For the past nine months Swiss banking secrecy has been under enormous pressure from the United States, Germany, France and the UK. Some of these countries, indeed, are demanding an automatic information exchange. Others have demanded the abolition of the different treatment of tax evasion and tax fraud by Switzerland.
If Switzerland is not co-operative on this, the OECD will put the country on a black list of tax havens. This would have grave consequences for the Swiss banking industry and for the country’s economy as a whole. The Swiss government caved in to the pressure and decided to give up making a difference between tax evasion and tax fraud for foreigners after Singapore, Liechtenstein, Austria and Luxemburg had all announced that from now on, they would adhere to OECD standards.
Nothing has happened as yet. Switzerland has double taxation treaties with 70 countries under which the treatment of income, capital gains and inheritance tax is governed. South Africa is one of the member countries with a double taxation agreement in place. The treaties also describe the treatment of tax evasion and tax fraud.
In the future, Switzerland will co-operate in documented cases of tax evasion. If the above mentioned countries accept this new offer, it will be part of individual negotiations. Switzerland will probably demand that tax havens such as British Virgin Islands or Cayman be treated the same. Instead of offering automatic information exchange, Switzerland will likely offer an automatic but anonymous withholding tax on interest (and possibly dividends) to other countries such as the US, much like the EU withholding tax.
What does this mean for investors with assets in Switzerland?
For investors with declared assets nothing will change. Those with non-declared assets will be at a higher risk than in the past, no matter where the assets are placed. Income out of those assets will likely be levied with a non-refundable withholding tax of up to 35%. International money transfers will become very risky. Such transactions can easily be backtracked to the paying bank. Incoming money transfers from abroad will likely be tracked and the receiver checked for full tax compliance.
Investors with assets abroad should enter tax compliant solutions to avoid withholding taxes, to guard their privacy and to arrange their estate planning. One of SARS approved off-shore structures are off-shore private banking insurance wrappers. SARS has confirmed by means of an Advanced Tax Ruling that where the assets are within the structure, no income tax or capital gains tax will apply. When funds are withdrawn or the structure is abolished, CGT will apply on the net gain.
Current market conditions make such a structure certainly favourable, as many equity based portfolios carry an unrealised loss. In contrast to other (unapproved) life wrappers, it is possible to incorporate existing assets, such as shares, unit trusts, cash and bond investments. They do not have to be redeemed or switched into other investment vehicles, thereby incurring unnecessary costs. Further, the investor can retain his/her custodian bank and his/her investment advisor.
Estate planning is taken care of within the structure, by nominating beneficiaries. There is no need for a foreign will or an off-shore executor to distribute the assets, saving costs and time. Multiple owners and life assurers are also possible.
The structure is fully tax compliant and approved by SARS. After transfer of the assets into the structure, the investor no longer has taxable income or capital gains. This solution is not only ideal for South African investors, but can also be used by tax citizens of Germany, Spain, Italy, UK, Scandinavia and the US.
Tony Hug, BCom, CFP, IMM, CEA, is Director of Swiss Financial Consulting.