Possibilities and limits of tax planning for investments of natural persons - national and international
Workshop on the occasion of the ISIS seminar on 9/10 September 2019 entitled "Tax planning in the area of conflict between cost optimisation, tax compliance and Good citizenship - opportunities and risks".
Preliminary remark: The solution notes for case studies 1.1, 1.2, 2.1 (question 1) and 2.2 were written by Andrea Hildebrand, the solution notes for case studies 1.3, 2.1 (questions 2 and 3), 3 and 4 by Ruth Bloch-Riemer. The views expressed therein may differ from those of the other speaker.
1. investments in real estate abroad
1.1. the case of a real estate company abroad
Ms David is the sole beneficiary of the Liechtenstein Trust, which she has set up herself and which is transparent from a tax law perspective. In addition to securities, the trust has held a property in England since 2018 through the Guernsey real estate company Eagle Eye Ltd. The party to the 2018 purchase agreement was Eagle Eye Ltd.
The investment in Eagle Eye Ltd. was recorded in the trust's books at a pro memoria amount.
Eagle Eye Ltd. only holds real estate property, liquid funds for the management of the properties (bank accounts with the foreign L Bank) and transitory assets. Their obligations exist solely towards the trust. In addition to rental income, only a small amount of personnel and administrative expenses are recorded in the annual financial statements.
The property is inhabited by the daughter of Mrs. David. The rental agreement was concluded between Eagle Eye Ltd. and the subsidiary. A market rent was agreed.
Question 1: What is your assessment of the facts of the case from Mrs David's tax perspective?
Question 2: Ms David argues that there is double taxation because England claims the right to tax the income from the property.
1.2. the real estate company case in France: Société Civile Immobilière (SCI)
Mr and Mrs Köhler live in Zurich and are the owners of the Le Paradis property in France. The property is held through a French Société Civile Immobilière (SCI). The property is the holiday home of the family. To finance the purchase price of the property, the taxpayers granted SCI a loan of approximately CHF 2.5 million, which has since risen to approximately CHF 3.0 million. The shares in SCI have a nominal value of EUR 1'000 and, as SCI does not generate any income, there is no need to keep accounts or prepare financial statements.
Due to the abolition of the inheritance tax DBA with France, the Köhler couple has transferred the shares in SCI in equal parts to their adult children Andreas and Brigitte, granting them a free life-long usufruct in their own favour. The children have accordingly acquired naked ownership of the shares of SCI.
Question 1: How is the beneficial interest in SCI of the Köhler couple to be treated for tax purposes?
Question 2: How is the situation to be assessed from the children's point of view for tax purposes?
1.3. case real estate company in Mallorca
Mrs. Bucher, Swiss citizen, single and childless, lives in Zurich in a condominium. It is the sole owner of Sala S.L., a Spanish limited liability company organised in the legal form of a sociedad limitada, with its registered office in Mallorca/Spain. In 2015, Sala S.L. acquired for around CHF 22 million an estate with a living area of around 1000 square metres in the north-west of Mallorca. By acquiring the property through Sala S.L., Ms. Bucher intended in particular to save the so-called Impuesto sobre la Renta de No Residentes, a special imputed rental value tax for non-residents of Spain. (This is a type of income tax which, similar to the Swiss imputed rental value, compensates for the use of real estate). She also heard that in the event of inheritance it was advantageous to hold the property through a company.
In recent years, Mrs. Bucher has spent about half of each year in the estate for her own residential purposes. She did not pay any remuneration for the use of the estate and assumed the maintenance costs incurred herself; the property was not left to third parties. Mrs. Bucher has not been subject to Spanish income tax since the acquisition. As Sala S.L. is not a profit-making activity, it has not been subject to any Spanish tax on income or profits.
Question 1: Where is Ms Bucher resident for tax purposes?
Question 2: Is Swiss income tax due?
Question 3: What is the situation regarding Swiss wealth tax?
Question 4: What would be the Swiss tax consequences of a sale of the estate if Mrs Bucher intended to collect the profit herself by means of a dividend?
Question 5: What are the Swiss inheritance tax consequences if Ms Bucher inherits the participation rights in Sala S.L. to a friend who is Swiss citizen and resident in Germany? (Case based on Mäusli-Allenspach, Inheritance and gift taxes in Switzerland, an overview, Part II, in: zsis) 2012, Monthly Flash No. 5, Item 3.8.1.)
Mrs. Bucher holds the estate directly, i.e. not through Sala S.L.
Question 6: Does anything change compared to question 5 with regard to the Swiss inheritance tax consequences? (Case based on Mäusli-Allenspach, Inheritance and gift taxes in Switzerland, an overview, Part II, in: zsis) 2012, Monthly Flash No. 5, Section 3.8.2.)
2. investments in foreign partnerships
2.1 Case GmbH & Co. KG
Holdt Vermögensverwaltungs GmbH & Co. KG ("HV GmbH & Co. KG") has its registered office in Germany. It holds 50% of the shares in X GmbH and 50% of the shares in Y GmbH, both of which operate in Germany. The shareholders of HV GmbH & Co. KG are H GmbH, also domiciled in Germany, as general partner with no capital share, and Mr Holdt, domiciled in Switzerland, as limited partner with a limited partner's share of EUR 5,000.
According to the articles of association, the purpose of HV GmbH & Co. KG in the administration of its own assets and the operation of other businesses (e.g. management services).
X GmbH provides the HV GmbH & Co. KG provides the infrastructure and personnel. However, no expense was recorded in the financial statements of X GmbH for this purpose.
In his tax return for 2018, Mr. Holdt deducted the income of HV GmbH & Co. KG to Germany in full.
Question 1: Rightly?
Question 2: What should be considered from a social security law perspective?
Mr. Holdt is taxed according to expense.
Question 3: Does anything change from a social security law perspective?
2.2. the S corporation case
Mr. Granelli is an American citizen and is therefore subject to taxation in the USA for his worldwide income. He lives and works in Switzerland with a B residence permit. In addition to his Swiss income, he regularly receives dividends from a company operating in the healthcare sector based in the USA (Company C). Company C has opted for taxation as a so-called S-Corporation under US tax law. In the USA, the income is allocated to Company C in accordance with the obligatory (transparent treatment) and must be taxed there.
Question 1: Should Switzerland exempt the distribution from taxation?
The S Corporation does not have any operations in the USA, so there is no segregation in the USA and Switzerland taxes the investment income generated by the S Corporation with income tax. This leads to international double taxation.
Question 2: How can Mr Granelli defend himself?
3. lump sum taxable persons and trusts
With a view to planning the next stage of their lives, the couple David and Emma Roberts have decided to move their current residence in France to Switzerland. David Roberts is 57 years old and is an English citizen, domiciled in the United Kingdom and resident in France. He is founder and managing director of an investment company in France. The couple co-finances their living expenses from the wages and profit sharing that David Roberts receives from his position in the company. Emma Roberts is 56 years old, has French nationality and is resident and non-domiciled in the UK. She is not gainfully employed, but performs an honorary function as a member of the board of trustees of a charitable foundation in Switzerland, for which she receives a contribution towards expenses. The couple has four children born in 1997, 1998, 2000 and 2003.
The cantons of Zug and Schwyz are the main destinations for the influx. The couple would first like to rent an apartment in Canton Schwyz and then look for a home in Canton Zug that meets their needs. Because the three older children in France are all integrated into the school and education system and have a stable social environment, the couple intend to move to Switzerland with only the youngest child.
The couple's assets consist mainly of various foreign bank accounts and securities accounts and a large property in France. In addition, Emma Roberts as a settlor established the so-called Hilaris Trust under Jersey law a few years ago:
- Neither Emma nor David Roberts can influence the distributions of the Trust, amend the Trust Deed or recall or reappoint the Trustees.
- The beneficiaries of the trust are the four children of the couple. David Roberts is expressly excluded as a potential beneficiary by the Trustee.
- The function of trustee is performed by Stanson Trustee Limited in Jersey. The Trustee appoints its own successor and has the sole authority to decide on the granting of distributions and to add or remove potential beneficiaries.
- Certain investments of the Trust are managed by the investment company which David Roberts has founded and of which he is the Managing Director. Management by the Investment Company is carried out at third-party prices. However, the systems are not maintained by David Roberts himself but by other employees.
- The assets managed by the trust amount to approximately CHF 450 million.
The value of the couple's other assets totals less than CHF 100 million. The couple's living expenses will be around CHF 450,000 when they move in.
Question 1: Does the couple qualify for taxation according to the amount of direct federal tax and state and municipal taxes? In answering the question, it must be disregarded that the couple intend to move to another canton after moving to Switzerland.
Question 2: What is the relevant assessment basis for the Roberts couple?
Question 3: Is it possible to change residence from Canton Schwyz to Canton Zug with retention of taxation according to expense?
The Roberts finally moved to the canton of Zurich.
Question 4: Does the couple meet the conditions for taxation on the basis of effort? What is the tax base?
All the couple's children move with them to Switzerland, first to Canton Schwyz, then to Canton Zug.
Question 5: How should the situation now be assessed in terms of taxation on the basis of effort?
4. real estate agent
Markus Jeger is 25 years old and is a doctoral student studying economics at the University of Basel. He successfully completed his Master's degree with a Master's thesis on a macroeconomic topic in the Swiss housing market. His father, Andreas Jeger, is general partner and managing director of Jeger Immobilien KmG, a limited partnership specializing in the management and trading of real estate. Markus Jeger has the position of a limited partner.
In 2012, Markus Jeger bought an apartment building with five apartments in Gempenstrasse in Basel for CHF 820,000. At that time, Mr. Jäger was 18 years old and a student of economics at the University of Basel. Because he had no capital of his own at the time, he financed the purchase of the property through an interest-free loan from his mother in the amount of CHF 250,000 and by taking out a mortgage in the amount of CHF 570,000. That same year, Markus Jeger moved into the attic apartment of the property, where he lived until 2016; the remaining apartments were rented out. In 2017, Markus Jeger renovated all the apartments and divided them into condominium plots, which he subsequently sold individually. Markus Jeger carried out most of the construction planning, construction management and construction management of the renovation himself or delegated the corresponding tasks himself. He financed the renovation of the property largely by borrowing additional funds. In the same year, he purchased another apartment building in Delsbergstrasse in Basel for a purchase price of CHF 2,320,000.
Markus Jeger always declared the property in Gempenstrasse as private property, including in the 2017 tax return. In the corresponding assessment ruling, the Basel-Stadt tax administration declared Markus Jeger as a commercial property trader and calculated income from self-employment in the amount of CHF 800,000 for the direct federal tax within the scope of an assessment according to dutiful discretion.
Question 1: Can the property in Gempenstrasse be allocated to business assets on the grounds that it has been let by a majority?
Question 2: Was the tax administration right to offset?
Question 3: Markus Jeger is based on the view that the tax administration has accepted the qualification of the property in Gempenstrasse as private property in the years 2012 to 2016. This is expressed above all in the fact that the tax administration had always granted the lump-sum deductions for real estate in private assets. Is this argumentation suitable to question the assumption that Markus Jeger has already started self-employment in 2012?