Reform of the Swiss Federal Withholding Tax System on Interest

Reform of the Swiss Federal Withholding Tax System on Interest

For a number of years, endeavors to reform the Swiss federal withholding tax system with regard to the taxation of interest from collective debt instruments have been going on. The reform is generally aimed at strengthening the Swiss debt capital market. The latest proposals would completely do away with federal withholding tax on bond interest.

Background to the reform – the current withholding tax system

Under the current rules, interest paid or accrued on collective debt instruments – so called “bonds” and “debentures” – issued by Swiss resident issuers, as well as interest arising on deposits with Swiss banks is subject to federal withholding tax at the statutory tax rate of 35%. In contrast, interest paid on private and commercial loans, as well as interest paid on collective debt instruments issued by non-Swiss issuers is generally not subject to Swiss federal withholding tax.

Taxable bond and debenture defined

The notions of “bond and “debenture” for federal withholding tax purposes are quite broad. Generally, taxable “collective debt” instruments are defined as written debt acknowledgments for fixed amounts which are issued in multiple tranches at comparable conditions for the purpose of collective financing, and which allow the investor to evidence, reclaim or transfer its receivable claim.

A debt instrument is qualified as a taxable “bond” if it meets all of the following criteria:

  • The borrower issues written debt acknowledgments over fixed amounts;
  • the debt acknowledgments are based on a single credit arrangement and have identical conditions;
  • the lenders include more than ten non-banks (including certain types of sub-participants), i.e. not including Swiss or foreign banks as defined by the Swiss Federal Banking Act or comparable foreign banking legislation at the place of establishment of the lender; and
  • the aggregate amount borrowed under the arrangement amounts to at least CHF 500’000.

A loan or similar debt instrument is qualified as a taxable “debenture” for federal withholding tax purposes where the following conditions are all met:

  • The borrower issues written debt acknowledgments over fixed amounts;
  • the debt acknowledgments may have variable conditions;
  • the lenders include more than 20 non-banks (as described above); and
  • the total borrowed amount corresponds to at least CHF 500,000.

Taxable Swiss bank deposit defined

Interest paid by Swiss banks as well as Swiss branches of foreign banks acting under a banking license on “customer deposits” is likewise subject to federal withholding tax at the statutory rate of 35%. A taxable “customer deposit” includes debt funds raised by any Swiss resident entity that publicly solicits interest-bearing deposits, or continuously accepts interest-bearing deposits from more than 100 depositors – other than Swiss or foreign banks as defined by the applicable banking legislation – whereby the aggregate amount of the “deposits” amounts to at least CHF 5,000,000.

The federal withholding tax rules exclude Swiss and foreign banks (as described above), as well as any corporate entities under the control or covered by accounting consolidation of the Swiss resident borrower as potentially “harmful” lenders or “depositors that may trigger an interest withholding tax liability for the debt arrangement.

The rather complex definitions of the notions of “bond” and “bank customer deposit” under current withholding tax regulations make it necessary to include fairly restrictive language in syndicated bank loan facilities for Swiss resident borrowers with regard to transfers of any loan portions to “non-bank” investors, to prevent the Swiss borrower from becoming liable for the deduction and payment of interest withholding taxes whenever any of the “non-bank lender” thresholds are exceeded.

Swiss versus non-Swiss issuers/borrowers

Collective debt instruments such as “bonds” or “debentures” as well as “customer deposits” (taking the above-mentioned “non-bank rules” into account) result in a federal interest withholding tax liability where the issuer or borrower is a Swiss resident person or entity. Under certain circumstances, debt formally issued abroad, through a non-Swiss issuer may be deemed to be issued by or on behalf a Swiss resident borrower, and thereby trigger federal interest withholding tax liability. Such will be the case under the following, cumulative conditions:

  • The (actual or deemed, see above) bond/debenture is guaranteed by a direct or indirect Swiss parent company of the foreign issuer (down-stream guarantee);
  • the proceeds from the issuance of the bond/debenture are directly or indirectly on-lent to one or more Swiss affiliates of the foreign issuer; and
  • such on-lending to Swiss affiliates exceeds the sum of (i) the combined accounting equity of all non-Swiss subsidiaries directly or indirectly controlled by the Swiss parent company, plus (ii) the aggregate amount of loans granted by the Swiss parent and its Swiss subsidiaries to its non-Swiss affiliates.

The “debtor system”

Swiss federal withholding tax on dividends and certain types of interest is based on the so-called “debtor system”: The law technically defines the debtor of the taxable payment as the person liable to tax. In particular, where a debt instrument qualifies as a taxable “bond” or “debenture”, the Swiss resident borrower or issuer owes the 35% withholding tax to the Federal Government, irrespective of the nature or fiscal residence of the investor and beneficiary of the interest payment.

At the same time, the Withholding Tax Act requires the debtor to shift the economic burden of the withholding tax to the investor, i.e. the beneficiary of the taxable interest payment. Thus, the debtor is legally required to deduct the applicable withholding tax from the taxable gross payment, and to submit such tax to the Federal Tax Administration. Any private arrangements designed to circumvent the debtor’s duty to impose the withholding tax burden upon the income beneficiary are declared null and void by the Withholding Tax Act.

Functions of the federal withholding tax

The function of the federal withholding depends crucially on whether the investor into a taxable equity or debt instrument is a Swiss or foreign resident for tax purposes:

  • For Swiss resident investors / income beneficiaries, the federal withholding tax essentially fulfills the function of a mere ”safeguarding” tax, designed to ensure full compliance with the investor’s income tax and net worth tax obligations. Swiss resident individuals and corporate entities beneficiaries may fully reclaim the withholding tax, if they duly report the income in their tax return, or in their accounts used for tax purposes (as applicable) and meet some further conditions, such as beneficial ownership of the income and absence of any tax avoidance. Failure to “spontaneously” declare (or report) the income principally leads to a forfeiture of any withholding tax refund claims.
  • For foreign resident investors, the federal withholding tax has a strictly fiscal purpose: Federal withholding tax is principally meant to constitute a final tax burden, with no possibility for a subsequent refund or initial relief at source. Partial or (in some cases) full relief of the federal withholding tax may exclusively be obtained on the basis of international double taxation or similar treaties between Switzerland and the investor’s country of tax residence, to the extent that such treaties limit the authority of Switzerland as a source country to impose withholding taxes.

The 35% federal withholding tax on interest hits all Swiss and foreign resident investors into “collective” debt instruments, including certain types of syndicated loans and revolving debt facilities where the “non-bank rules” are not complied with. This has rendered the issuance of such debt by or through Swiss resident issuers somewhat unattractive, given that the Swiss debtor has to initially deduct the full tax from the taxable interest payment under all circumstances regardless of the nature and tax residence of the investors, without any possibility for a relief at source.

Foreign resident investors need to rely on a double tax treaty to obtain any subsequent refund of the withholding tax from the Federal Tax Administration. In the light of these disadvantages, Swiss based groups tend to carry out their collective debt financing activities outside of Switzerland.

Features of the proposed reform

The proposed partial reform of the Federal Withholding Tax Act with regard to interest withholding tax is aimed at mitigating some of the above-described issues. On 3 April 2020, the Swiss Federal Council published a first reform draft with an explanatory report for public comments. The key element of the draft bill was a removal of the “debtor system” (as far as withholding tax on bond interest is concerned) in favor of a “paying agent” system.

Under the paying agent system, (Swiss) debtors of collective debt financing instruments would make their interest payments gross, without deduction of any withholding tax. The paying agent (usually a bank in Switzerland) would then have to draw a distinction between different categories of investors/interest beneficiaries:

  • Payments/credits of interest to Swiss resident individuals would be charged with a 35% backup withholding tax, which the paying agent would deduct and submit to the Federal Tax Administration.
  • Payments/credits to any other types of investors, including Swiss corporate investors and any foreign resident investors would be exempt from the backup withholding tax.
  • The backup withholding tax liability would be extended to interest payments on collective debt instruments (bonds etc.) issued by non-Swiss issuers, where the interest beneficiary is a Swiss resident individual. Furthermore, the backup withholding tax on interest would be extended to any indirect investments in taxable bond instruments made by Swiss resident individuals (typically via investment funds).

Further elements of the draft reform bill inter alia included:

  • The backup withholding obligation of Swiss paying agents would also be applicable to interest components in structured financial products;
  • A statutory regulation of federal withholding tax on compensation and “replication” payments for taxable dividends and interest (so-called “manufactured” payments) would be introduced (at present, such manufactured payments are only covered by administrative regulations, which in the author’s opinion are lacking statutory basis). Swiss paying agents’ obligation to apply 35% backup withholding tax to compensation payments for Swiss dividends embedded in the return of derivative financial instruments and structured products, as well as in the context of securities lending and repo arrangements would not only apply to payments made to Swiss resident individuals, but rather to dividend compensations made to all types of Swiss and foreign resident beneficiaries;
  • In order to determine the interest components embedded in the returns of Swiss and foreign collective investment schemes (funds), additional detailed reporting requirements would be introduced so as to enable the Swiss paying agent to calculate and deduct proper backup withholding tax in respect of such fund units owned by Swiss resident individuals. As regards foreign investment fund products, a catch-all provision would be introduced to capture the entire return (including underlying Swiss and foreign source dividends and interest, as well as capital gains) as a basis for the backup withholding obligation, unless the foreign fund provides proper reporting to the Swiss paying agent with a breakdown of underlying taxable interest and exempt dividends and gains, respectively;
  • Finally, the draft bill provided for an exemption of the trading Swiss bonds from the federal securities transfer stamp duty, which under current law is levied from “Swiss securities dealers” at a tax rate of (up to) 0.15% of the consideration paid for trades in the secondary market.

Results of the consultation process and latest developments of the proposed reform

The public consultation process has shown that, while most commentators have welcomed the general improvements achieved by the proposed change to a paying agent system in conjunction with the limitation of the exposure to (backup) withholding taxes on interest to Swiss resident individuals.

Especially the banking and investment fund industries have warned against the increased complexities arising from the extension of the backup withholding obligations to non-Swiss debt instruments, and in particular from the extension of such obligations to indirect investments in such (Swiss and foreign) debt instruments.

Considering the overall results of the consultation process, the Swiss Federal Council announced on 11 September 2020 that it would principally go ahead with the withholding tax reform; however, the initially envisaged system of backup withholding on interest arising on Swiss and foreign collective debt instruments (bonds etc.) via paying agents in Switzerland will be dropped in favor of a full exemption of all interest payments arising on Swiss and foreign issued collective debt instruments to any type of investors.

Only interest paid to Swiss resident individuals on Swiss bank deposits would remain subject to federal withholding tax according to the latest announcement by the Federal Council.

The dispatch to the Federal Parliament with the government’s final reform proposal is expected to be issued in the course of the second quarter of 2021. It is expected that the final legislative proposal will still include the abolition of the securities transfer stamp duties on Swiss bonds and similar instruments. To what extent other elements of the initial reform proposal (such as the statutory regulation of the withholding tax treatment of dividend compensations and the like) will be addressed by the final legislative proposal remains to be seen. https://www.reinarz-taxlegal.com

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Peter Reinarz

Peter Reinarz

Reinarz
Beware Tax pitfalls when moving from one country to another

Beware Tax pitfalls when moving from one country to another

Be sure to beware tax pitfalls when moving residence

Swiss Courts ruled that a US citizen living in the UK could not get Swiss dividend tax back. With a judgment rendered on 27 November 2020 (case no. 2C_835/2017), the Swiss Federal Supreme Court (“FSC”) confirmed a decision by the Federal Administrative Court (“FAC”) of 24 August 2017 (decision no. A-1462/2016) concerning a an individual tax residence matter that arose in the context of certain dividend withholding tax (WHT) refund requests, which had been raised by the appellant (Mr. A, a US citizen) pursuant to the USA-Switzerland income tax treaty of 1996 (the “US Treaty”) with regards to Swiss dividends he had derived in the calendar years 2008-2010.

Both Swiss court instances confirmed the decision of the Federal Tax Administration (FTA) to reject the refund request and to claw back a WHT refund that it had already granted to Mr. A on a summary basis, as they concluded in fact that Mr. A failed to meet the tax residence criteria as defined under art. 4 (1)(a) of the US Treaty. The FTA had at some point suggested that Mr. A. should rather seek a partial WHT refund pursuant to the double taxation treaty between Switzerland and the UK (the “UK Treaty”).

However, Mr. A maintained that he held a “resident non-domiciled” tax status in the UK, which would effectively preclude him from benefits under the UK Treaty, as he did not remit the dividends in question to the UK and consequently did not owe any UK taxes thereon.

Facts of the Case

During the relevant periods Mr. A apparently lived in the UK, where he was treated as a UK “resident bot not domiciled” taxpayer. Mr. A held shares in several Swiss companies, from which he received substantial dividends, namely an aggregate amount of CHF 22.75 million in 2008 and 2009 and an amount of CHF 5,872,459 in 2010, all amounts before deduction of 35% WHT. Mr. A filed partial WHT refund requests with the FTA by using the Forms 82I, which is foreseen for Swiss WHT reclaims made by individuals pursuant to art. 10 of the US Treaty.

The reclaimed amounts corresponded to 20% of the gross dividends received. The FTA first satisfied the WHT reclaims for 2008 and 2009 for an aggregate amount of CHF 4.55 million on a summary basis, even though it had already noted that Mr. A had indicated a residential address in the UK. After receipt of Mr. A’s WHT refund request for 2010, the FTA explored further and suggested that Mr. A make a reclaim under the UK Treaty instead.

Upon Mr. A’s explanation that he could not utilize the UK treaty as he was taxed in the UK merely on a remittance basis, and after Mr. A had filed for a further partial WHT refund for the year 2012, this time indicating a residential address in the USA, the FTA finally rejected the open WHT requests and ordered Mr. A to return the already received WHT refund of CHF 4.55 million with 5% interest per annum. The FTA had concluded that Mr. A did not qualify as a US tax resident in the meaning of art. 4 (1) (a) US Treaty.

Under said provision, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, nationality, [….] is considered a resident of that State. However, the second sentence of subparagraph (a) provides for a special rule pertaining to non-Swiss resident US citizens and non-US national green card holders in the United States: Such persons are considered resident in the United States only “… if such person has a substantial presence, permanent home or habitual abode in the United States”.

Mr. A. had maintained that he had at least a permanent home available to him in the United States, if not also a substantial presence, facts which the FTA had denied, however.

Relevant considerations of the FAC

The key considerations of the FAC focused on whether Mr. A – as a US citizen not resident in Switzerland – met any of the three criteria mentioned in the second sentence of subparagraph a of art 4 (1) US Treaty: having either (i) a substantial presence, (ii) a permanent home, or (iii) habitual abode in the United States. The FAC considered that the notion “substantial presence” derived from US law and referred to the Technical Explanation of the US Treaty by the US Treasury Department and § 7701(b)(3) of the U.S. Internal Revenue Code.

On the other hand, the notions of permanent home and habitual abode are not used by US domestic law; hence in the FAC’s opinion, they should be construed in an autonomous manner. Those two notions re-appear in the tie breaker provision of art. 4 (3) (a) and (c) US Treaty, which is modeled along the OECD Model Tax Treaty.

Remarkably, the FAC considered that the second sentence of art. 4 (1) (a) US Treaty means in fact that a US citizen or green card holder (thereby automatically a US resident for US income tax purposes) who is not also a Swiss tax resident must prove particular ties to the United States in order to qualify as a US resident for purposes of the US Treaty.

The FAC went even as far as questioning whether the criteria of substantial presence, permanent home or habitual abode are really to be construed as strictly alternative criteria, as the literal wording of the provision (expressed by the word “or”) would suggest.

The FAC considered that in light of the tie breaker rule of art. 4 (3) US Treaty that uses similar criteria as well, it is important to stress that art. 4 (1) (a), 2nd sentence in any case requires a strong personal nexus with the United States of such category of US taxpayers in order to qualify as US resident under the US Treaty.

The FAC in that sense rejected a merely literal interpretation of that treaty provision solely based on the word “or”. In the FAC’s opinion, such a literal interpretation would deprive the criterion of “substantial presence” of any meaning; the FAC feels that it was not the intention of the Contracting States to grant access to the tax treaty benefits just to any persons with only minimal ties to a Contracting State.

It appears that the FAC gives the notion of permanent home in art. 4 (1) (a), 2nd sentence the meaning of a mere tie-breaker, which becomes relevant only where the taxpayer is treated as a resident under the domestic laws of two states, namely the United States and a third country (in the case at hand, the UK).

In the case at hand, as Mr. A did not meet the substantial presence test of US income tax law, nor did he have habitual abode in the United States, the FAC concluded in fact that Mr. A. had stronger ties to the UK than to the United States and discarded Mr. A’s argument that he had a permanent home in the United States available to him.

The fact that Mr. A had indicated his UK address on two of his WHT reclaim forms seems to have played a certain role. Furthermore. Mr. A also had a permanent home in the UK where he was active as a trader. Even though Mr. A. had insisted that he also possessed one or more homes in the United States available for his private use, the FAC expressed doubts as to whether Mr. A. used those home permanently. On those grounds the FAC refused to acknowledge that Mr. A met the US residency criteria of the US Treaty.

Moreover, the FAC pointed to a letter by Mr. A’s counsel to the FTA, in which such counsel had indicated that art. 27 (1) of the UK Treaty was applicable to his client. Under that rule, a UK resident who would principally be entitled to a (partial) relief from Swiss WHT pursuant the provisions of the UK-Switzerland treaty. And who is not taxed in the UK, under UK domestic rules, on the full amount of such Swiss revenues, but only on such portion thereof that is received in, or remitted to the UK shall only be entitled to the Swiss tax relief for the fraction received in, or remitted to, the UK.

The FAC stressed that reference to that provision of the UK Treaty implied that Mr. A was in fact a UK tax resident in the meaning of art. 1 and art. 4 of the UK Treaty. The FAC referred to the FSC decision 2C_436/2011 of 13 December 2011, according to which a UK resident taxpayer who is merely taxed on a remittance basis in the UK is principally considered as a UK tax resident under art.1 and art. 4 of the UK Treaty.

The FAC considered that Mr. A. would likely have been able to obtain a partial Swiss WHT refund pursuant to the UK Treaty, had he chosen to remit the relevant dividends to the UK; he should not be allowed to effectively circumvent that remittance requirement for benefits under the UK Treaty by invoking the US Treaty instead. https://www.reinarz-taxlegal.com/

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Peter Reinarz

Peter Reinarz

Reinarz
Covid-19 crisis – Succession planning and planning for incapacity

Covid-19 crisis – Succession planning and planning for incapacity

Covid-19 crisis – Succession planning and planning for incapacity

The second wave of Covid-19 in this fall 2020 has shown that the virus is not yet under control and that it may still take us a long time to go back to a new normality.

The pandemic has given us time to reflect, prioritize and take up projects that were on stand-by because of our busy lives. Many clients have had time to dedicate to solving family matters and have approached us to set up or review their estate planning and to establish mechanisms to protect them and their families in case of incapacity.

Broadly speaking, this includes last wills, durable powers of attorney, patient decrees or living wills and any practical or legal measures which can be set up to organise one’s affairs in the event of death or durable incapacity. Different legal tools can be used to plan and to reduce the number of difficult decisions a family has to take when facing a dramatic, unexpected event, such as the death or the sudden accident of one of its beloved ones.

I. Is your last will up-to-date?

A last will is a living document. As your life and business situation changes, your estate, assets, family relations etc. also change, and your last wishes may need to reflect these changes. You should therefore regularly review your last will to ensure that it corresponds to your wishes and your particular situation. Especially, you should make sure that it is adapted to any new circumstances and to the applicable legal provisions, both from a civil and a tax point of view.

In Switzerland, a testator may write a last will by hand (holographic form) or make it before a notary public (public deed form). In case of imminent risk of death, it is also possible to make an oral will by declaring the wishes in front of two witnesses and instructing them to draw up a testament in the form of a public will. This document is, however, limited in time and if the testator survives, it loses effect.

Pursuant to Swiss International Private Law, Swiss law will apply to the estate if the deceased’s last domicile was in Switzerland. That being said, any foreigner living in our jurisdiction may choose the application of the law of his/her nationality by making a professio juris (choice of law). Swiss nationals living abroad may equally chose the application of the law of their last domicile.

It should be noted that Swiss law knows forced heirship rules that e.g. protect the surviving spouse and the descendants, or the parents in the absence of spouse and descendants.

Also, in case you are married, attention must be paid to the applicable matrimonial regime as it has consequences on any succession. Upon the death of one spouse, the matrimonial regime is first dissolved to establish whether matrimonial assets fall into the estate of the deceased spouse. Then, the estate of the deceased is established and liquidated. Consequently, the amount entering into the estate will depend on the matrimonial regime dissolution.

In your estate planning, the choice of the matrimonial regime can have a substantial impact on the assets left to the surviving spouse. In Switzerland, pre-nuptial agreements are common to govern this aspect. Post-nuptial agreements are also possible with retroactive effect under certain conditions.

II. Is a durable power of attorney for the case of your incapacity in place?

In case you have a temporary or durable incapacity, a person or an authority will have to intervene to conduct your business and decide on your personal matters, as you will not be able to do it.

Swiss law provides that the spouse or the registered partner has to protect the interests and assist the other spouse/partner. The first can hence settle the incapacitated person’s day-to-day affairs but cannot make any key decisions. For instance, to buy or sell real estate for the incapable, an application to the Child and Adult Protection Authority is necessary.

Single persons or those without close relatives nearby capable of taking care of their affairs will have a curator appointed by the Child and Adult Protection Authority.

In order to control who should take care of your matters in case of incapacity, you have the possibility to appoint a private representative in a durable power of attorney. You will so be able to avoid the intrusion of the state, an unknown third party, or an unwanted person. This solution also prevents the nomination of an official curator who does not know you, your family, the peculiarities of your situation, and your wishes.

A representative nominated by you and of your trust will receive clear indications on how to manage your assets and personal matters and act in your best interests. Such a solution is all the more recommended in complicated family matters or for persons without close relatives.

As regards to the form, according to Swiss law, advance care directives must be made in the same form as a last will (either holographic or before a notary public).

III. Is your patient decree or living will available?

Most of us are afraid of losing our reasoning powers or of being unable to communicate our wishes relating to care and medical treatments but often we avoid finding a solution in advance, as the matter is not easy to address. However, family members who are confronted with a relative who is no longer able to decide on these matters are subject to enormous pressure and stress because they wish to make the right decisions, and this may be difficult or subject to different opinions.

The decision may include deciding on whether life sustaining measures should be continued. These questions are not often discussed among family members, as they relate to difficult and intimate topics. However, it is recommended and necessary to do it in order to take away this burden from family members.

In Switzerland, you can decide in advance which care and therapeutic measures you wish to receive if you are not able to make decisions by yourself. These so-called “patient decrees” can be more or less detailed and can form part of a durable power of attorney or be made separately.

You should provide your patient decree to your family doctor or to some family members to make sure they are informed. Equally, you can download it on an online platform or add a special note regarding the decree on your Swiss insurance card. In any case, several of your trustworthy relatives should know where the document can be found.

Drafting a patient decree will save your family and/or relatives from having to make painful decisions. It will also avoid having your relatives fighting over what they believe would be your true medical instructions and wishes.

IV. Can somebody of your trust access your bank account to ensure liquidity?

In case of an unexpected illness, sudden incapacity and/or accident, it is important that someone of your trust is able to access your accounts to ensure not only your day-to-day payments but also the settlement of extraordinary bills that may be related to the situation.

A banking power of attorney appointing a trusted person (the proxy) to act on your behalf and in your best interests should hence be signed. In order to reduce chances of abuses, you can appoint two persons with joint signatory powers.

This solutions is easy to put in place as the powers granted to the proxy can be cancelled at any time by sending a written order to the bank, provided however that you are mentally capable.

V. Your digital estate: is the information about your accounts/digital assets/codes etc. save and accessible?

Nowadays, most of us use Facebook, Instagram, tweeter, LinkedIn. At the same time, we do not realise the digital print we leave on the internet. We may also have cryptocurrency accounts that are only accessible with a code.

As we usually do not share our passwords/codes and we are advised not to write them down, turning off our social media accounts or accessing our cryptocurrency accounts can create a problem after one’s death.

You shall hence keep an overview of your online activities and delete any unused user accounts. At the same time, you should to make a list of all your online accounts, including their passwords and keep them in a safe place; and do not forget to inform a trustworthy person or your executor of the location of this list.

Equally, you could draw up this information in a side letter attached to your last will and indicate what you wish to be done by your heirs in this context.

Finally, automatic online payments and transfers should be listed in order to be promptly cancelled.

VI. Have you established an inventory of your assets?

Tax returns often serve the purpose of establishing an inventory of the deceased’s assets. However, in this document, for couples married under the ordinary regime, no distinction is made between personal and acquired properties. And this differentiation is of outmost importance as it can impact in a significant way the size of the estate.

This is why spouses, before or during marriage, often make private inventories of their assets, indicating which is acquired property and which individual, either in the form of a private agreement or before a notary public.

In the event of one of the spouses’ death, the inventory will facilitate the liquidation of both the matrimonial regime and the estate. It will also help avoiding or weakening your heirs disputing the qualification of some assets.

VII. Have you dealt with issues that you do not wish your family/heirs to know?

Every family has its secrets and surprises; every individual has its private matters. To protect some of your relatives or to avoid any legal dispute among your heirs, we recommend to plan ahead and implement solutions.

Creative answers can be found, for instance, to favour some heirs, to bequest non-family members (within the limits of the applicable laws).

https://mll-legal.com/?lang=en

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Patricia Guerra

Patricia Guerra

MML Legal

mll-legal.com

covid-19

Maud Udry-Alhanko

MML Legal

mll-legal.com

Forfait tax in Switzerland – What you need to know

Forfait tax in Switzerland – What you need to know

Swiss forfait tax – What you need to know

1.What is the forfait about?

Switzerland has for decades had the so-called forfait taxation regime, essentially allowing foreign nationals relocating to Switzerland to pay tax on their worldwide expenditure.

The forfait regime is often mentioned alongside the UK and Irish non dom-regimes and, more recently, the Italian regime available to new residents. By comparison, the forfait regime, coupled with other advantages of the Swiss tax system, is more beneficial on many counts (e.g. legal certainty and/or inheritance tax). In particular as far as professional activity is concerned, however, the regimes on the islands may be perceived as carrying the day.

2. Can I apply?

The forfait regime is available to foreign nationals taking up tax residence in Switzerland for the first time or after an absence of at least 10 years.

Although the regime was originally aimed at wealthy foreigners coming to spend the autumn of their life in Switzerland there has never been a minimum age (nor maximum, for that matter).

3. Can I work?

To be eligible for the forfait regime you may not exercise any paid work in Switzerland, neither as employee nor in a self-employed capacity.

Gainful activity abroad is permissible, however.

4. I would be entitled, then. But my spouse is Swiss. Can I still get the forfait?

No, you can’t. Both spouses must fulfil all criteria.

5. I’m a dual national. Am I eligible?

No, dual citizens with Swiss nationality do not qualify either (and never did).

6. How do I calculate my tax?

Forfait taxation is essentially based on (i) the taxpayer’s worldwide living expenses that serve as tax base, (ii) the rent multiple (7 x annual rent for accommodation) or (iii) the so-called control calculation to which ordinary tax rates are then applied.

Living expenses include in particular worldwide costs for accommodation, general living, cars, aircrafts and yachts, housekeeping and personnel in respect of all individuals (family members etc.) financially supported by the taxpayer.

Put simply, the tax base corresponds to what it takes to keep the family going, whereby cantons have substantial leeway in determining the practical aspects. The minimum base for Federal tax purposes is CHF 400’000.

And there is another factor to take into account, the so-called control calculation. Tax payable under forfait must be at least equal to (income and wealth) tax payable at ordinary rates on (i) Swiss real estate and related income, (ii) movable assets located in Switzerland and related income, (iii) Swiss securities and related income, (iv) Swiss intellectual property and related income, (v) Swiss source pensions and (vi) income for which treaty benefits are claimed (for treaty benefits see question 8).

Swiss securities comprise Swiss shares and dividends or interest from Swiss sources. Whereas a portfolio of non-Swiss shares held and managed by a Swiss bank should not give rise to any issues, interest, if any, on a Swiss cash account may.

Treaty protected income will typically include non-Swiss dividends or royalties subject to a withholding tax in the source country. Such income must be included in the control calculation if a reduction of source tax is claimed under an applicable treaty (question 8).

In summary, the tax base is usually the higher of (a) CHF 400,000, (b) worldwide living expenses, (c) the rent multiple or (d) the sum of the control calculation.

7. As a forfait tax payer, do I get the benefit of double tax agreements (DTA)?

Any income for which treaty protection is claimed will need to be included in the so-called control calculation.

Some DTA will not accept a forfait tax payer as tax resident. Others contain express provisions in respect of forfait tax payers, namely those with Germany, Belgium, Norway, Italy, Austria, Canada the US and France. Typically, these DTA will require any treaty protected income to be included in the tax base. That said, in particular with France there is some uncertainty in practice as to the treatment of French source income.

8. Social security? – no one ever told me

Forfait tax payers under the age of 65 are subject to social security contributions. Depending in particular on an individual’s wealth the contribution may amount up to CHF 24’000 plus approx. 5% administrative costs per person.

9. Procedure – how do I obtain my forfait and what do I have to disclose?

Obtaining the forfait is usually less of an issue than immigration, especially for non-EU nationals.

Once the chosen place of residence has been identified one would typically approach the local cantonal tax authorities. They are competent to grant a forfait ruling. Immigration authorities will have to be consulted with, too, as they issue the residence permit.

Information to be provided includes an individual’s worldwide living expenses and an approximation of his or her wealth. The level of detail requested by the authorities varies greatly between cantons. https://www.frb-law.ch/

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Michael Fischer

Fischer Ramp Buchmann

frb-law.ch

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

Swiss Family Foundations: Ensuring Stability, Protection, and Continuity

Swiss Family Foundations: Ensuring Stability, Protection, and Continuity

The Family Foundation is used hesitantly in Swiss succession and estate planning, although in recent years, the establishment of a foundation has been increasingly evaluated again. 

A robust estate planning ensures a reliable regulation and avoidance of conflicts amongst heirs. In each case, a tailor-made structure must be determined. While a testator may want to commit family assets over several generations to his family, another may seek avoidance of long inheritance proceedings or high inheritance taxes. Yet, other families seek anonymity and asset protection. A foundation may also be used in cases where an entrepreneur has no descendants suitable for succession or if he wants to ensure long-term continuity of his company.

The use of a Family Foundation

A Swiss testator is faced with narrow rules limiting his or her estate planning options. Relatively high compulsory portions (forced heirship rules) encumber a free transfer of assets to heirs of the testator’s choice. Therefore, the use of a family foundation has rarely been considered in a pure Swiss family situation. However, since families are often spread over different countries and continents and assets are located in various jurisdictions, contributions of assets to foundations maybe an optimal solution.

The main purposes of a Swiss Family Foundation

The Swiss Civil Code permits the establishment of family (maintenance) foundations “to meet the costs of education, equipment or support of family members or similar purposes“. The purposes have in common that assistance is to be provided to family members in certain situations, such as in adolescence, when setting-up their own household, or live on their own, and in case of need.

Educational costs include both the cost of basic and of continuing education at universities, apprenticeship schools and other educational institutions. The term equipment as of today includes payments that serve to establish, secure or improve a livelihood, in particular when starting a household, getting married or taking up self-employment. The concept of endowment is to be interpreted broadly and understood to be an allocation of assets of a certain size and value. As is the case for benefits under the title “education”, distributions do not require an actual need or emergency situation of a beneficiary. The support of family members finally requires a situation of need of the beneficiary.

Beneficiaries are individually determined family members

The Civil Code prohibits the permanent confinement of assets in favour of a particular family combined with unconditional distributions for an indefinite period. Thus, a Family Foundation may grant a special right to receive benefits to an individual or to individually determined family members instead of family members in general. A founder may reserve for himself or for certain individuals rights to use, enjoy or exploit the assets contributed to the foundation and/or its earnings. These individuals may include heirs who are willing to renounce their compulsory portion in favour of the foundation or other related persons such as cohabiting partners, relatives, or friends.

Special rights my include a usufruct on all or part of the foundation’s assets, residential rights or payments in favour of a specific person. Although family members cannot receive an unconditional benefit in their capacity as a beneficiary, it is possible to provide the spouse, the descendants or grandchildren with general distributions for their cost of living, if they are individually determined in a special right.

Business Foundations

A Business or Holding Foundation is a special form developed by practice and not explicitly regulated by law. A business foundation is characterized by its proximity to the economy. If an entrepreneur has no descendants suitable for succession, the settlement of a Business Foundation could be a temporary bridging measure until the succession is settled. The establishment of a Business Foundation can on the other hand ensure the long-term continuity of the company. https://blumgrob.ch/

RFF Lawyers is a tax law “boutique” firm in Portugal, specialized in tax and business law, both for corporate and institutional entities and individual clients. Rogério and his team at RFF Lawyers seek to foster lasting relationships - of confidence and trust - and to provide the proper legal solutions meeting the specific needs of each client, whether individual or corporate. 

Rogério Fernandes Ferreira

Rogério Fernandes Ferreira

RFF Lawyers

rfflawyers.com

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Natalie Peter

Blum Grob