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About the Editor
Adam Starchild can occassionally be persuaded
to take time off from his private entrepreneurship
activities to write. During these interludes he
has written over a dozen published books and
hundreds of magazine articles, primarily on
international business and finance. Four of his books
have been on tax havens, the earliest in 1978, and the
most recent in 1993. His articles have a appeared in
a wide range of publications around the world --
including Euromoney, International Living,
The Futurist, Tax Planning International,
Trusts & Estates, and many more.
Discretionary Accounts
If you have something on the order of $100,000 to
invest (depending on the bank, more at most of them),
you might consider a discretionary account with a Swiss
bank. The bank will manage the investment for you,
according to criteria you define. The investment will
move among markets and currencies and instruments,
according to the bank's best judgment.
For this sort of operation, you should consider
Geneva's private banks, rather than the large
nationwide Swiss banks. Most of these banks require a
$250,000 minimum investment. Remember that most of the
smaller Swiss banks (except for Baer and Vontobel,
which are listed on the Swiss stock market) do not
publish their balance sheets. Many of them will not
accept business without an introduction. This is not a
matter for a first-time overseas investor to undertake
with only a book as a guide.
The leading Swiss private banks are Pictet,
Lombard Odier, and Hentsch in Geneva. (Hentsch will
take an account with $100,000, but the others probably
will not.) They do not welcome walk-in clients. Two
other private banks are a bit more accessible.
Gutzailler, because it is a Eurobond issuer, and
Vontobel, because it does corporate finance. It is
possible to use a corporate banking relationship as a
doorway to private banking services at these banks,
which is why they are included in the listings at the
end of this chapter.
Swiss banks have developed the gold storage
business into a fine art. Although the days of sales
tax-free gold buying in Switzerland are over, the fee
for storing your gold in Switzerland is still quite
low. The minimum for having a Swiss bank store your
money is one kilogram (2.2 pounds) or 30 gold coins. It
is perfectly legal for Americans to buy and store gold
outside the United States. You do not have to declare
to any authorities that you own gold abroad in any
amount. However, you should declare for U.S. taxes any
capital gain from a sale of gold.
Despite these options, most foreigners in
Switzerland have simple bank accounts. Most of these
are not numbered accounts, but ordinary name accounts.
The minimums for ordinary accounts (which vary by bank)
are much lower. You can arrange for your bank to keep
your statements for you or send them in a plain
envelope once a year. You can work out a code with your
bank to be sure that, when you call, the person on the
other end of the telephone actually is you. Most common
is to give your mother's maiden name.
The largest banks operate throughout the country.
Private banks are concentrated in Geneva because most
of their clients historically were French.
Many Swiss bankers (and even bank employees at the
bottom of the totem pole, such as tellers and
switchboard operators) speak English. They also speak
German, French, and Italian as a matter of course and
frequently speak other languages as well, such as
Spanish.
Still the safest wealth protection haven
Based on liquidity ratio (a function of how easily
a bank can cover its outstanding obligations by selling
off its assets), the following banks are the safest in
Switzerland, and perhaps the world.
These banks will open accounts for new clients
only if they are known to the bank or are recommended
by an advisor or correspondent with whom the bank is
familiar.
Banque Financiere De La Cite
Banque Lausannoise de Portefeuilles
BFZ Bankfinanz
Cambio Valorenbank
Dreyfus Sohne & Cie
Ferrier Lullin & Cie SA
FIBI Bank (Switzerland) Ltd.
Guyerzeller Bank
PBZ Privatbank Zurich
Ruegg Bank Zurich
The Dutch connection
One way to invest in a broad portfolio with a
Swiss bank without too much money is through the Dutch
mutual fund group Robeco (Rotterdamse Belegings Co.).
The Dutch group was founded in 1929. The SEC doesn t
approve of it because it is publicly listed and
open-ended. (In the United States, publicly listed
mutual funds are closed-ended.)
In practice, this means that Robeco intervenes on
the Dutch stock market to repurchase its shares or sell
them to keep the price close to net-asset value.
Legally, the funds in the group are incorporated
investment institutions with variable capital.
The Robeco group is the largest mutual fund
management group in the world outside the United States
and Britain, with funds under management topping $15
billion. It offers four funds: Robeco, an equity fund
aiming at worldwide blue chips; Rolinco, an equity fund
aiming at growth but still prudent; Rodamco, a
diversified international real estate investment
company (whose largest investments are in the United
States) aiming at appreciation and income; and Rorento,
a bond fund, a fixed-interest accumulator trust aiming
at earning interest and capital gains. Investors can
switch among the funds without fees. The Dutch fund
management group has opened a bank in Geneva, Banque
Robeco (Suisse), and which acts as a distribution
center for Robeco products outside the Netherlands.
A few years ago, the Dutch government began to
fuss about nondistributed earnings being reinvested in
the funds and threatened to make trouble about getting
identification from new clients (as part of a crackdown
on tax evasion within the Netherlands). To help
circumvent these developments the group opened its bank
in Geneva. The whole operation still is essentially run
out of Rotterdam, with the added advantage of Swiss
secrecy and multi-currency efficiency.
Deposits or withdrawals can be made in any major
currency. The highly efficient computerized system
automatically reinvests all dividends (without
withholding taxes, as would be required were Robeco
Swiss rather than Dutch). The minimum investment is
$5,000, and you can divide it among up to four funds to
best match your investment needs.
These folks speak English well: Robeco, N.V., Heer
Kobelweg 133, Postbus 973, NL-3000 Rotterdam, The
Netherlands; tel. (31-10)465-0711; fax (31-10)465-1544.
SWITZERLAND AND EUROPE
1991 was Switzerland's 700th birthday, but there
was no grand, flag-waving celebration. Throughout the
year, cities and villages celebrated in their own way,
with alpine yodeling and wrestling fests, fireworks
over Lake Zurich, and ballet in Lausanne.
This country -- made up of 26 highly independent
cantons, embracing four languages -- is simply too
diverse to host a big, nationalistic bash such as the
United States put on in 1976, the Swiss explain.
Seven hundred years ago, if legend is to be
believed, three brawny peasants met on a pretty meadow
called the Rutli at the foot of the steep climb to the
St. Gotthard pass, then as now the most direct route
from the upper Rhine to Venice and the silk routes
leading east. The perpetual alliance they swore is
usually considered the nucleus of the Swiss
Confederation.
The three men in the meadow 700 years ago were
tribal chieftains of what later became the cantons of
Schwyz, Uri and Unterwalden. They signed a treaty for
mutual protection in the crisis of succession after the
death of the Habsburg ruler Rudolf I. The Habsburgs'
ancestral castle was not far away, and the men of the
forest cantons worried that some more remote king might
be less amenable to leaving them alone to collect
bridge-tolls and provide guided mule trains.
Twenty years later the neighbors in Lucerne were
invited to join the loose confederation. Its influence
spread, sometimes by persuasion and often by conquest,
only after a resounding defeat by the French at
Marignano in Lombardy in 1515 did the mountaineers
decide to eschew foreign military adventures. That
neither kept them from fighting among themselves for a
few centuries more nor, since the country was
desperately poor in natural resources, from hiring
themselves out as mercenaries for others. The last
survivors of that practice are the Vatican's Swiss
Guards.
But expansion has its limits. In December, 1992,
the Swiss electorate voted against affiliation with the
European Community.
What should we make of the Swiss vote? Here is
the richest country in Europe (and on some measures the
richest in the world), in the middle of the world's
largest trading bloc, saying it can stand back from
closer union. On the face of it, it looks as though
the Swiss have made a serious and uncharacteristic
error, at least in economic terms. While the vote will
not lead to any economic catastrophe, conventional
wisdom suggests that it will clip something off future
growth. Swiss firms live by their exports and, to some
extent at least, they will find it harder to export
across the border. They may be forced to push some
production over to subsidiaries within the European
Community. Perhaps some investment that would have
gone to Switzerland will go elsewhere.
It was fear that the brilliant Swiss economy would
be damaged that encouraged the political leaders to
press for membership of the European Economic Area. Is
this a case of ordinary voters allowing their hearts to
rule their heads against the advice of the
establishment?
The conventional view was that the decision would
hinder future economic growth. It reckoned that as far
as the stock market was concerned a combination of
higher trade costs and lower gross domestic product
growth would more than offset any advantages from non-
membership such as lower interest rates and freedom
from EC competition policy. By this theory the
economic effects of a "no" vote would justify a
permanent fall in Swiss share prices.
This was an intriguing exercise, but of course a
move in the stock market of between 5 and 10 per cent
is not that much, given the scale of the swings that
take place in securities prices every week. The
implication for growth is perhaps more worrying. A
major investment banking firm, Goldman Sachs,
immediately published a crisis report reckoning that
the diversion of investment following the "no" vote,
and labor migration (skilled people leaving) might
together chip 0.6 per cent off annual growth over 10
years. That would be quite a lot, if it were to
happen.
But will it? There is a counter argument to be
made, which is that staying outside the EEA might
actually enhance Switzerland's economic performance. It
runs like this.
Switzerland happens to be in an extremely strong
structural position. It has great strength in
industries that look like being winners for the next
decade or more. These include financial services (the
three big banks and the Geneva-based fund management
industry), pharmaceuticals (the three big chemical
companies), food (Nestle, Suchard), and up-market
tourism (St. Moritz, Klosters and Verbier).
These are all areas of the world economy in which
Japan and the newly industrialized countries cannot
actively compete, and where the price of the product is
not being constantly shaved by some new technological
advance. By contrast, Switzerland is not strong in
cars, aircraft, electronic consumer durables, computers
-- all areas where European industry is, or is about to
be, threatened by the Far East.
In that sense it is better protected than most of
the EC. Switzerland does have important industries in
areas like machine tools, which are more open to
international competition and might suffer if the
economy were distanced from the rest of Europe, but
much of its strength is in areas where it is quite well
protected.
Indeed in some of these areas, being outside the
EC is a positive advantage. Take financial services,
which accounts for 30 per cent of the value of the
securities on the Swiss stock market. Swiss banks trade
on their safety and their discretion. It was
fascinating to see that foreign money actually flowed
into Swiss securities following the vote. Switzerland
was perceived as being a safer place to put cash if it
remained outside the EEA, presumably for fear that at
some future date the EC bureaucrats would get their
fingers on those numbered bank accounts.
In most of the other areas noted above, EEA
membership is not really an issue. In pharmaceuticals
there might be some modest disadvantage from staying
outside, but the market is such an international
"brain-based" one that it is hard to see any serious
damage. Food products? Well, Nestle generates roughly
97 per cent of its turnover outside Switzerland, and is
not really dependent on exports across the Swiss
national boundary into the rest of Europe. Tourism?
Membership of the EEA is not an issue.
So while there might be some modest disadvantage
to Switzerland, the Swiss winners would be fine. Some
sectors, in particular financial services, would do
better by staying outside. The effect might therefore
be merely to push the country even further towards its
specialties. But since these are good growth areas that
does not matter. One could even construct an argument
that Switzerland will benefit by keeping apart from the
rest of Europe.
The Use of Tax Havens
Tax havens are one of the most important subjects
for an international entrepreneur, yet few understand
and use them properly. One group discount them as
hiding holes for dirty money, which is not a legitimate
use for tax havens. Others think they are only for
banking money after you have made it. Not true either.
Money grows much faster if a tax haven is part of your
business planning, and almost any international
business has an opportunity to use tax havens. It is
the purely domestic business, confined to one country,
that cannot benefit from the international fiscal
loopholes. Switzerland is a major financial center,
but not generally a tax haven.
Simply stated, a tax haven is any country whose
laws, regulations, traditions, and, in some cases,
treaty arrangements make it possible for one to reduce
his overall tax burden. This general definition,
however, covers many types of tax havens, and it is
important that you understand their differences.
No-Tax Havens. These are countries that have no
income, capital gains, or wealth (capital) taxes, and
in which you can incorporate and/or form a trust. The
governments of these countries do earn some revenue
from corporations; "no-tax" means that what you pay is
independent of income derived through a company. These
states may impose small fees on documents of
incorporation, a small charge on the value of corporate
shares, annual registration fees, etc. Primary
examples are Bermuda, Bahamas, and the Cayman Islands.
No-Tax-on-Foreign-Income Havens. These countries do
impose income taxes, both on individuals and
corporations, but only on locally derived income. They
exempt from tax any income earned from foreign sources
that involve no local business activities apart from
simple "housekeeping" matters. For example, in such a
haven there is often no tax on income derived from
export of local manufactured goods.
The no-tax-on-foreign-income havens break down into two
groups. There are those that allow a corporation to do
business both internally and externally, taxing only
the income coming from internal sources, and those that
require a company to decide at the time of
incorporation whether it will be one allowed to do
local business, with the consequent tax liabilities, or
one permitted to do only foreign business and thus be
exempt from taxation. Primary examples in these two
sub-categories are Panama, Liberia, Jersey, Guernsey,
Isle of Man and Gibraltar.
Low-Tax Havens. These are countries that impose some
taxes on all corporate income, wherever earned.
However, most have double-taxation agreements many the
high-tax countries that may reduce the withholding tax
imposed on income derived from the high-tax countries
by local corporations. Cyprus is a primary example.
The British Virgin Islands is another, but no longer
has a tax treaty with the U.S.
Special Tax Havens. These are countries that impose
all or most of the usual taxes, but either allow
special concessions to special types of companies (such
as a total exemption from tax on shipping companies,
or movie production companies) or allow very special
types of corporate organization, such as the very
flexible corporate arrangements offered by
Liechtenstein. The Netherlands and Austria are
particularly good examples of this.
To understand the precise role of tax havens, it is
important for you to distinguish two basic sorts of
income: (1) return on labor and (2) return on capital.
The first kind of return is what you get from your
work: salary, wages, fees for professional services,
and the like. The second kind of return relates,
basically, to the return from your investments:
dividends on shares of stock; interest on bank
deposits, loans and bonds; rental income; royalties on
patents. It is the second kind of income, income from
an investment portfolio, that tax havens are useful
for. Forming a corporation or trust in a tax haven can
make the second form of income totally tax free, or
taxed so low that you will hardly notice. Certain types
of businesses can be effectively based in a tax haven.
If you publish a newsletter, for example, you might be
able to set up the entire operation in a totally tax
free country such as the Bahamas or the Cayman Islands.
If your income comes from copyright royalties, perhaps
on the computer program you invented, the Netherlands
is famed as a base for sheltering royalty income.
Tax havens are a very complex subject, but the
hours you spend studying their use will probably pay
you more per hour than the hours you spend directly
earning an income -- an unfortunate commentary on the
confiscatory taxation policies of most governments.
For the best detailed information on tax havens,
order The Tax Haven Report from Scope International
Ltd., 62 Murray Road, Waterlooville, Hants., PO8 9JL,
United Kingdom. Price is approximately US$135,
including airmail postage worldwide, and they accept
Visa or MasterCard.
Just stop and think for a moment how much faster
your money can grow if you are not paying out an
average of 40% to a taxing government somewhere.
THE SWISS INSURANCE INDUSTRY
Insurance companies belong to one of the most
important sectors of the economy in Switzerland. It is
also extremely conservative and safe. In 130 years
none have failed, a record that even Swiss banks cannot
match. Unique tax advantages combined with
conservative money management cause Swiss insurance
products to perform much better than one might expect.
Conservative does not have to mean low returns. (If
the insurance company doesn't have to deduct losses on
a lot of bad investments, it is much easier to maintain
a conservative, safe, high return.)
Swiss government insurance company regulation
keeps investment portfolios at a nearly no risk level.
Liquidity and valuation of investments are ultra-
conservative. Only a maximum of 30% of investible
funds may be put in real estate. Swiss real estate has
always held the highest values, but this is ultra-
conservatism at work. If it should go down, it might
not be liquid enough to cover claims -- so let's be
ultra-conservative and severely limit the exposure. A
philosophy that a lot of American banks and insurance
companies are probably now wishing they had followed --
or at least their policyholders are wishing they had.
Then just in case this isn't enough, Swiss
insurance companies often carry their real estate
holdings at less than half their present market value,
allowing a very wide margin of price changes before
safety can possibly be affected.
Swiss accounting in general seems to be on the
conservative side. Companies tend to have hidden
reserves of millions, rather than the North American
style of overvaluing assets to achieve a high stock
market price for takeover bids. This conservatism
applies all the more to the insurance industry.
The Swiss insurance companies offer a greater
range of services than the American investor is used
to. In fact, the range is broader than that offered by
most Swiss banks. There are only about 20 insurance
companies in Switzerland. This concentration makes the
industry stronger, and easier to supervise, than the
thousands of American insurance companies. There are
no weak insurance companies in Switzerland, unlike the
United States were insurance laws in many states permit
an insurance company to be formed with capital as low
as $100,000, and licensed, empty insurance company
shells are frequently sold in classified ads in The
Wall Street Journal and other newspapers.
The industry is regulated by the Swiss Federal
Bureau of Private Insurance -- a very strict regulator.
There is no rate competition -- the emphasis is on
maintaining the strength of the insurer, and
prohibiting risky investments (although it is unlikely
that a Swiss insurance manager would even think of
making a risky investment).
Regulation of private insurance companies has been
established by a clause in the Swiss federal
constitution since 1885. Contrast this to the United
States where insurance companies are often regulated
only by rules promulgated by a politically appointed
insurance commissioner, who expects to be employed by
an insurance company when the governor who appointed
him is retired in a few years.
BOOKS BY ADAM STARCHILD
It's Your Money: A Consumer's Guide to Credit
Books for Business
How to Develop and Manage A Successful Condominium
Books for Business
Business in 1990: A Look to the Future
anthology introduced and edited by Adam Starchild
University Press of the Pacific
Starchild & Holahan's Seafood Cookbook (co-author)
Pacific Search Press
Tax Havens: What They Are and What They Can Do
for the Shrewd Investor
Arlington House
Tax Havens and Corporations
Gulf Publishing Co.
Investing in the USA
Euromoney Publications
The Amazing Banana Cookbook
Lakewood Books
Everyman's Guide to Tax Havens
Paladin Press
The Tax Haven Story
PPI Publishing
Establishing Self Employed and Individual Retirement Plans
PPI Publishing
Building Wealth: A Layman's Guide to Trust Planning
AMACOM, publishing division of
the American Management Association
How to Develop Your Own Construction & Land
Development Business
Nelson-Hall Publishers
Tax Planning for Foreign Investors in the U.S. (co-author)
Kluwer Law & Taxation Publishers
The Seafood Heritage Cookbook
Cornell Maritime Press
Marketing Computer Hardware & Software in Latin America &
The Caribbean
Books for Business
The Tax Haven Report
Scope Books
You will find these and other books by Adam
Starchild listed in Books in Print at your public library
or bookstore. These books generally are not available
directly from the author, but most bookstores will order
them for you directly from the publishers. Those books
which are out of print may be obtained from the Books on
Demand Service of University Microfilms in Ann Arbor,
Michigan. Again your bookstore may place this order for
you, or you may obtain current price and ordering
information by calling University Microfilms.
The Shareware Principle Extended to Consulting
Offering this material on disk through shareware
distribution channels is an experiment. The principle of
"try before you buy" computer shareware is now well
established, and the author is now offering a test of
"try before you buy" consulting services.
Normally the author works with a client's own
lawyers and accountants, advising them on the comparative
advantages and legal structures available in the various
tax havens, while the domestic professionals then relate
that knowledge to the tax laws of the particular client's
country of citizenship and/or residence. The author's fees
for such consultations are normally $250 per hour plus
travel expenses. You now have the opportunity to study the
basic structure of that advice, and determine if you can
use it in your personal financial situation. There is no
set fee for the use of this program, and the author leaves
it to the individual user to determine how much use he has
derived from it.
If you read it and enjoy it as a book, but have no
particular use for the information except as information,
then a price similar to that you would have paid for a book
would be appropriate -- say $25. (The author's books on
tax havens sell for as much as $125.) If you are using this
program as a substitute for personal consultations, then a
substantially larger fee is requested -- a minimum of $250
would be appropriate. Checks should be made payable to
Adam Starchild and mailed to:
Adam Starchild
P. O. Box 917729
Longwood, Florida 32791
U.S.A.
It is understood that some readers of this type of
information may prefer to leave no trail by sending a money
order, or remain anonymous even to the author by sending a
money order or cash. That is perfectly acceptable. Others
may prefer to maintain proof of payment in order to take a
tax deduction for tax or investment information.
Swiss Secrecy: Not A Legend
Swiss banking is often identified in America with
banking secrecy. Popular media stories have created
two contradictory pictures: that Swiss secrecy hinders
law enforcement officers from prosecuting criminals,
while others claim that Swiss secrecy does not exist
anymore and is as full of holes as a Swiss cheese.
Neither is true.
The basic position in Swiss civil law is that the
information concerning a customer and the customer's
financial dealings is protected as part of the
individual's legal right to privacy. In Switzerland,
this has been made part of Article 28 of the Swiss
Civil Code, and not only protects the information, but
makes the person violating the secrecy liable to pay
damages to the customer. In addition, the banking law
makes it a criminal offense in Switzerland for a banker
to divulge information about a customer in violation of
the law, punishable by fine or imprisonment. Both the
bank and the bank employee may be subject to various
penalties if a violation occurs.
A bank can only disclose information when
authorized to do so under existing statutory provisions
or by a Swiss court order, which must be founded on
law. Secrecy is interpreted so broadly that it is
illegal for a bank to say whether or not a person is a
customer, since if the bank failed to do so it would be
implying that the person was a customer.
The right of secrecy is a right belonging to the
customer, not the bank. It is the customer's privacy
that is protected by law. The customer can waive the
secrecy, but the bank cannot. For example, the
customer may waive secrecy and ask the bank to give a
credit reference to a specific creditor. But such a
waiver is only valid if the customer acts voluntarily
and not under duress. Therefore, waivers that were
signed pursuant to foreign court orders compelling a
customer to sign a waiver may well be invalid. A
financial institution cannot ask the government for an
order waiving secrecy. Only the customer can waive the
secrecy.
Contrary to an opinion current in America, Swiss
secrecy is not absolute. It can be overridden by
statutory provisions which compel the giving of
information.
Such rules requiring disclosure of information --
usually with a limited scope -- can be found in Swiss
inheritance law (you really wouldn't want your
legitimate heir going into the insurance company with
your death certificate to be told they can't tell him
anything), in enforcement of judgments from creditors,
in bankruptcy or in divorce.
The most widely known limitation on secrecy is in
treaties concerning Swiss cooperation in foreign
criminal matters.
In a criminal investigation conducted in
Switzerland, of a Swiss crime committed by a Swiss
citizen, secrecy can be lifted by court order. The
treaties extend this possibility to foreign crimes by
foreign citizens in foreign investigations, but only in
the limited circumstances spelled out in the treaties.
Before a foreign legal assistance request for
Swiss financial records can be honored the following
conditions must be met:
1) Compulsory disclosure is only possible if the
offense that is being prosecuted is punishable as a
criminal offense in both countries (the requesting
state and Switzerland).
2) In tax cases assistance is available to
foreign prosecutors only if the investigated violation
of foreign tax laws would be qualified under Swiss law
as a tax fraud and not merely as tax evasion. Tax
evasion is simply the failure to declare income or
assets for taxation. Tax fraud is distinguished by the
fact that "fraudulent conduct" is involved. Normally
"fraudulent conduct" can only be assumed if forged
documents are used.
There is a special provision of the Swiss-United
States Treaty on Mutual Assistance in Criminal Matters
that provides Swiss legal assistance to U. S.
prosecutors even in tax evasion cases if they are
conducting an investigation against an organized crime
group.
3) As a general rule, the information obtained in
Switzerland through a legal assistance procedure may
not be used for investigative purposes nor be
introduced into evidence in the requesting state in any
proceeding relating to an offense other than the
offense for which assistance has been granted.
It must be emphasized that foreign authorities or
foreign courts cannot directly ask a Swiss financial
institution for information. Even in cases in which
legal assistance can be granted and therefore secrecy
is lifted, only a Swiss court order - which in these
cases is based upon a foreign request for legal
assistance - can validly lift secrecy.
Considering this, it can be said that secrecy is
strict and is only put aside in case clearly defined by
Swiss law and pursuant to Swiss rules. Secrecy is,
however, not absolute and does therefore not protect
criminals.
Switzerland has long served as a magnet for the
money of wealthy foreigners who perceive the world as
buffeted by over-taxation, over-regulation and
political turmoil. They are attracted, of course, by
the confidentiality and discretion that have been a
hallmark of Swiss bankers since the French Revolution,
when they offered financial refuge to French
aristocrats. In 1934 secrecy was enshrined into law.
Insurance Annuities
Swiss annuities minimize the risk posed by U. S.
annuities. They are heavily regulated, unlike in the
U.S., to avoid any potential funding problem. They
denominate accounts in the strong Swiss franc, compared
to the weakening dollar. And the annuity payout is
guaranteed.
Swiss annuities are exempt from the 35%
withholding tax imposed by Switzerland on bank account
interest received by foreigners. Annuities do not have
to be reported to Swiss or U.S. tax authorities. They
are not a foreign financial account for the purpose of
U.S. reporting requirements.
A U.S. purchaser of an annuity is required to pay
a 1% U.S. federal excise tax on the purchase of any
policy from a foreign company. This is much like the
sales tax rule that says that if a person shops in a
different state, with a lower sales tax than their home
state, when they get home they are required to mail a
check to their home state's sales tax department for
the difference in sales tax rates.
The federal excise tax form (IRS Form 720) does
not ask for details of the policy bought or who it was
bought from -- it merely asks for a calculation of 1%
tax of any foreign policies purchased. This is a one
time tax at the time of purchase; it is not an ongoing
tax. It is the responsibility of the U. S. taxpayer,
to report the Swiss annuity or other foreign insurance
policy. Swiss insurance companies do not report
anything to any government agency, Swiss or American --
not the initial purchase of the policy, nor the
payments into it, nor interest and dividends earned.
Earnings on annuities during the deferral period
are not taxable in the U.S. until income is paid, or
when they are liquidated, following exactly the same
tax rules as for annuities issued by U.S. insurance
companies.
Swiss annuities can be placed in a U. S. tax-
sheltered pension plans, such as IRA, Keogh, or
corporate plans, or such a plan can be rolled over into
a Swiss-annuity. (To put a Swiss annuity in a U.S.
pension plan, all that is required is a U.S. trustee,
such as a bank or other institution, and that the
annuity contract be held in the U.S. by that trustee.
Many banks offer "self-directed" pension plans for a
very small annual administration fee, and these plans
can easily be used for this purpose.)
Investment in Swiss annuities is on a "no load"
basis, front-end or back-end. The investments can be
canceled at any time, without a loss of principal, and
with all principal, interest and dividends payable if
canceled after one year. (If canceled in the first
year, there is a small penalty of about 500 Swiss
francs, plus loss of interest.)
A new Swiss annuity product (first offered in
1991), SWISS PLUS, brings together the benefits of
Swiss bank accounts and Swiss deferred annuities,
without the drawbacks -- presenting the best Swiss
investment advantages for American investors.
SWISS PLUS, is a convertible annuity account,
offered only by Elvia Life of Geneva. Elvia Life is a
$2 billion strong company, serving 220,000 clients, of
which 57% are living in Switzerland and 43% abroad.
The account can be denominated in the Swiss franc, the
U.S. dollar, the German mark, or the ECU, and the
investor can switch at any time from one to another.
Or an investor can diversify the account by investing
in more than one currency, and still change the
currency at any time during the accumulation period --
up until beginning to receive income or withdrawing the
capital.
If you are not familiar with the ECU, it is the
European Currency Unit, a new currency created in 1979.
It is composed of a currency basket of 11 European
currencies, and its value is calculated daily by the
european Commission according to the changes in value
of the underlying currencies. The ECU is composed of a
weighted mean of all member currencies of the European
Monetary System. Since the ECU changes its balance to
reflect changes in exchange rates and interest rates
between these currencies, the ECU tends to limit
exchange rate risk and interest rate risks.
Although called an annuity, SWISS PLUS acts more
like a savings account than a deferred annuity. But it
is operated under an insurance company's umbrella, so
that it conforms to the IRS' definition of an annuity,
and as such, compounds tax-free until it is liquidated
or converted into an income annuity later on.
SWISS PLUS accounts earn approximately the same
return as long-term government bonds in the same
currency the account is denominated in (European
Community bonds in the case of the ECU), less a half-
percent management fee.
Interest and dividend income are guaranteed by a
Swiss insurance company. Swiss government regulations
protect investors against either under-performance or
overcharging.
SWISS PLUS offers instant liquidity, a rarity in
annuities. All capital, plus all accumulated interest
and dividends, can be freely accessible after the first
year. During the first year 100% of the principal is
freely accessible, less a SFr 500 fee, and loss of the
interest. So if all funds are needed quickly, either
for an emergency or for another investment, there is no
"lock-in" period as there is with most American
annuities.
Upon maturity of the account, the investor can
choose between a lump sum payout (paying capital gains
tax on accumulated earnings only), rolling the funds
into an income annuity (paying capital gains taxes only
as future income payments are received, and then only
on the portion representing accumulated earnings), or
extend the scheduled term by giving notice in advance
of the originally scheduled date (and continue to defer
tax on accumulated earnings).
According to Swiss law, insurance policies --
including annuity contracts -- cannot be seized by
creditors. They also cannot be included in a Swiss
bankruptcy procedure. Even if an American court
expressly orders the seizure of a Swiss annuity account
or its inclusion in a bankruptcy estate, the account
will not be seized by Swiss authorities, provided that
it has been structured the right way.
There are two requirements: A U. S. resident who
buys a life insurance policy from a Swiss insurance
company must designate his or her spouse or
descendants, or a third party (if done so irrevocably)
as beneficiaries. Also, to avoid suspicion of making a
fraudulent conveyance to avoid a specific judgment,
under Swiss law, the person must have purchased the
policy or designated the beneficiaries not less than
six months before any bankruptcy decree or collection
process.
These laws are part of fundamental Swiss law.
They were not created to make Switzerland an asset
protection haven. In the Swiss annuity situation, the
insurance policy is not being protected by the Swiss
courts and government because of any especial concern
for the American investor, but because the principle of
protection of insurance policies is a fundamental part
of Swiss law -- for the protection of the Swiss
themselves. Insurance is for the family, not something
to be taken by creditors or other claimants. No Swiss
lawyer would even waste his time bringing such a case.
Contact information
The only way for North Americans to get
information on Swiss annuities is to send a letter to a
Swiss insurance broker. This is because very few
transactions can be concluded directly with foreigners
either with a Swiss insurance company or with regular
Swiss insurance agents.
When you contact a Swiss insurance broker, be sure
to include, in addition to your name, address, and
telephone number, your date of birth, marital status,
citizenship, number of children and their ages, name of
spouse, a clear definition of your financial objectives
(possibly on what dollar amount you would like to
receive), and whether the information is for a
corporation or an individual, or both.
One firm specializes in dealing with English
speaking investors, and everybody in the firm speaks
excellent English. They are also familiar with U. S.
laws affecting the purchase of Swiss annuities.
Contact: Mr. Jurg Lattmann. JML Swiss Investment
Counsellors AG, Dept. 212, Germaniastrasse 55, 8031 Zurich,
Switzerland; tel. (41-1) 363-2510, fax: (41-1) 361-074.
WHY SWITZERLAND?
Switzerland has long served as a magnet for the
money of wealthy foreigners who perceive the world as
buffeted by over-taxation, over-regulation and
political turmoil. They are attracted, of course, by
the confidentiality and discretion that have been a
hallmark of Swiss bankers since the French Revolution,
when they offered financial refuge to French
aristocrats.
Banking in Switzerland, a land of few natural
resources, has been immensely lucrative. Operating in a
country less than half the size of Maine, Swiss banks
control more than $400 billion in assets, making the
country the third-largest financial center in the
world.
For people with money to protect -- whether a
little or a lot -- Switzerland is traditionally
considered the world's safest repository. These days,
the Swiss can give Americans many reasons to leave
funds in Switzerland But the promise of total secrecy
in financial matters remains one of the greatest
attraction of Swiss banks.
The Withholding Tax
The Swiss impose a 35% withholding tax on interest
paid in Swiss francs. You can recover this money by the
simple expedient of declaring the interest to the IRS.
You will come out ahead doing this, because you will
receive a refund, if you are in the standard 28%
bracket and not subject to state or city income taxes.
However, the Swiss do not issue 1099 forms, and it may
be difficult to determine the appropriate exchange rate
for the dollar.
One way to avoid the withholding tax is to have an
account denominated in a currency other than the Swiss
franc. A certificate of deposit can be denominated in
Swiss francs, but held outside the country. However,
such accounts may be only as sound as the foreign bank
into which the Swiss bank placed your money. Another,
very common, way to avoid the withholding tax is to
have the Swiss bank act as your money manager, in what
is called a fiduciary account. All of the investments
are made outside of Switzerland, in whatever you tell
the bank to do -- mortgages, mutual funds, other banks.
The money is merely passing through Switzerland, and is
not taxed there.