3 September 2007
The UK and Switzerland were both identified as offshore financial centres by the International Monetary Fund in a report published earlier this year. Although both countries are quick to argue against this classification, they undeniably have reputations for offering sophisticated financial services and favourable tax regimes to outsiders.
London has long been a popular destination for the world's key international financial services organisations. Switzerland has also attracted its fair share of wealth, but historically more for its private banking and wealth management services than as a base for businesses. Recent changes in the legislation of both countries, however, have led to a shift in these traditional positions and an increased interest in relocation to Switzerland.
UK tax burden
In the UK individuals who have resident non-domiciled status may pay income, capital gains and inheritance taxes only on UK source income and UK situs assets. The tax burden can be minimal if the bulk of their wealth is held offshore and their affairs are appropriately structured. This makes it an appealing base for high-net-worth individuals.
However, the rules have recently come under attack in the investigation of motorcyclist Valentino Rossi, from whom the Italian tax authorities are seeking to recover tax of around E60m (£40.79m), despite his claim that he has been resident in London during the relevant period. Recent press reports speculating that closer attention might be paid to those claiming non-domicile status also suggest that many high-net-worth individuals living in the UK might contemplate a move to Switzerland if their tax status in the UK is challenged.
The Swiss alternative
Switzerland also offers favourable tax treatment for high-net-worth individuals. The usual rates of tax are low in Switzerland by comparison with many of its neighbours, but it is the special 'forfait', or lump sum, regime from which non-Swiss nationals may benefit that is attracting increasing numbers.
Usually in Switzerland, an individual pays tax on their worldwide income (at both federal and cantonal level) and on their overall wealth (only at cantonal level). Most cantons also impose gift and estate tax, although there are generally exemptions from the latter for spouses and children. There is no tax on private capital gains.
Under the forfait arrangement, instead of paying tax on their income and wealth, individuals are taxed by reference to the level of their expenditure (calculated as a lump sum). The starting point is to assess the value of expenditure in any given year, which should not be less than five times the annual rental value of the individual's home in Switzerland. The ordinary rates of tax at federal, cantonal and communal levels are then applied to the agreed figure.
Since each canton has its own tax rules, different levels of forfait and of tax may be negotiated in each, and would-be immigrants should bear this in mind when choosing where to settle. This may sound complicated, but once the level of taxation has been agreed it is not usually recalculated unless the taxpayer's circumstances change significantly, and this arrangement generally leads to a far lower tax liability than would otherwise arise.
To benefit from the forfait, the taxpayer may not undertake any form of gainful employment in Switzerland. However, there is an important exception: managing one's own wealth. So foreigners may set up their own management company and act as a member of the board without jeopardising their forfait arrangements.
The forfait does not cover gift and estate taxes, to which the taxpayer will remain subject. However, given the exemptions generally available for spouses and children, this will often not be an issue. Care should be taken where an individual wishes to transfer or bequeath assets to unrelated third parties, however, as the rates of tax tend to increase with the distance of family relationship, so tax charges can be high on gifts between co-habitees or to trusts.
With regard to the latter, it should be noted that although Switzerland has ratified the Hague Convention and recognises trusts, rules on their taxation have not yet been issued either at federal or cantonal level.
Immigration is also very straightforward. To obtain a residence permit in order to move to Switzerland on a forfait basis, an EU national only has to show that they have sufficient resources to support themself and their family members to ensure they will not claim social benefits in Switzerland, and that they all have comprehensive health insurance for as long as they intend to stay. For non-EU nationals there are more formalities, but the process is not usually problematic for high-net-worth individuals.
Following a corporate tax reform in 1997, Switzerland has seen a dramatic influx of companies from overseas. Geneva in particular has become the headquarters to a number of large businesses. Swiss companies are subject to corporate income tax on their net profits. Capital gains and losses are generally included in the calculation of profit. Corporate capital tax (a kind of wealth tax for companies) was abolished at federal level in 1998, but is still levied at cantonal level. However, thanks to rules decreeing that profits from branches outside Switzerland are not subject to Swiss taxes and different rules are applicable to holding and other special companies, businesses with significant interests abroad can be structured to achieve low levels of taxation.
The future for funds
Switzerland is also becoming a popular base for investment management businesses. In the past Swiss investment funds have not been particularly attractive due to relatively high taxation and inflexible regulation and the consequent limits on the types of funds and vehicles permitted.
As a result many 'Swiss' funds have been located in Luxembourg. New laws implemented earlier this year as part of an overhaul of Swiss investment and funds legislation have changed all this. New vehicles are being introduced and many previous restrictions relaxed. This, coupled with the opportunities for low levels of taxation, promises to revitalise Switzerland as a centre for the international investment industry.
Earlier this year it was feared that proposed changes to the way in which hedge funds were taxed in the UK would lead to an exodus of successful fund managers from London. Currently the profits of many funds are taxed as capital gains, and with the availability of business property relief to private equity investors, many enjoy a rate of taxation of only 10 per cent. The Government was talking of introducing measures to tax such profit as income in the future, which would increase the rate of tax to 40 per cent.
With its new legislation and existing popularity with the internationally wealthy, Switzerland seemed a likely refuge for funds and investors fleeing the UK. However, it seems that such changes are not to be brought in for the time being after all, and it remains to be seen to what extent Switzerland will compete with the UK in this area while current conditions prevail.
Justine Markovitz is head of the Geneva office and Rachel Mainwaring-Taylor is an associate at Withers