Eyes on Switzerland

Switzerland has been an exceptionally busy front for private client practitioners over the last 18 months. International tax agreements, high-profile trust cases and changes to banking regulation have caught the headlines, and a similar rate of change is set to continue in the foreseeable future.

Federal gift and estate tax

In common with its peers, Switzerland faces an ageing demographic. A committee formed by some political groups (predominantly on the left) consulted on introducing an estate and gift tax, to be levied at federal level as an additional source of funds for the Swiss 'old age and survivors' insurance' (OASI). The popular initiative that has subsequently been lobbied would impose the estate tax in place of cantonal gift and inheritance taxes.

The main elements are:

• tax levied at 20 per cent
• tax on estates of individuals whose last domicile was in Switzerland and other estates being administered in Switzerland
• an exemption for transfers to surviving spouses, but no exemption for other transfers (including to descendants)
• taxable estates valued at current market rates
• special rules for appraising businesses and farms within a taxable estate
• a tax-free allowance for each estate of SFr2 million;
• gifts in excess of SFr20,000 per year will, from 1 January 2012, be aggregated to the estate for tax purposes.

The Federal Chancellery has recently announced that the referendum was successfully filed. Therefore, the Swiss will vote on introducing federal estate tax; the vote is expected in 2015 or 2016 (depending on whether the Swiss government or parliament wishes to prepare a counterproposal).

If the referendum is successful, the necessary preparation of legislation (including the resolution of questions on procedures and the avoidance of double taxation in international circumstances involving, for example, foreign real estate) is likely to take a further one to two years.

Lump-sum taxation

The Federal Chancellery announced in November 2012 that another popular initiative started by the left-of-centre political groups was successfully filed.

This referendum targets the abolition of the lump-sum taxation regime ('forfait'), which is available in certain cantons and at federal level to foreign nationals moving to Switzerland and not engaging in any gainful activity in Switzerland.

Traditionally used by wealthy 'retirees', an individual's tax rates under the forfait system are calculated on the basis of a deemed income according to the individual's annual living expenses (usually subject to a minimum amount). This is in contrast to the usual 'progressive rate' method of paying ordinary income tax on worldwide taxable income as it arises, the tax rate of which can often be below 19 per cent.

Although the lump-sum taxation has been available in some cantons for more than a century, it was only introduced in many cantons after 1990. It has subsequently been abolished in several cantons, most notably Zurich. The public referendum is expected for 2014 or 2015.

The Minder initiative

This concerns a new law that has been implemented following a successful popular referendum. The so-called 'Minder initiative' vote was held on 3 March 2013 (although it still needs to be implemented into law) and echoes similar developments in other jurisdictions concerning shareholder voting on executive pay.

In fact, the initiative is targeted at a relatively small faction - Swiss public companies listed on Swiss or overseas exchanges. It will therefore only apply to a relatively small number of companies operating in Switzerland, although future expansions cannot be ruled out.

The most notable provisions for private client practitioners perhaps are:

• a prohibition on certain forms of remuneration, such as severance payments, advance compensation payments and payments related to acquiring or disposing of companies
• a prohibition on members of the company's corporate governance from employment or mandates with other group companies
• an annual binding shareholder vote on the aggregate remuneration of board members, the management team and any advisory committees; and
• criminal sanctions where the initiative has been breached.

Although the coverage attributed to Minder and its rigorous terms has been plentiful, and although the initiative will have a real impact on public companies' proceedings, it seems unlikely that it will greatly affect private client practitioners and most of their clients.

Matthew Shayle is an associate in the private client group of Lenz & Staehelin

Frédéric Neukomm, partner in the tax group, and Alexander Greter and Julien Perrin, associates in the private client group, contributed to this piece