Foreigners who take up residence in Switzerland for the first time or after an absence of more than ten years may opt for a special tax regime provided that they will not carry out any gainful activity in the country. In doing so, they will benefit from the application of a special method for the assessment of their income and wealth, which is an expenditure–based taxation. This special regime is more generally known as “lump-sum taxation”. It is applied at Federal level and in some cantons, more particularly in the West part (French speaking part) of Switzerland. Opting for lump-sum taxation regime will generally be a decisive criterion for the grant of a residence permit to applicants from non EU countries who are under the age of 55 and have no specific personal relation to Switzerland.

Lump-sum taxation has raised a rather intensive controversy in Switzerland during the year 2014 and even earlier. Until very recently the system was under the attack of certain political parties and organizations that launched popular initiatives (typical democratic rights provided by Swiss constitution), in several cantons and at Federal level, calling for lump-sum taxation to be abolished. The canton of Zürich, for instance, had to abolish lump-sum taxation in 2009 as a result of a cantonal popular initiative that collected a majority of votes against this tax regime. The reasoning of the opponents to lump-sum taxation is that the system would not be consistent with the constitutional guarantee of equal treatment. In other words, tax payers benefitting from lump-sum taxation – who cannot be Swiss citizens – are considered to be taxed on a more favourable way than other tax payers – mainly Swiss citizens – who are taxed under the ordinary regime.

This is not the place to enter into the controversy even though there are many reasons to consider that foreigners taxed on a lump-sum basis in Switzerland are not actually in the same situation as Swiss nationals and other foreigners who are taxed under the ordinary regime. Therefore different situations allow different treatments, in particular when it relates to taxation. Furthermore, economic considerations surrounding lump-sum taxation show that this system brings a lot of benefits to the local economy which recovers most of the expenses, quite actual and significant, incurred by lump-sum taxpayers for their living at their place of residence. This explains why the business community strongly opposed the abolition of lump-sum taxation.

Finally, on November 30^th, 2014, the initiatives to abolish lump-sum taxation at Federal level and in the canton of Geneva were strongly rejected by the population at both levels. So far there are no other cantonal initiatives against lump-sum taxation pending in other cantons.

It is now very clear that lump-sum taxation will remain in force in Switzerland, at Federal level and in some cantons, more particularly in the French speaking part of the country (for instance in the cantons of Geneva, Vaud and Valais). However, following the abolition of this special regime in some cantons of the German speaking part of Switzerland, Confederation had already taken the lead in tightening the conditions for the application of lump-sum taxation at Federal and Cantonal levels. In this respect amendments, effective as at January 1, 2016, have been made to the Federal Direct Taxation Act (DFTA) and to the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal levels (DTHA).

For the sake of clarification, it is worthwhile noting that Swiss tax system provides for tax jurisdiction at three levels, Federal, Cantonal and Communal. Taxation is however made by Cantonal authorities who act for themselves and, by delegation, for the Confederation and the home municipality of the tax payer. Confederation levies tax on income only, while cantons and municipalities levy tax on income and wealth.

Principles applicable to lump-sum taxation at Federal level (art. 14 DFTA) and at Cantonal and Communal levels (art. 6 DTHA)

• Expenditure-based taxation (lump-sum taxation) replaces ordinary taxes on income and wealth.

• The system is available only for foreigners who set up domicile in Switzerland for the first time or after an absence of ten years. Swiss nationals cannot benefit from this tax regime.

• Spouses living in the same household must both meet the requirement for lump-sum taxation.

• The portion of expenditure–based taxation replacing the ordinary income tax is calculated on the basis of the annual expenditure / living costs of the tax payer, in Switzerland or abroad, for himself and for his family members or other people dependant from him and living with him. Taxes are levied on the highest of the following amounts:

• The minimum amount set by the law, which may not be less than CHF 400’000.- for Federal direct taxation. (Cantons have to set in their legislation, at their discretion, the amount of the minimum assessment basis);

• Seven times the annual rent or annual deemed rental value of the home of the main tax payer;

• For other tax payers living for example in a hotel or in a pension: three times the price of the annual pension for food and housing at the place of residence of the tax payer.

• Tax is levied at ordinary tax rate.

• Cantons are free to determine how cantonal wealth tax is covered by lump-sum taxation.

• The amount of taxes due on the basis of the lump-sum assessment must be at least equal to the total of income and wealth taxes that would be charged to the tax payer if he would be taxed on following items, under the ordinary regime:

• Real estates in Switzerland and the income generated by such assets;

• Movable assets located in Switzerland and the income generated by such assets;

• Financial assets invested in Switzerland, including debts secured by real estate and the income generated by such assets;

• Copyright, patents and similar rights exploited in Switzerland and the income generated by such rights;

• Retirement pensions, annuities and other pensions from Swiss sources;

• Foreign income for which the tax payer requires partial or full exemption of foreign taxes based on any double taxation treaty entered into by Switzerland with the country where taxes are levied.

• If the income from a foreign state is exempted provided that Switzerland levies taxes on such income, applying the rate for global income, Swiss taxes are calculated not only on the basis of the income mentioned above but on the basis of all items of income from the state at source or attributed to Switzerland based on the relevant double taxation treaty.

Specific conditions at Cantonal level (limited to the Cantons of Geneva, Vaud and Valais):

Minimum annual assessment basis, i.e. lump-sum amount, set forth by law:

• Geneva: CHF 300’000.-

• Vaud: CHF 300’000.-

• Valais: CHF 220’00.-

However, in practice lump-sum taxation is granted based on higher minimal amounts, as follows, by approximation:

• Geneva: CHF 350’000.-

• Vaud: CHF 350’000.-

• Valais: CHF 280’00.-

So far, the above cantons have not set forth any specific condition in order to assess wealth separately, in addition to tax assessment based on expenditures.

Comments

As explained above, renouncing to any gainful activity is a key condition in order to benefit from lump-sum taxation. Therefore, foreigners who become new Swiss taxpayers under this special regime are not allowed to take up any employment in Switzerland, should it be with a third person/entity or with a legal entity under their control, for instance as shareholder or beneficial owner of such entity. The same applies to any independent gainful activity. For the time being carrying out gainful activity outside Switzerland is still allowed. The conditions in this respect might become more tightened in the future, at least at Cantonal level. According to existing practice, lump-sum tax payers are still authorised to be a member of a Board of directors of a company in which they have interests (equity and/or loan), in the capacity as “observer” for the purpose of monitoring their investment. However they may neither participate to corporate decisions nor receive any remuneration for their position within the company. In any way one must remain careful in this respect. The practice, more particularly at Cantonal level, could develop new and stricter requirements.

Lump-sum taxation and residence permit

Any foreigner who decides to take up domicile in Switzerland with or without any gainful activity must obtain a residence permit.

Residence permit for gainful activity must be obtained from the first day of activity. Residence permit without any gainful activity is necessary after a continuous stay of 90 days in the country.

For European citizens, obtaining a residence permit with or without gainful activity is a simple and swift process based on the agreement between Switzerland and the European community supporting the free movement of persons.

For citizens from non EU countries, the process is less straightforward. Residence permit with gainful activity requires a labour market survey to verify that there is no one available on local market and in the EU countries to take up the position. Authorizations are reserved for people at executive level for positions that will help develop the local labour market. For residence permit without gainful activity, the applicant must be over 55 and justify good ties with Switzerland. If none of these two prerequisites are met, the applicant may still show that he will be of a significant interest to his home canton in terms of taxation.

In this context, lump-sum taxation is frequently combined with the application for residence permit without gainful activity. Indeed, for non EU applicants who are not 55 of age or older and who have no ties to Switzerland, opting for lump-sum taxation is generally the only route to the grant of a residence permit without gainful activity. One must however be aware that the lump-sum amount must be of some significance in order to create a tax interest for the canton. Currently, the minimum amount of the lump-sum taxation basis is in the order of CHF 800’000.- to CHF 1’000’000.- depending on the Canton of residence. One can note therefore that the minimum assessment amounts (CHF 400’000.- at federal level) or seven times the housing expenses as lump-sum amount might not be sufficient when applying for a residence permit.

For practical reasons, it is advised therefore to obtain first a lump-sum taxation agreement with relevant Cantonal tax administration in order to be able to apply then for a residence permit in front of the population office of the Canton of residence.

Conclusion

The recent confirmation of the lump-sum taxation system in Switzerland will quite certainly result in a renewed interest for foreigners who see the country as a possible place for immigration. In addition the political and economic stability in the country combined with a high quality of life will continue to make Switzerland a first choice for immigration.

The UK encourages foreign direct investments by granting high net worth individual investors and their families the right to reside temporarily in its territory, with the associated tax benefits of the resident ‘non-dom’ regime. And after a qualifying period, whose length depends on the amount invested in the British economy, the individual and their kin can obtain indefinite leave to remain (ILR) in the UK. Later, they can even apply for British citizenship.

The Immigration Rules that regulate the process are extremely complex and subject to frequent and unexpected changes. The most significant amendments became effective on 6th November 2014 following an extended period of scaremongering and rumours, which mostly turned out to be true. The new rules doubled the investment threshold and only gave panicked HNW migrants 20 days to apply under the old rules or face an expensive revision of their investment plans.

The Home Office’s explanatory notes are comprehensive; however, clients rarely submit visa applications themselves. Usually they engage a triad of advisors who are experts in the fields of UK immigration law, financial and tax planning. It is not a coincidence that the tax consultants are right at the end of the list — experience has shown that despite moving to a high-tax country, seeking comprehensive tax advice often comes as an after-thought, when the investments are made and the arrival dates are set. This article highlights the primary tax planning considerations relevant to non-domiciled investors at different stages of the UK immigration process for high-value migrants.

Immigration

There are two pathways that such high-value migrants can take — Tier 1 (Investor) and Tier 1 (Entrepreneur), although this article focuses on the planning opportunities for the former. These differ in the size of the investments and the commitments on behalf of the migrant. The Home Office’s website (http://tinyurl.com/ldtl8cw) explains the regimes in detail and contains policy guidance documents (http://bit.ly/1yIoFKt), extracts from which the author used in writing this article.

The Tier 1 (Investor) category is for high-net-worth individuals who can afford to invest at least £2 million in the UK. The investor does not need a job offer in the UK nor is he required to prove a good command of the English language although the latter will be required when applications for ILR and settlement are made. Broadly, the funds must be his own savings or belong to his spouse or a partner — the Rules no longer permit borrowing the funds. According to Home Office’s statistics (http://bit.ly/1GvfGTu) in 2013, the Chinese received the largest number of investor visas, followed by the Russians; the rest of the nationalities trailing behind. Anecdotal evidence suggests a significant number of the investors being wives of wealthy foreigners; the latter, together with the couple’s children being her dependants, who are free to visit the UK as they please without any commitments as to the duration of visits or making the investments.

For the sake of completeness, Tier 1 (Entrepreneur) is for non-European migrants who want to invest in the UK by setting up or taking over, and being actively involved in the running of, a UK business or businesses. Broadly, the applicant needs to invest £200,000 in a UK company and comply with a host of other requirements, including speaking English to a certain standard and having enough money to support himself in the UK. This route is attractive to younger entrepreneurs who might have sufficient savings and are prepared to actively manage the business and create jobs in the UK. In fact, certain graduate entrepreneurs are allowed to apply with only £50,000. With the recent tightening of the rules allowing foreign students to seek work in the UK after finishing their studies, the Entrepreneur visa has become especially popular with parents willing to help their children to stay in the UK.

Both routes allow the migrant to apply for the ILR after a continuous residence period in the UK of five years. This can be reduced to three years for the investor who invests £5 million or the entrepreneur who makes extraordinary progress with developing his business. A further reduction to two years is available to the investor who invests £10 million. Interestingly, the Rules only allow the main applicant to reduce the length of time before he applies for the ILR and exclude his dependants, who need to wait the whole five year period before submitting the application. There are also strict requirements regarding the number of days that the migrant can spend outside the UK in any 12-month period (http://bit.ly/1ndkzW5). Failing to meet them will result in the inability to apply for the ILR and settlement.

Statutory Residence Test

Taxation in the UK primarily depends on a person’s residence status. Since April 2013, residence has been determined under the statutory residence test (SRT). The SRT is explained in brochure RDR3 (http://tinyurl.com/SRTRDR3), which also contains useful practical examples, which are worth reviewing by anyone attempting to ascertain their residence situation. The SRT establishes residence status according to the number of days that an individual spends in the UK during the tax year that runs between 6 April and 5 April of the following calendar year. Residents generally pay tax on their worldwide income and gains, whilst non-residents are generally only taxed on income from sources in the UK. However, individuals resident but not domiciled in the UK can elect to be taxed on the remittance basis where non-UK income and gains are only liable to tax when directly or indirectly remitted (brought) into the UK.

On its own, an individual’s immigration status or current nationality has no bearing on his UK tax liability whatsoever. The investor should be treated as a regular typically non-domiciled taxpayer who requires the usual pre- and post-arrival tax planning measures. Nevertheless, tax advice should take into account two considerations that pertain to the granting of the Tier 1 (Investor) status.

Firstly, assume that the end goal of most investors and their families is to settle in the UK. To achieve this they must spend at least 185 days in every 12-month period in the UK starting from the day of arrival in the UK under the newly issued leave to enter. This immediately denies the benefit of the UK-residence planning techniques based on the extended periods of absences from the UK. As a result, most tax planning measures should be undertaken before the investor’s arrival in the UK during Stage one as explained below.

Secondly, the Rules require the investors to physically bring the investment funds into the UK. Unless these are derived from clean capital, accumulated during the period of non-UK residence, the investor will suffer the consequences of making a remittance of foreign income or gains, which will be taxed at the appropriate rates. Further remittances might occur where the investor pays for the services rendered to him in the UK, such as immigration advisors’ and solicitors’ fees. Taxation of remittances can be avoided under the business investment relief as described below; however, the expense of planning for the minimisation of the tax burden might nullify the tax benefits it aims to achieve.

The Tier 1 (Investor) process

It is possible to split the Tier 1 (Investor) immigration process in three stages. Stage one is preparatory during which the migrant collects documents and submits the visa application. As Stage two, the investor arrives in the UK after receiving leave to enter the country. Stage three involves the migrant making the investment, which will permit him to remain in the UK and to apply for the extension of his stay until he can apply for the ILR and later for citizenship. There might be a period of several months between Stages one and two during which the investor stays in his home country waiting for the outcome of the application. The migrant typically has up to three months from the day of his arrival in the UK to fulfil the requirements of Stage three. The investor should plan to remain non-UK resident at Stage one and even partly through Stage two; and during this period of non-residence he should aim to perform the larger share of his tax planning strategy.

During Stage one the applicant prepares and submits documentary evidence of his ability to invest at least £2 million in the British economy. This amount must be in cash and kept in a regulated financial institution (typically a bank) in the UK or overseas. Sometimes instead of clear funds the future migrant has an asset portfolio that includes capital assets and undistributed income, but the Home Office will not take these into consideration. Funds held by companies or trusts are equally excluded. The investor should convert these assets into cash: any gains accumulated in securities and properties should be crystallised by selling them; where there is a right to receive income — dividends, interest, salary, royalties, business profits — this right should be exercised and the proceeds received into a bank account.

It might seem reasonable only to create sufficient cash to fund the £2 million investment. In fact, when converting assets into cash or receiving income, the investor might be subject to a double tax liability, determined by his current tax residence and the source of funds, although this might be reduced under double tax agreements or domestic tax exemptions. However, any non-UK gain that is crystallised and non-UK income that the investor receives after he becomes UK resident will be liable to UK’s fairly high taxes unless the taxpayer claims the remittance basis of taxation and does not bring the funds to the UK. As a result, the migrant might face the situation where he cannot pay for his life in the UK without incurring a significant tax cost.

‘Clean capital’

Conversely, income and gains received before becoming resident form so-called “clean capital”. If the investor loans clean capital to someone, the loan principal will always remain clean capital when repaid to the investor (but note the position with regard to loan interest below). Gifts received from related and third parties are also clean capital provided they are not considered to be a form of hidden income or gains distribution. In practice, some UK-resident investors live off the gifts made to them from their non-UK resident spouses, who earn income and gains not liable to UK tax. Clean capital will not be taxed in the UK, whether brought in its territory or not. However, in the case of an investor’s death, clean capital kept in a UK bank account will form his UK-situs asset liable to 40% inheritance tax. Therefore, it might be prudent to bring to the UK only the amounts necessary to fund current expenses.

Clean capital should be credited to a separate bank account and never mixed with non-UK income and gains that might be derived after assuming UK residence. In fact, considering that income and gains are taxed differently in the UK, they should also be kept in separate bank accounts. Moreover, if clean capital generates income — say it has been loaned and the investor receives interest — this should be paid to the income bank account and not into the clean capital account to avoid tainting it. Counterintuitively, the same cannot be done with gains generated with the use of clean capital. For example, if clean capital is used to buy shares, any gain realised on their future disposal will always form part of the proceeds and it cannot be segregated from clean capital by being paid to a separate bank account. There are methods that allow for such separation of gains involving the use of several connected trading entities or loaning clean capital to a bank to secure a bank loan, which will later be used to acquire capital assets.

If the investor runs out of clean capital he might have no choice but to bring foreign income and gains to the UK and face the prospect of the maximum 45% taxation. He can borrow from an overseas lender provided that the loan is made on commercial terms and the interest is serviced from UK-source income or gains. It had been possible to borrow under security of non-UK income and gains; however, in August 2014 this possibility was revoked.

There is no requirement or in fact possibility to declare clean capital to the UK tax authorities (HMRC) upon becoming UK resident. Equally, there is no requirement to report the use of clean capital on UK’s tax returns. However, the taxpayer should keep documents that reflect dates and methods of creation of non-UK income and gains to prove that they were received while he was non-UK resident and thus form his clean capital. Such documents include bank statements, sale and purchase agreements, loan agreements. They might be necessary in case of a future dispute with HMRC.

The Rules also allow the investor to rely on money that is owned either jointly with or solely by his close relative (spouse or partner). If the close relative is a lower rate taxpayer then, subject to the rules of their residence jurisdiction, the investor can gift the assets to the relative, which she can dispose of subject to the payment of a smaller amount of tax.

Provided the requirements of stage one are satisfied, the investor will receive the leave to enter the UK as a Tier 1 (Investor). The arrival to the UK should be timed with regards to the residence planning considerations as discussed next. At the same time the investor should not delay his arrival in order to satisfy the continuous residence requirement required to apply for the ILR at the end of his stay.

‘Connecting factors’ of tax residence

Under the SRT UK residence may be acquired automatically if the individual spends over 182 days in the UK, has a home in the UK or works in the UK on a full-time basis. If the investor is not UK-resident automatically, he might be resident under the sufficient ties test, which looks at the connection ties that the individual has with the UK. The relevant factors include having a family resident in the UK, presence of UK accommodation, working in the UK and length of visits to the UK in the preceding tax years. The more UK ties the investor has — the less number of days he can spend in the UK during the tax year without becoming a UK tax resident. It is also possible to be automatically non-UK resident under a separate set of circumstances. Residence is determined for the entire tax year starting from 6th April regardless of the taxpayer’s relocation date. However, there is a possibility to split the tax year and only begin UK tax residence from the day of arrival in the UK.

Experience shows that in the tax year of arrival in the UK, most investors have two connection ties: they acquire a home in the UK and their families become UK resident. The SRT allows them to stay in the UK for up to 120 days without becoming resident here provided they are not UK resident automatically. However, there are plenty of pitfalls and before determining his residence situation, the investor should avoid buying accommodation in the UK or entering into long-term leases, moving family and sending children to school and spending over 90 days in the UK in any tax period. Additional planning opportunities might be offered by the tie-breaker clause in the residence article of the double taxation treaty that the UK might have with investor’s residence State, although complications might arise stemming from the mismatch between the tax years’ periods. HMRC provides an interesting explanation of this rule in part INTM154040 of its International Manual (http://tinyurl.com/INTM154040).

Under Stage three the investor must invest £2 million by way of UK Government gilt-edged securities, share capital or loan capital in active and trading companies that are registered in the UK. The minimum investment threshold must be met only when the investments are made and there is no need for a top-up if their value falls during the continuous ownership period. It is also possible to rely on the existing investments, however, the Home Office will only count those that have been made in the UK in the 12 months immediately before the date of the application. Otherwise, the investor will have to make “fresh” investments, which might trigger tax consequences in the UK or in his residence State if to do so he would have to realise assets pregnant with gains.

Remittance rules and Business Investment relief

Provided that the investment comprises clean capital accumulated during Stage one, there will be no UK tax consequences on bringing the funds in the UK. In the opposite scenario, where the investments consist of foreign untaxed income and gains made after the date of first becoming UK tax resident, these will constitute remittances, on which the investor will be taxed at his applicable income tax rate. HMRC explain the meaning of remittance in part RDRM33140 of its Residence, Domicile and Remittance Basis Manual (http://tinyurl.com/RDRM33140).

Individuals who choose security over higher returns might prefer UK Government gilts, which can also be tax advantageous — there is no UK capital gains tax on their disposal and the coupon can be structured in a way that does not attract interest taxation when paid to non-UK tax residents. Also some gilts are exempt assets for UK inheritance tax purposes. Others invest through international banks that form a balanced portfolio of low risk quoted securities. UK-resident taxpayers are taxed on dividends they receive and gains derived from disposals. These methods are preferable for individuals with large amounts of clean capital that they can bring and invest in the UK without any tax consequences.

Investors with non-UK income and gains that will be taxed on remittance to the UK and who are not averse to risk might instead buy shares of UK trading unquoted companies or provide the funds to such companies as loans. The only limitation is that the companies cannot be mainly engaged in property investment, property management or property development, although it does not prevent investment in, for example, construction firms, manufacturers or retailers who own their own premises.

If they satisfy terms of the business investment relief (http://bit.ly/1wq9Wj6) the invested amounts shall not be treated as remittances and shall not be liable to UK tax. There are additional income tax and capital gains tax reliefs such as EIS, SEIS and VCT intended to encourage investment in the shares of unquoted trading companies. Finally, if the investor is appointed director or taken on as an employee of the company in which he has invested, he might be able to receive a substantial reduction on futuredisposal of its shares under the terms of the ‘Entrepreneurs’ Relief’ where the personal tax rate may be 10% on gains made.

Thus pre-arrival tax planning for a Tier 1 investor is a complex matter that should be done prior to finalising immigration plans. Future migrants should consider their medium to long-term planning strategy, which includes residence planning, creation of clean capital and acquisition of assets in the UK.