1. 1 Private clients Swiss tax issues IFA Bilateral Meeting United Kingdom / Switzerland London 11 May 2012 Hans Koch - Baker & McKenzie Zurich Paul Whitehead - Berwin Leighton Paisner LLP Doc No. 23464756

2. 2 Private Client Relocation/Tax Competition UK Resident Non-domiciled – and – Swiss Lump Sum/Forfait Taxation

3. 3 I.Introduction

4. 4 II. Basics

5. 5 Switzerland – Forfait/Lump Sum Taxation Regime Available for foreigners upon their first immigration to Switzerland Only if they are not exercising any professional or business activity in Switzerland Tax basis: the effective costs of living (subject to negotiation) Resulting tax basis is subject to ordinary tax rates Business abroad remains permissible (to be confirmed) Under certain DTC lump sum taxation is not recognized: in that case income sourced in the treaty state must be fully taxed in Switzerland in order to benefit from DTC protection (“modified lump sum taxation”)

6. 6 Switzerland – Forfait/Lump Sum Taxation Regime Only a part of an individual‘s income and wealth are effectively taken into consideration Typically interesting for wealthy individuals who earn passive income and who are not actively engaged in a business (dividends, interest, rental income, etc) Lump sum taxation is always based on an advance tax ruling which deals with the details of the specific case

7. 7 Switzerland – Forfait/Lump Sum Taxation Regime The system is currently under political pressure: 3 cantons (Zurich, Schaffhausen, Appenzell Ausserrhoden) have abolished the system, 3 have introduced stricter requirements (Thurgau, St.Gallen, Lucerne), in at least 5 cantons there are proposals to abolish or modify the system (Aargau, Basel-Land, Basel-Stadt, Bern, Geneva, Zug). A proposal to abolish the system is also pending on the federal level (applicable to all Switzerland) An introduction of stricter requirements for all cantons is expected (on the federal level) : minimum taxable income would be CHF 400‘000 or 7 times the annual rental income value

8. 8 Basics – the UK : the Remittance Basis Residence – uncertainty – statutory test – from 6 April 2013 Domicile – origin – dependence – choice

9. 9 Basics : the Remittance Basis Resident/Non-domiciliary “remittance basis user”:- -Income Tax – UK source – taxed – Non-UK source – not taxed unless remitted -Capital Gains – Disposal of UK assets – taxed – Disposal of Non-UK assets – not taxed unless remitted -New “Business Investment Relief”

10. 10 Basics : the Remittance Basis From 2008 – Remittance Basis Charge –1 st 7 tax years – free –8-12 tax years - £30,000 –13 tax years onwards - £50,000 Can choose each tax year whether to pay

11. 11 III. Pre-immigration Planning & Trusts

12. 12 Switzerland – Taxation of Trusts In principle, trusts are an unknown concept in Swiss domestic law, yet they are recognized (Hague convention) Swiss authorities frequently struggle about how to deal with trusts Problems can typically arise: Regarding income, wealth and gift taxation, Regarding estate planning or Regarding the acquisition of Swiss real estate by a trust Decisive question: whom should the income and the principal of a trust be allocated to?

13. 13 Switzerland – Taxation of Trusts Setting up a revocable trust: –Should be seen as a tax neutral operation: The settlor keeps full economic control. He therefore remains taxable for income and wealth tax purposes “as if there were not trust”. Setting up an irrevocable fixed interest trust: –Not tax neutral. The beneficiaries derive the full benefit, they are considered the economic owners for tax purposes and become taxable. Setting up such trust can also lead to gift tax consequences if beneficiaries are not exempt (e.g. spouse, direct descendants)! Setting up an irrevocable discretionary trust: –Not tax neutral. Similar as a donation to a third party, potentially triggering full unrelated party gift taxation (e.g. Zurich: 36%).

14. 14 Switzerland – Taxation of Trusts A specific trust should always be discussed in advance with the tax authorities (advance tax ruling). Trusts are seldom set up to optimize Swiss taxes – but one wants to make sure no harm is done either! The Swiss tax authorities fully accept to deal with trusts, but they welcome appropriate explanations and interpretation of the trust.

15. 15 Pre-Immigration steps (i) Definition of Revocable under Circular of the Swiss Tax Conference on the Taxation of Trusts (retaining the possibility of power of interest) –This may offer opportunities for non-Swiss resident settlors with CH resident beneficiaries –Careful planning requested for immigrants Wash out of income and gains during lifetime of settlor to ensure inheritance and gift taxation at time of distribution to beneficiary Inheritance and gift taxation is Cantonal (unless new legislation will be introduced in 2014 or later)

16. 16 Pre-Immigration steps (ii) Private Ruling on Cantonal/Federal income, net wealth, inheritance and gift taxation requested to ensure that the goals of the interposition of a trust are achieved –Careful drafting of trust documentation requested, e.g., addition of beneficiaries who are not related to settlor being resident in Switzerland at time of death may trigger a high inheritance tax exposure (up to 50% and more) –For private ruling tax authorities request to see trust deed, other trust documentation and letter of wishes

17. 17 Pre-Immigration Planning and Trusts – the UK Aims : -(i) Maximise tax free amounts in UK, using the remittance basis -(ii) Protect from Inheritance Tax -(iii) Avoid/minimise business profits being taxed in UK

18. 18 Pre-Immigration Planning and Trusts – the UK Difficulties with the Remittance Basis - Mixed Fund rules Solutions 1.Capital and Income Accounts 2.Life Policies 3.Trusts and Companies

19. 19 Pre-Immigration Planning and Trusts – the UK Loan repayment Premium Interest free loan Surrenders (Max 5% p.a.) Repayments (Max 5% p.a.) Capital Distribution Settlor Life Policy Non-UK Co. Non-UK Trust Beneficiary Interest free loan Settlor Non-UK Trust Interest free loan Settlor Interest free loan Non-UK Trust Interest free loan Settlor Interest free loan Non-UK Trust Interest free loan Settlor Interest free loan Non-UK Trust Interest free loan Settlor Non-UK Co. Interest free loan Non-UK Trust Interest free loan Settlor Premium Non-UK Co. Interest free loan Non-UK Trust Interest free loan Settlor Premium Non-UK Co. Interest free loan Non-UK Trust Interest free loan Settlor Premium Non-UK Co. Interest free loan Non-UK Trust Interest free loan Settlor Life Policy Premium Non-UK Co. Interest free loan Non-UK Trust Settlor Non-UK Trust Settlor Non-UK Trust Settlor Non-UK Trust Settlor Non-UK Co. Non-UK Trust Settlor Premium Non-UK Co. Non-UK Trust Settlor Interest free loan Premium Non-UK Co. Non-UK Trust Settlor Interest free loan Non-UK Co. Non-UK Trust Settlor Premium Interest free loan Non-UK Co. Non-UK Trust Settlor Premium Interest free loan Non-UK Co. Non-UK Trust Settlor

20. 20 Pre-Immigration Planning and Trusts – the UK UK Property Trust/Company/Property Structure Budget 2012 -15% SDLT on properties over £2 million acquired by a company -CGT on sale -Annual charge -Solutions?

21. 21 Pre-Immigration Planning and Trusts - Businesses Control and management Branch/PE in the UK Remuneration

22. 22 IV. Inheritance/Estate Taxes And Successions/Wills

23. 23 Swiss forced heirship concept Forced heirship claims under Swiss law –1/4 for spouse –3/8 for issue –(1/8 – 1/2 for parents) At least 3/8 freely disposable. Potential claw back.

24. 24 Possibility to Elect Law to Govern Estate for Swiss Residents Only for non Swiss nationals Scope of elected law? Coordination of inheritance/matrimonial property law Recognition outside of Swiss probate

25. 25 Tools For Wealth Preservation inheritance/nuptial contracts life interest/usus fruct donations inter vivos trusts foundations/corporations fiduciary structures life insurance policies secondary heirs

26. 26 Inheritance/Estate Taxes – the UK Inheritance Tax Domicile Deemed domicile -2 tier test (i)UK tax resident in any part of 17 out of a continuous period of 20 tax years; or (ii)actually domiciled in the UK in the last three years

27. 27 Inheritance/Estate Taxes – the UK Inheritance Tax Domiciled/Deemed domiciled -Worldwide assets Not domiciled/deemed domiciled -UK assets only

28. 28 Inheritance/Estate Taxes – the UK Inheritance Tax Planning UK assets -Company -Debt -Life assurance Long term residents -Trust

29. 29 Succession/Wills – the UK Succession -Situs of assets -Domicile Planning -Will in jurisdiction of domicile -Will in jurisdiction of assets -Trust

30. 30 V. Summary And Further Questions

31. 31 Private Client Relocation/ Tax Competition This document provides a general summary only and is not intended to be comprehensive. Specific legal advice should always be sought in relation to the particular facts of a given situation.