against
17|2011Automatic Information Exchange
The Swiss Federal Department of Finance, in a clearly-worded announcement that has been a long time coming, stated that it rejects pressure from European nations to participate in a system of universal automatic information exchange regarding private individuals’ tax information. Europe has been pushing Switzerland to follow certain international financial centers and European Union member states to exchange tax information automatically. Switzerland maintains that a combination of withholding taxes on investment income and voluntary disclosures are the best way to balance the need for tax revenues and client privacy and pointed out that bilateral agreements are all in place to ensure that this is done efficiently.
The next challenge for Switzerland in its deliberations with the European Union has to do with attempting to define tax offenses as money laundering. Switzerland, along with countries such as Luxembourg and Singapore, tends to define serious tax crimes as narrowly as possible. The Financial Action Task Force (FATF) plans to make tax offenses a “predicate offense” for money laundering by 2013, to which the Swiss Federal Department of Finance states that, “The main objective from the Swiss perspective is not the criminalization of as many tax transgressors as possible, but the efficient combating of money laundering.
9th February 2011
New Protocol to Double Tax Treaty
16|2010between Russia and Cyprus
On 7 October, 2010, Russia and Cyprus signed a new protocol to their 1998 Double Tax Treaty that represents a major step in the commercial relationship between the two countries. As a result of the new protocol, Cyprus is removed from Russia’s “Black List of Offshore Jurisdictions” and retains all of the advantageous cross-border withholding tax rates with Russia. To ensure Russia’s acceptance of the protocol, Cyprus agreed to tax information exchange with Russia based on the OECD model. Since 1991, approximately USD 52.6 billion has been invested in Russia via Cyprus and the tax regime between the two countries served as a major catalyst.
The protocol also spells out what investors using Cyprus as a base from which to invest in Russia should watch out for. On the topic of Cyprus companies investing in Russia, the two countries agreed that the company’s effective management and control must be maintained in Cyprus at all times in order to benefit from the tax treaty. This means that the Cyprus companies must have enough substance in Cyprus and should avoid giving any power of attorney to Russian residents.
The most important aspect of the amended treaty has to do with Cyprus companies investing predominantly in Russian real estate. These rules will come into force in January, 2015, allowing for a transition period so that affected investors have the time to arrange their affairs accordingly. If the shares of a Cyprus (or Russian) Company derive their value from more than 50% immovable property, any gains from the sale of these shares will be taxed in the country where the property is located (the assumption being that most of the property will be located in Russia). It is important to note that this article does not apply to gains resulting from corporate reorganizations or if the shares are listed on a recognized stock exchange.
Given the important commercial relationship between Russia and Cyprus, this protocol gives both countries an opportunity to deepen their relationship whilst putting in place a double tax treaty regime that is both efficient and committed to ensuring tax certainty for investors.
Please contact us if you wish to obtain more information about the new protocol.
12th October 2010
Switzerland and Singapore Agree on Wording
15|2010of Revised Double Taxation Agreement
On September 23rd, Switzerland and Singapore successfully concluded their deliberations on a revised Double Taxation Treaty (DTA) between the two countries. Although the DTA’s contents remain confidential until Switzerland’s cantons have had the opportunity to review the document, the Swiss Confederation has indicated that the DTA will follow the OECD model. This means that administrative assistance regarding tax matters between the two countries will become broader and that financial flows between the two countries may be subject to reduced and clearer taxation. The most pressing tax clarifications within the DTA framework tend to fall into the categories of withholding tax on dividends, interest and royalties whilst arbitration rules are also covered.
The DTA between Switzerland and Singapore will now pass through the consent process in both countries, upon which ratification is expected by the respective governmental organs. The Swiss Confederation has already ratified ten similar DTAs, all including the broadened administrative assistance clauses, so an efficient ratification process may be expected from both sides.
27th September 2010
Swiss Federal Council Proposes Changes
14|2010to Lump-Sum Taxation
On 8 September, the seven-member Swiss Federal Council announced that it was proposing changes to the Swiss lump-sum taxation regime that may result in marginally higher taxes for persons living in Switzerland under this regime. The Council’s proposal, which will be subject to a consultation period ending on 17 December, 2010, aims to increase the cost basis for federal and cantonal taxation and to introduce a federal minimum taxable income basis of CHF 400,000. Cantons will also be required to implement a minimum taxable income basis and include a person’s wealth tax in the cost basis calculation.
The Federal Council hopes to generate CHF 255 million per year with these changes, up from CHF 131 million in 2007. The Council assumes that some of the ca. 4,500 lump-sum taxpayers may choose to depart Switzerland as a result of these changes but that the higher tax revenues will compensate for this shift. It is also important to note that, by proposing to amend the lump-sum taxation system, the Federal Council hopes to show that the elimination of the lump-sum taxation regime is not up for consideration, as the politico-economic implications of such a step would be disastrous for Switzerland.
16th September 2010