Switzerland: Less than Meets the Eye The reader may have wondered why Switzerland and Liechtenstein are not considered together in a chapter on European havens. The reason is simple: Switzerland is not a tax haven. Not any more. This may come as a shock. Many people think "tax haven" means a numbered account with a Swiss bank. This is a fallacy today. Switzerland is no longer even a banking haven, and all its remaining advantages are offered by Hong Kong, Liechtenstein, and other countries without its present disadvantages. Such a conclusion is liable to be greeted with considerable skepticism. So let us detail why Switzerland is not a tax haven and why those seeking a haven should stay out of the Swiss Alps. Why is Switzerland so widely considered a tax haven? To begin with, there is its remarkable internal and international political stability. It has been a most successfully neutral country in many European wars and both world wars, so in modern times, its economy has never been devastated by war's destruction. Also, it is a basically free enterprise country with little government regulation and economic control and relatively low taxes. Its banks have had a tradition of inviolate secrecy, stability, and reliability. Its currency, the Swiss franc, has a very good reputation and is very strong and stable. The country is geographically in the center of Europe, where major continental roads from east, west, north, and south intersect. Its internal roads and railways are excellent, and all its transportation services are punctual. It is also accessible by river barge directly from the sea. Airline service is tops, and telecommunications are the very best available. Needless to say, professional services are of the very highest quality and reliability. As we have noted, Switzerland is politically stable, as is well attested to by its history, legal structure, and present socioeconomic situation. Its basic constitution, enacted in 1848 and slightly revised in 1974, gives the country a confederation system. It has 123 articles, specifying rights and duties of both citizens and the government. The twenty-five cantons (states) have inalienable constitutional rights that cannot be usurped by the federal government. There is a seven-man national cabinet, nationally elected. The foreign policy has for centuries been peaceful neutrality concerning all international conflicts. The legal system is grounded in the civil law tradition. Switzerland is multilingual; German, French, Italian, and Romansch are official languages. German is the most widespread tongue, having a variety of local dialects. English and French are universally taught in the high schools, and the business community is widely conversant with them. Both the federal government and the cantons as well as the municipalities tax separately, with cantonal taxes the heaviest. Companies are taxed both on their profits and on their capital by the federal government and the cantons, as well as the "community." Company taxes are not flat but progressive. The brackets depend not on the total volume of a company's profits, but as in Liechtenstein, on the "profit intensity," the ratio of profits to capital. All taxes on worldwide income add up to usually 25-35 percent. Switzerland is clearly no tax haven. The individual income tax is also progressive and is levied on the total of one's worldwide income. There is special tax treatment for holding companies. This special treatment applies also to ordinary companies to the extent that they operate as holding companies and derive income from merely "Passive" sources (dividends, interest, etc.). Such tax exemptions are highly limited, however; for instance, they do not apply to interest from loans and royalties from leases paid by companies in which one has stock ownership. Still, a pure holding company pays no federal income tax, only a federal capital tax on the value of share capital and a similar canton capital tax. Domiciliatory companies, those based in Switzerland but doing business only outside the country, have been granted exemptions from local income taxes by some cantons. The applicable taxes are reduced cantonal capital tax, federal income tax, and federal capital tax. Apart from these taxes, one has to consider a turnover tax of 4-5 percent against payment on the internal delivery of goods by a wholesaler. This can be avoided if the goods are immediately exported or if they are merely in transit. There is a similar tax on imported goods, on top of the import duty. Even with a purely investment-holding company, there is one huge liability: a 35 percent withholding tax imposed on dividends paid to foreign stockholders. It applies indiscriminately to dividends, interest on bonds, and interest on bank deposits; only royalties are exempted. Might not the double-taxation agreement between the United States and Switzerland allow one to consider Switzerland as a base for a holding company? On the surface, this seems to be so. The agreement reduces the U.S. withholding tax on dividends to 15 percent. However, the Swiss government has taken special measures to restrict the usability of the agreement for tax minimization purposes. If, say, more than 50 percent of the profits of a Swiss company derived from U.S. sources are paid to aliens, no withholding tax benefits can be claimed. One may think that the way out is not to distribute to himself dividends from his Swiss company and instead reinvest all profits. However, another law requires a company to pay as dividends at least 25 percent of the gross income derived from tax relief benefits. Thus, there are narrow limits to using the agreement. On top of these disadvantages, Swiss incorporation is expensive. There is a stamp duty of 2 percent on authorized capital. If all this is not enough, neither the joint stock company nor the private limited liability company, the two business entities available in Switzerland, offers any particular tax advantages. While Switzerland is not a tax haven in the sense of the rest of this book, as a place to base your corporation or trust, there is one fascinating exception. Asset Protection and High Returns in Swiss Annuities Saving for a secure retirement has never been more difficult. Taxes severely penalize savings, and efforts to cut taxes on savings are routinely derided by economically ignorant politicians as "giveaways" to the rich. And if you still manage to put money aside, despite punitive taxes, where do you invest it? Banking systems are tottering in both the United States and Japan. Nor can insurance companies necessarily be trusted anymore -- as anyone who bought annuities from California's First Executive Life can bitterly attest. And even if you manage to save and invest successfully, a third barrier looms between you and secure retirement -- a lawsuit could easily wipe out everything you own. In the United States, especially, anyone who looks like he might have money is at risk of being victimized by a frivolous or vengeful lawsuit -- with potentially devastating consequences. If all this makes a secure retirement sound like an impossible dream, take heart. There is a way that you can save on your taxes and protect your hard-earned assets against seizure by creditors. Not only can you avoid the kinds of risks that brought down the customers of First Executive Life, but you can protect against the ravages of inflation as well. Best of all, it's a totally private form of investment. Absolutely nobody need know about it -- not the government, your nosey motherİin-law, or even the hostile lawyer you may someday have the misfortune to confront. This amazing form of investment is the Swiss annuity. Like U.S. annuities (and annuities in a number of other countries), their Swiss counterparts offer a tax benefit. The money you put in compounds tax-free. Withdrawals are also tax-free -- until you've withdrawn an amount equal to the sum of your contributions. And if you're worried about inflation, you can denominate your annuity in Swiss francs. One cumulative result of follies in Washington, D.C. is that the U.S. dollar has lost 90% of its purchasing power since 1949. In contrast to the U.S. dollar, Swiss currency is still backed by gold. (Swiss law requires at least a 40% gold reserve for each franc in circulation. But actual Swiss reserves are over 50%) Thus, the Swiss franc is the world's sweetheart currency. Its value has risen from US$0.23 in 1971 to US$0.75 in 1993. This sort of financial conservation is also your guarantee against the sort of catastrophe that ruined customers and policyholders of U.S. insurance companies that went belly up in the 1990s. In the 130-year history of the Swiss insurance industry,not one company has ever closed its doors or failed to meet its obligations. A Swiss annuity also offers excellent asset protection. Under Swiss law, an annuity cannot be seized by any courtİordered collection procedure instigated by creditors. So even if you were to become a victim of a lawsuit in litigious North America, your creditors could not enforce a judgement against your annuity in Switzerland. Of course, one way to avoid being sued in the first place is to avoid looking like an attractive target. Remember, lawyers typically take these cases on a contingency basis. So you have to look like your pockets are deep enough to make it worth their while. If you don't look like you have a lot of money, you have virtually nothing to worry about. No fee-hungry lawyer will waste his time trying to squeeze blood from a stone. Unfortunately, there is no financial privacy at all in the United States today. Any insurance salesman, Treasury agent, creditİrating agency employee or private investigator worth his salt can find out virtually to the last penny exactly what you've got and what you owe. A Swiss annuity, however, may be one of the world's few remaining totally private investments. Nether the fact that you own an annuity nor the earnings gained from it will be reported by Swiss insurance companies to the U.S. government or any foreign authority. U.S. citizens are required to report their ownership of foreign financial accounts İİ such as bank and brokerage accounts to the Internal Revenue Service if the sum of the accounts totals $10,000 or more in any calendar year. Swiss annuities, however, are legally exempt from this reporting requirement. So unless you spill the beans yourself, no one need ever know how much you may have quietly tucked away in your Swiss annuity. One especially attractive annuity is a Convertible Annuity Certificate (CAC), commonly called Swiss Plus. It is a singleŞpremium annuity that combines the privacy of Swiss banking with the typical safety of an annuity. One advantage of CACs is that they allow a choice of three currencies: the Swiss franc, the Deutschemark or the ECU. At the moment, the yield on all these currencies is substantially above that of U. S. Treasury bills. Another advantage is that there are no up-front fees. So all the money you put in goes to work right away. Furthermore, you can withdraw your funds at any time. (You are, however, subject to a withdrawal fee of SFr500 if you cash out before the end of the first year.) Profits earned in your CAC are also free from Swiss taxes. And under U.S. law, corporate pension plans, Keoghs, or Individual Retirement Accounts (IRAs) can be invested or rolled over into CACs. The minimum investment required for the Swiss Plus CAC is $10,000. The Swiss Plus CAC is one of the best investment vehicles you can find if you value safety and stable returns on your capital. For more information, contact Mr. Jurg M. Lattmann, JML Investment Counsellors (Dept. 212), Germaniastrasse 55, CHİ8033 Zurich, Switzerland. As always, adopt no tax-avoidance or asset protection strategy without professional guidance from your accountant or lawyer.