TAX UPDATE. FEDERAL LEGISLATION Introduction of a national inheritance and gift tax

Transcription

1 January international TAX UPDATE FEDERAL LEGISLATION Introduction of a national inheritance and gift tax In a bid to increase the income of the Old Age Insurance System, a new Swiss inheritance and gift tax initiative has been proposed by several left parties. The new tax would be enacted at a federal level, although assessed and collected at the cantonal level with the cantonal laws currently in place being repealed. The aim of the initiative is to introduce a flat rate tax of 20% on estates of individuals who had their last residence in Switzerland or on estates which are open-ended in Switzerland. Whilst it is not expected that the tax will be introduced until 2015, if enacted lifetime gifts from 1 January 2012 onward will be added retroactively to the estate and be taxed as well. Facts & Figures: The tax will be levied on estates of individuals who at the time of their death were resident in Switzerland, or Estates of individuals whose probate proceedings have already begun in Switzerland. Flat rate tax of 20% which will be payable by the estate, rather than the beneficiary Exemptions: - CHF 2 million one-off exemption on the total estate and taxable gifts made prior to death - Gifts to spouse or registered partner - Gifts to tax-exempted legal institutions, mainly charitable institutions - Gifts up to a maximum of CHF per year per recipient It is essential that individuals who are resident in Switzerland are aware of the proposals and review their estate with a view to considering making the gifts or transferring assets prior to 31 December 2011, if appropriate. It is important to note that individuals who are taxed under the forfeit (lump-sum taxation) regime will also be caught in the scope of this new initiative, as inheritance and gift taxes are not usually included within their agreement with the tax authorities. Dear Reader, We are pleased to send our second international Tax Update on behalf of BDO Ltd, Switzerland. This issue will give you a short update on international tax aspects with regard to Switzerland and Liechtenstein and focuses on the initiative to introduce a national inheritance and gift tax and new developments regarding the cantonal lump-sum taxation. Additionally, we highlight the new tax agreements with Germany and UK regarding the taxation of investment income. Finally, you find an update on new double taxation agreements, amendments, signed memorandums and adopted dispatches. We wish you an interesting and pleasant read. Thomas Kaufmann Partner, Head of International Taxation BDO Ltd, Zurich thomas.kaufmann@bdo.ch

2 2 The abolition of lump-sum taxation for foreign millionaires in Schaffhausen Voters in Switzerland s canton Schaffhausen accepted No more taxation privileges for foreign millionaires on 25 September 2011 with more than 55% in favour. The referendum for an abolition of lump-sum taxation was launched by left-wingers and trade unions but was also supported by conservative exponents. As per notification of the Government Council, the initiative will be implemented by early A corresponding amendment in the law on direct taxes comes into effect 1 January Despite the fact that foreign rich people pay over CHF 670 million in taxes in Switzerland, in the near future the lump-sum taxation may well be brought to an end in other cantons as well. St. Gallen keeps hold on lump-sum taxation Although the canton of St. Gallen will continue to adhere to its lump-sum taxation practice however foreign rich people will have to pay more taxes in the future. The counter-proposal of parliament and government as well as the social party (SP) initiative for an abolition of lump-sum taxation was accepted by voters on 27 November In the deciding key question, the counter-proposal finally won. By 2012, foreign rich people will pay seven times (today five times) the price of their annual rent in tax or at least CHF According to the counter-proposal, the taxable assets in the tax declaration is 20-fold the income, hence CHF 12 million. By the end of 2010, the canton of St. Gallen had 87 people to be taxed under lump-sum taxation who paid approximately CHF each. ADMINISTRATIVE ASSISTANCE AND DOUBLE TAXATION AGREEMENTS Switzerland and Germany sign tax agreement A tax agreement was signed on the 21 September 2011 in Berlin by Switzerland s and Germany s Finance Ministers. The agreement will resolve the outstanding issues that have existed for decades between Germany and Switzerland concerning the taxation of German investors investment income in Switzerland. The negotiations led to a fair outcome that has ensured a balanced reconciliation of interests between the two countries, particularly from a tax equity point of view. The tax agreement signed by Switzerland and Germany respects the protection of bank clients privacy applicable in Switzerland and also ensures the implementation of the German authorities legitimate tax claims. No penal procedures against bank employees or legal persons for aiding and abetting will be engaged or pursued with respect to the taxes covered by the agreement. The agreement differs between liquidation of the past and future taxation of all investment income. Liquidation of the past: - anonymous haircut on relevant capital at a face value rate of 34%, which in most cases leads to an effective rate of 19% - 25%, depending on how long the money was in CH - self-indictment Future Taxation of all investment income: - final withholding tax rate of % - consent to exchange of information There is a guaranteed payment of 2 billion Swiss Francs made by the 50 major Swiss banks. Payments resulting from the haircut will be credited against this guarantee. In addition, mutual market access for financial services will be improved in both countries. The agreement requires the approval of parliament in both countries, and should come into effect at the start of British residents money in Swiss banks will be taxed Switzerland and Britain struck a deal on the 24 August 2011 to tax money kept by British residents in secret Swiss bank accounts. The deal followed the same model as the agreement between Germany and Switzerland. Dealing with the past: - Historical payment at a tax rate of between 19% - 34%. The exact tax rate will be based on how long the account has been open and when the funds were deposited in the period from 2003 to Clients stay anonymous. Dealing with the future: - The levy charge in relation to the future will be 48% on interest/investment income, 40% on dividends and 27% in relation to capital gains. The rates are slightly lower than the respective top tax rates in Britain. - HMRC will be able to make requests in relation to individual taxpayers to the Swiss authorities to discover if the individual has an account(s) in Switzerland. Initially this will be limited to 500 requests per year. - Guaranteed payment by Swiss banks over 500 million Swiss francs. The treaty is expected to come into effect in January EU commission in doubt about taxation agreements legality The EU commission issued an analysis on 18 November 2011 on Switzerland s taxation agreements with Germany and Great Britain. The commission is forcing both countries to renegotiate their taxation agreements with Switzerland otherwise face threatened legal action. Therefore, the commission has also warned other countries which are interested in taxation agreements with Switzerland to reassess their terms. Nevertheless, countries such as Belgium and the Netherlands are still interested. EU tax commissioner Semeta made clear that these countries are allowed to negotiate such taxation agreements but EU rules and the powers of the EU Commission must be respected thereby.

3 3 Furthermore, it has pointed out that the agreements with Germany and Great Britain infringe on parts of the EU directive (law) on taxation regarding savings as well as the savings tax agreement between Switzerland and the EU. Instead of initiating infringement procedures against Germany and Great Britain, the EU commission has proposed that the two countries renegotiate their agreements. Switzerland itself has seen no need for renegotiation at this time but the need for clarification on all stages is certain. Given the difficult legal situation of these taxation agreements, France has withdrawn negotiations with Switzerland. Switzerland and Spain signed revised double taxation agreement Switzerland and Spain signed a protocol on 27 July 2011 to amend the double taxation agreement (DTA) in the area of taxes on income and capital. The revised DTA also contains provisions on the exchange of information in line with the internationally applicable standards. Aside from the exchange of information, Switzerland and Spain have in particular agreed that in future no withholding tax will be levied on dividend payments from significant holdings of at least 10% (up to now 25%) in the capital of the company making the payment, as well as on dividend payments to pension funds. The holding period for capital stakes in the company making the payment will be reduced from the current term of two years to one year. In addition a comprehensive arbitration clause was included. Double taxation agreement with Georgia comes into effect The first double taxation agreement (DTA) with Georgia in the area of taxes on income and capital came into effect on 5 August It has contributed to the further positive development of bilateral economic relations. The provisions of the agreement will apply to the taxes withheld at source on contributions credited or paid out on or after 1 January 2012, and will apply to the other taxes for tax years from 2012 onwards. In line with the Swiss agreements policy at the time of the negotiations, the DTA with Georgia does not contain any provisions on the exchange of information in accordance with the international standard applicable at present. New negotiations are planned to adapt the administrative assistance to the international standard. Switzerland and Colombia have revised their double taxation agreement At the time the original double taxation agreement (DTA) between Switzerland and Colombia was signed in 2007, the administrative assistance clause was not in line with the international standard. Therefore, Switzerland and Colombia have concluded negotiations and initialled a protocol of amendment on revising their double taxation agreement (DTA), which will come into effect shortly and be applicable from 1 January Along with an administrative assistance clause in accordance with the internationally applicable standard, the revised agreement contains various provisions that are beneficial to the Swiss economy.

4 4 Switzerland has revised the double taxation agreement with Portugal Switzerland and Portugal concluded negotiations in August 2011 to revise the existing double taxation agreement (DTA) so that it includes an administrative assistance clause in accordance with the internationally applicable standard. The final agreement will be subject to the ordinary approval procedures of the respective countries. Federal Council adopts six double taxation agreements On 31 August 2011, the Federal Council approved double taxation agreements (DTAs) with Bulgaria, Korea, Malta, Romania, Sweden, Singapore, and Slovakia and submitted them to parliament for approval. Switzerland and Russia sign memorandum on financial dialogue and revised double taxation agreement At the Annual Meeting of the International Monetary Fund in Washington on 25 September 2011, Switzerland s and Russia s Finance Ministers signed a memorandum on cooperation between Switzerland and Russia on financial matters. A protocol to amend the double taxation agreement (DTA) was signed at the same time. The revised DTA also contains provisions on the exchange of information in line with the internationally applicable standards. Amendments to the double taxation agreement with Poland have come into effect The Protocol of Amendment from 20 April 2010 to the double taxation agreement (DTA) with Poland came into effect on 17 October It contains provisions on the exchange of information in accordance with the international standard applicable at present. Along with the administrative assistance clause according to the OECD standard, a withholding tax exemption for dividend payments from significant holdings as well as for dividend payments to pension funds was agreed with Poland. The term significant holding refers to a stake of at least 10% (previously 25%) in the capital of the company making the payment, provided it has been held for at least two years. The Protocol of Amendment sets out the right of the source state to levy 5% tax on interest and royalty payments; a withholding tax exemption is provided in the case of interest and royalty payments between related companies. Contributions to a pension fund in the other contracting state will now be tax-deductible. In addition, the Protocol of Amendment to the DTA contains an arbitration clause. The provisions of the Protocol of Amendment will apply from 1 January 2012, with the exception of those concerning the withholding tax rates for interest and royalty payments. These will apply from 1 July The Protocol of Amendment has been approved by parliament in both countries. Switzerland and Hong Kong sign double taxation agreement On 4 October 2011, Switzerland and Hong Kong signed a double taxation agreement (DTA) in the area of taxes on income. It replaces a DTA signed back in 2010, which never came into effect. The new DTA also contains provisions on the exchange of information in line with the internationally applicable standards. A withholding tax exemption was agreed for dividend payments to companies that hold a stake of at least 10% in the company making the payment, as well as for dividend payments to pension funds and the Swiss National Bank. In other cases, the withholding tax rate will be 10%. Interest will generally be exempt from withholding tax and the limit on the tax the source state is entitled to levy on royalty payments will be 3%. In addition, an arbitration clause was included in the agreement. Amendments to the double taxation agreement with India come into effect The revised double taxation agreement (DTA) with India in the area of taxes on income and capital came into effect on 7 October It contains provisions on the exchange of information in accordance with the international standard applicable at present. The provisions of the agreement will apply to income originated in India from 1 April 2012 onward. In Switzerland, they will apply to income originated in tax years starting from 1 January Regarding the exchange of information, the provisions will apply to information referring to tax years which start on or after 1 January Amendments to the double taxation agreement with the Netherlands have come into effect The revised double taxation agreement (DTA) with the Netherlands that was signed on 26 February2010 came into effect on 9 November It contains provisions on the exchange of information in accordance with the international standard applicable at present. Compared with the current DTA, improvements have been achieved in the area of withholding taxes: the percentage holding for withholding tax exemptions for dividends has been reduced from 25%at present to 10%. Dividend payments to pension funds will also be exempt from tax in the source state in future. Furthermore, a zero rate has also been agreed for interest. In addition, the new DTA contains an arbitration clause. Switzerland and the Netherlands informed one another via diplomatic channels that the national approval procedures had been concluded. The provisions of the agreement will apply from 1 January From this date administrative assistance requests can also be made in accordance with the currently applicable OECD standard relating to offences occurring on or after 1 March The agreement replaces the currently applicable agreement dating from 1951 and 1966.

5 5 Federal Council amends ordinance on double taxation agreement with United States At its meeting on 16 November 2011, the Federal Council approved an amendment to the double taxation agreement (DTA) between Switzerland and the United States that dates back to The amendment should ensure that the procedural rights of affected persons domiciled in the United States remain guaranteed even if administrative assistance requests are submitted based on certain patterns of behaviour. The negotiated economic benefits of the DTAs include reductions in withholding tax, interest and royalty payments in the source state and even possible tax exemption for dividends, as well as arbitration clauses within the scope of mutually agreed procedures. The agreements thereby facilitate the activities of the export economy, promote bilateral investments and contribute to the prosperity of Switzerland and that of the partner state. In addition, they prevent tax discrimination. The cantons and the business associations concerned have welcomed the conclusion of these DTAs. Double taxation agreements: Federal Council adopts additional dispatches On 23 November 2011, the Federal Council adopted the dispatches on four further double taxation agreements which will now be submitted to parliament for approval. The DTAs with Russia, Spain, Hong Kong, and the United Arab Emirates contain provisions on administrative assistance in accordance with the internationally applicable standard. They also promote the development of bilateral economic relations. Liechtenstein Disclosure Facility: Formal Deadline for Notifications extended to 1 April 2012 Pursuant to Liechtenstein s taxpayer assistance and compliance programme (TACP), Liechtenstein financial intermediaries are required to notify existing UK clients who have beneficial interests in relevant property of the need to demonstrate that they are compliant in relation to their UK tax obligations in relation to that property. In order to ensure that the process of identifying and notifying is completed as effectively as possible, HMRC and Liechtenstein have agreed to a three month extension of the notification deadline to 1 April BDO Ltd is one of Switzerland s leading providers of auditing, accounting and consulting services. With 31 offices nationwide, our branch network is the most extensive in the sector. For cross-border transactions, we can also draw on the support of the financially independent global BDO network. For more information about BDO Ltd, please visit This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Please contact BDO Ltd to discuss these matters in the context of your particular circumstances. BDO Ltd, a limited company under Swiss law, incorporated in Zurich, forms part of the international BDO network of independent member firms. BDO Ltd, January 2012