Pole position

Switzerland's recently amended agreement with France on cross-border inheritance taxes could be ahead of the curve, says Matthew Shayle

Switzerland continues to be a place of change in the context of its international wealth and investment management offerings, its latest development being an amendment to the double taxation agreement with France dating from 1953. Both countries signed a new agreement on inheritance taxes on 11 July, and, with some fairly partisan rhetoric, Paris has declared its hope that this means more money being claimed from wealthy and 'evasive' French individuals.

Under the 1953 treaty, which generally favoured Swiss residents, the countries taxed (non-realty) inheritance broadly in the jurisdiction in which the deceased lived. This meant that a Swiss resident could leave Swiss assets to their French-resident relatives without subjecting those assets to French inheritance taxes. Swiss resident forfait [fixed amount] taxpayers also benefit from the terms of the agreement.

Broadly, the amendment means that inheritances will be taxed according to the jurisdiction in which the recipient resides. French residents, therefore, who receive assets from their Swiss-resident relatives will be taxed in France on those receipts, wherever the assets are located; in this context, even where those assets are located in Switzerland. It also stipulates that Swiss forfait taxpayers will be excluded from the 1953 treaty benefits.

Another change concerns companies holding French realty. Previously, French tax was not imposed on transfers on death of shares in société civile immobilières [fully incorporated companies with a registered office in France] owning French land. The amendment says that French land held through companies and other structures will be taxable in France on the death of an individual if the individual (and their family) owns at least half of the company and the French property makes up at least a third of the company's assets.

Of further note is the concession that, to be taxable in France as a beneficiary of a Swiss inheritance, a French resident must have been so resident for at least eight of the ten years prior to receipt.

Suspicious activity

France taxes inheritance progressively at up to 45 per cent, whereas Swiss cantons' inheritance tax regimes impose much lower rates and often exempt gifts to spouses and direct descendants. Given this difference and being mindful of French statements of intent, it seems that the amendment will make it all the more important for Swiss residents to undertake well thought-out succession planning where there are French-resident beneficiaries.

Ominously, the amendment also requires Switzerland to investigate suspicious bank activity, even where France does not have the name of the account holder.

It should be understood that the amendment must still be approved by the parliaments of each country and that politicians in the main Swiss political parties have spoken against it. A date for the Swiss parliamentary hearing has not yet been decided.

Bigger picture

Within Switzerland, concerned parties have expressed worry that the country's agreement to this amendment - taken in the context of other recently negotiated international agreements such as the 'Rubik' agreements with the UK and Germany and the 'model II' FATCA agreement with the US - is symptomatic of a Switzerland too ready to appease troubled countries seeking to repair their own coffers. The perception is that the amendment was imposed and was contrary to Switzerland's interests.

However, the amendment (if enacted) should be viewed in the context of the Swiss government's stated policy for protecting Switzerland as a global centre for asset management. In late 2012, the government announced details of a white-money strategy and identified asset management, pension funds and capital markets as having significant growth potential. The government plans to base its financial market policy on strengthening competitiveness, combating abuses and improving its framework.

Although some of the uncertainty that goes these changes affects the whole wealth management industry, the government's ambition to close Switzerland to undeclared funds and develop a strong financial services sector is clear and is arguably ahead of the growing trend towards globalisation.

On this basis, it may be argued that Switzerland is pre-empting the international community's inevitable move towards a complete tax cooperation network while protecting its own position in that network as a part of asset management plans.

Matthew Shayle is an associate in the private client group of Lenz & Staehelin's Geneva office

He writes a regular blog on Switzerland for Private Client Adviser