Switzerland Remains
13|2010Most Competitive Nation
The World Economic Forum (WEF) recently published its annual competitiveness survey and Switzerland was able to keep its place at the top, beating out Sweden and Singapore for the honors. The annual study focused on factors that positively and negatively influence the rankings, which meant that Switzerland benefited from having favorable macroeconomic policies, quality education and efficient public and private sector infrastructure. Among the negative factors helping Switzerland was the decline in competitiveness of the United States and the United Kingdom. The US, the survey’s top country in 2008, rests in fourth place and the UK, having fallen back in recent years to 12th place this year, continue to face unpleasant questions regarding tax uncertainty and market supervision from the survey’s participants.
The survey pointed out that Switzerland’s cantonal tax system permits transparent competition benefiting individuals and corporations, so that taxpayers can expect competitive tax rates and a commercial approach from their local tax authority. This advantage manifested itself in recent years with the arrival of substantial corporations and high net worth families in Switzerland from neighboring countries. Switzerland is a long-established player in the market for regional headquarters but is now seeing an influx of asset managers, mostly coming from jurisdictions that have seen a drop in their competitiveness, as measured by the WEF’s annual survey.
13th September 2010
12|2010Italy Removes Cyprus from Black List
Italian individuals or companies doing business in Eastern Europe and the CIS countries will be pleased to hear that Italy has removed Cyprus from its Black List of countries suspected of abetting tax avoidance and providing insufficient information exchange. The move comes as a result of Cyprus and Italy having ratified their 28 May, 2009, double taxation treaty, which includes exchange of information protocols. Italians investing in Eastern Europe will now be able to use Cypriot entities and take advantage of Cyprus’s excellent network of tax treaties with Eastern European states, not to mention Cyprus’s very competitive corporate taxation rates.
The most significant developments for Italian taxpayers are that they will no longer be assumed to hold controlled-foreign-companies when working through Cypriot subsidiaries and will no longer be assumed to be Italian companies for tax purposes. Italian authorities will also permit Cypriot companies to be used more effectively for portfolio income exemption purposes, as withholding tax rates will either be removed entirely or reduced to 12.5%. Finally, Cypriot companies are now exempt from the Italian reporting requirement that stipulates enhanced reporting of any import or export transactions in excess of EUR 50,000 with “blacklisted” countries.
23rd August 2010
Liechtenstein and Luxembourg’s
11|2010New Tax Treaty – Zero Withholding Tax
Liechtenstein and Luxembourg are in the process of ratifying a new Double Taxation Treaty (DTT) which will reduce the withholding tax on dividend payments to zero if certain conditions are met. The DTT also has a Tax Information Exchange clause that follows the OECD model treaty, illustrating Liechtenstein’s desire to operate transparently with its peers. Luxembourg has long been a leader in investment fund structures and international holding companies, a success that Liechtenstein is eager to emulate.
In order to qualify, entities in each respective country must hold direct participations of more than 10% of an entity in the country. The acquisition value of that participation must be at least EUR 1.2 million and must be held for a minimum of 12 months (for short-term holdings under 12 months, a 5% residual tax is assessed). For entities that do not qualify under these criteria, the withholding tax rises to 15%. The DTT also calls for zero withholding tax on interest or royalty payments.
4th August 2010
Europe – Progress on Cross-Border
10|2010Inheritance Issues?
The expansion and deepening of the European Union has made it easier for EU citizens to hold assets in and migrate to other member states without the threat of differences in inheritance taxes when compared with those paid by “locals”. The European Commission analyzed eight European Court of Justice Cases going back to 2003 and came to the conclusion that six of these eight cases were, in fact, discriminatory to the persons who migrated to another member country. As a result, the Commission is embarking on a public consultations process designed to harmonize cross-border inheritance taxes.
The consultations will focus on transferring the ownership of small businesses, property valuation rules, debt and liability deduction rules, tax allowance differentials, and issues such as Luxembourg’s freezing of non-resident heirs’ estates until guarantees can be established (Luxembourg nationals are exempt from this). In July, 2010, the Commission will provide additional figures describing the size of this problem and hold consultations with affected EU citizens, business groups and tax practitioners until 22 September, 2010.
29th June 2010
Switzerland – Significant Positive Changes
09|2010to Intra-Group Financing
Swiss-based corporations will have an additional reason to celebrate National Day on August 1st this year. The Federal Council has ratified significant changes to intra-group withholding- and stamp-tax relevant transactions: Loans between group companies are no longer considered to be bonds or money market instruments and thus no withholding tax and stamp tax consequences are incurred.
The government’s prime objective in promulgating these changes is to enhance Swiss internationally-active companies’ competitiveness as corporate financing and cash management centers. The elimination of the taxes provide clarity and lower financing costs to Swiss companies lending domestically and internationally. Companies will no longer have an incentive to incorporate non-Swiss financing subsidiaries.
24th June 2010
Changes to Swiss Lump Sum Taxation
08|2010on the Horizon?
Switzerland is attractive for wealthy individuals to become Swiss resident. Provided that these individuals are not employed in Switzerland, are not Swiss citizens and have not resided in Switzerland for the previous 10 years, significant tax advantages are available. Taxes for such individuals are not based on income and overall wealth (as is the case for “ordinary” residents) but on the individuals’ expected costs of living in Switzerland, represented by a lump sum tax. These individuals also have the opportunity to secure binding rulings from communal and cantonal tax authorities before arriving in Switzerland, minimizing the risk of any unpleasant taxation surprises.
Certain cantons and members of the federal government, however, are taking an increasingly dimmer view of such lump sum arrangements. Voters in the canton of for example Zurich, passed a referendum banning lump sum agreements altogether. Faced with a potential exodus of wealthy foreigners whose indirect taxes may be as important as their lump sum taxes as a revenue source for the cantons, supporters of lump sum taxation are discussing how to “be more fair” without alienating (literally) wealthy foreigners. The most common recommendations are the following:
Increasing the minimum cost-of-living benchmark to CHF 400,000 from the current 100,000 to 150,000, depending on the canton.
Increasing the minimum cost measurement benchmarks to seven times rental costs (from five times) or three times residential cum foodstuffs costs (from two times).
Introducing a lump sum wealth tax in each canton, which not all cantons currently have.
It is important for persons considering expatriating to Switzerland under a lump sum taxation agreement to keep abreast of these developments and to go through the scenarios that make the most sense for each individual.
10th June 2010
OECD and the Council of
07|2010Europe’s Tax Cooperation
In April, 2009, the OECD made a major breakthrough in its quest for increased tax cooperation amongst its members and “business” partners. The organization’s next objective is to deepen the international standard of tax information, using a treaty protocol developed in conjunction with the Council of Europe. The new standards may apply to non OECD or Council members and include the following changes.
Spontaneous (i.e. automatic) exchange of information, as opposed to information upon request.
Simultaneous tax audits between signatories to the protocol.
Tax audits abroad, whereby tax auditors from one signatory look at information in another signatory’s proper jurisdiction.
Assistance in the recovery of (direct and indirect) tax claims.
These steps are ambitious and will require detailed negotiations amongst member states and their satellites. For one, the question of providing automatic information exchange is contentious. Countries where residents’ private spheres are protected by legislation may have a difficult time agreeing to protocols that exchange information without criminal or civil acts having been confirmed by their domestic judiciary. The OECD and the Council’s “shopping list” of changes may prove to be difficult to implement on a less supranational level.
7th June 2010
New Licence Box Rule
06|2010of Canton of Nidwalden
Canton of Nidwalden recently changed the cantonal and communal tax law by introducing the “licence box rule” for corporations, to boost its attractiveness as competitive location for national as well as international licensing companies.
As per 1 January 2011, the net licensing income resulting from the right to use intellectual property rights (IP) will be taxed separately at 20% of the ordinary tax rate for cantonal and communal tax. As Nidwalden will introduce a flat rate income tax rate of 6%, qualifying licensing income will only be taxed at a flat rate of 1.2%.
The cantonal government will issue guidelines to define which type of intangible property shall benefit for the reduced tax rate.
7th June 2010
OECD Guidelines on
Treaty Benefits
05|2010for Collective Investment Vehicles
On 23 April, 2010, the OECD’s Committee on Fiscal Affairs published its latest guidelines on tax treaty benefits for international investors and institutions making use of Collective Investment Vehicles (CIVs). This is an important development because major CIV jurisdictions (Luxembourg, Ireland, the Cayman Islands, etc.) are all reviewing and amending their network of tax treaties and the OECD’s guidelines come at an opportune time. The guidelines also provide readers with a good summary of all major tax issues facing CIV jurisdictions, managers, and investors. The
OECD’s main goal in promulgating these guidelines is to ensure that smaller CIV investors are given the same tax treatment regarding their CIV investments as they would receive if they were to hold the CIV’s underlying positions directly. The guidelines try to help drafters of treaty protocols by suggesting texts (referencing provisions of standard OECD Conventions) that encourage tax neutrality for small and large investors, alike. To be sure, the guidelines also focus on anti-abuse language that are aimed at leveling the playing field amongst the place of investment, the CIV jurisdiction, and the investor’s tax domicile.
For more information, please visit this website.
04|2010Lump-sum taxation
The Swiss Upper House (the Staenderat) recently confirmed Swiss cantons’ freedom to enter into lump-sum taxation agreements with wealthy foreigner immigrants. The Swiss government estimates that, since 2008, 5,000 foreigners have entered Switzerland on lump-sum agreements, contributing around CHF 600 million to the Swiss economy. The Upper House debate also focused on the cantons which would suffer the most from the elimination of the lump-sum agreements.
The resulting vote in the St. Gallen-presented measure went 22 to 13, with the prolump- sum legislators carrying the day. The majority focused on the tax’s constitutional and free market principles. The Swiss Constitution calls for taxes to be “harmonized” at cantonal and communal levels, so a Swiss-wide ban on lump-sum agreements would have been difficult to support on constitutional grounds. The question of tax competition in the area of attracting highly mobile, wealthy talent to Switzerland was also used compellingly to defeat the elimination of the lump sum taxes.
Going forward, the Swiss National Assembly may debate the measure under somewhat different parameters in its Summer session. The deliberations will likely focus on the lump sum agreements’ qualifying and minimum criteria, not the elimination of the agreements.
03|2010World Forum for Tax Transparency
Baker & McKenzie, the global legal firm, recently commented on the announcement that a “World Forum for Tax Transparency” is being created. The Group will consist of 91 member countries taken from within and outside the OECD. The main objective is for the participants to examine how they apply the OECD’s information exchange standard. Participants will peer review each others’ legislative and regulatory regimes and then evaluate how the standard is being applied.
The first peer review group consists of Germany, Australia, Barbados, Bermuda, Botswana, Canada, Denmark, the Cayman Islands, India, Ireland, Jamaica, Jersey, Mauritius, Monaco, Panama, Qatar, and Trinidad & Tobago. The results of this peer review will be published and presented at the Group’s next meeting in Singapore (September, 2010) once they have been adopted by the Group. The entire Group process is expected to last three years.
02|2010Questions about banking secrecy
On 28 April, 2010, the Wall Street Journal reported that a combination of tax enforcement actions and fiscal amnesties is forcing Swiss banks to look at their options with regard to offshore clients. The stakes are enormous, as Switzerland is home to ca. USD 1.8 trillion and Swiss private banks control ca. USD 3.7 trillion. Banks are facing fundamental questions about banking secrecy and international taxation issues.
Reactions from the major players has been interesting to observe. UBS, for example, is forcing its bankers to demonstrate (in writing) that their clients are not using structures such as BVI companies to avoid taxes in their home countries. Furthermore, UBS’s bankers are no longer permitted to visit clients whom the bank suspects as not current on their tax bills. As is the case with other private banks, UBS clients are encouraged to take advantage of tax amnesties and other voluntary declataion programs in their home countries.
Another interesting development is the proactive provision of client tax statements to conform with their home jurisdictions’ reporting requirements. As the president of the Swiss Private Bankers Association points out, being assured of a clients full tax compliance is difficult. It is possible, however, to provide clients with tax statements or refuse to provide them with access to investments that do not comply with local registration requirements.
The head of Millenium Associates mentions that tax-compliant wealth management will replace banking secrecy and tax “neutrality” in Switzerland, and it is better for this transition to take place whilst Swiss banks still have the resources to make these changes happen successfully.
01|2010International Tax Transparency
Latest developments in the area of tax transparency and information exchange between the International Financial Centers (IFCs) and the supranational bodies (G20, OECD): The OECD (Organization for Economic Cooperation and Development) has decided that the best way to encourage IFCs to be transparent regarding tax evaders is to place them on “Grey Lists” or even “Black Lists” unless they adopt Double Taxation Agreements (DTAs), including OECD-approved information exchange clauses, with at least 12 other countries.
Switzerland has already concluded 12 such DTAs and has been removed from the OECD’s Grey List. The next step for Switzerland is the ratification of these DTAs, which is the responsibility of the Federal Councils. Given Switzerland’s direct democratic system, ratification may only take place if there are no referenda challenging the Councils’ ratification. Once the DTAs are ratified, they enter into force when each other treaty signatory has ratified the respective DTA.
Many OECD states view these DTAs as a transition to automatic information exchange, where the IFCs would be forced to exchange information as soon as local financial intermediaries have filed tax evasion-related reports to the local authorities. Countries such as Switzerland are trying to counter this trend by offering to collect compensatory taxes on behalf of the foreign tax authorities for clients who elect not to declare their assets.
Some OECD members have decided to take matters into their own hands. Italy, for example, launched a very successful tax amnesty and proved that amnesties can work in higher tax jurisdictions. The United States elected to force non-American financial institutions to disclose all financial information about their US clients or lose their (US) tax benefits. This represents an expansion of the Qualified Intermediary Agreement (QIA), which forced non-US banks to withhold dividend income at a higher rate for suspected US holders of US shares.
For Swiss banks, all these developments will force the banks to review the strategies for “offshore” funds. The banks will have to protect themselves from the risks associated with the new transparency initiatives. This means that they will have to look at their activities in advising “offshore” clients and how some of these advisory concepts could apply to the new “cross-border” banking models, country-specific or generally.