A leading expert on trusts and related issues talks about the shifting world of offshore finance an in particular, examines the prospects for Switzerland.

Editor's note: An occasional contributor to this publication, Alon Kaplan, a  senior legal advocate in Israel, senior STEP member and chairman of MMG Kaplex Trust Company (1978), and who is also a partner at Morgan & Morgan Group, gives his views on developments in the estate planning industry, with a specific focus on Switzerland. His views are his own, but this publication is grateful for the chance to use them here.

A 6 March Wall Street Journal article, Swiss Amend US Tax Treaty, contains an intriguing remark: “Under the new treaty, US authorities will be able to ask the Swiss to disclose names of US taxpayers at a bank who exhibit certain ‘behavioral patterns’ indicating tax evasion under US law, such as trying to conceal the ownership of the account through a trust.”

Many clients of Swiss banks create trusts for holding their assets using underlying companies. This can be an indication of “behavioral patterns” (“concealing ownership”) with possible disclosure of the identity of those persons involved in the trust.

The result of this new investigative provision in the tax treaty may be the end of banking secrecy in Switzerland with respect to trusts. Although one may argue that this has to do only with the US-Swiss tax treaty, it may well have an impact on clients who are not US persons.

The so-called offshore industry today includes many jurisdictions that prefer to describe themselves as “financial centres.”

Many of these jurisdictions do not have a real financial industry. They simply provide “tools” or legal structures to hold assets and properties in other countries that are very often considered “onshore,” i.e., jurisdictions where tax is levied on the income of individuals or corporations.

Switzerland, one of the world’s largest financial centres, is one of the leading countries to permit use of these offshore legal structures. In fact, almost all such legal structures are used by non-Swiss “foreign investors” who wish to enjoy the tax free regime granted to non-Swiss residents and nationals. The sun is now setting on this tax-free regime.

White money

In early March 2012, Switzerland announced that it will apply a “white money” policy to the bank accounts of foreign investors. It is envisaged that all Swiss banks will require from any non-Swiss customer a written declaration and proof that the funds on deposit at the bank have been declared to the tax authorities of his home country. Some professionals have expressed the view that this will be the end of the supremacy of the Swiss banking industry. This may be true with respect to the funds of foreign investors held in structures whose sole motivation is escaping taxes. 

Many people believe that the use of offshore structures in the Swiss context has to do with tax planning, tax avoidance or tax evasion. Yet it is likely that the huge sums of foreign money and financial assets in Switzerland are held through a company, a foundation or a trust for other reasons entirely.

There are other motivations for using legal structures to hold assets in Switzerland, or in any country where the investor is not a resident. Take for example the problem of cross-border succession. What will be the case if, say, a “Mr Lyons” from Israel keeps bank accounts in Cyprus, London and Switzerland in his own name? Upon the death of Mr Lyons a complicated legal procedure will be needed in order to release and distribute the funds to his heirs.

Suppose Mr Lyons is doing business in multiple countries. One of his creditors learns the location of one of his personal bank accounts and files a claim with an attachment on the funds in that country.

The same could happen with respect to a divorce claim, a bankruptcy or a similar situation in Mr Lyons’ country of residence.

If Mr Lyons receives proper professional advice and holds his assets through a legal structure such as a trust or a foundation, he would likely find a good way to resolve many of these situations.

Legitimate reasons

There is another important and legitimate reason for maintaining a bank account in Switzerland: the use by companies of the international network of tax treaties. It is not surprising that many countries with a strong export sector enter into tax treaties that grant benefits to persons and entities who are tax residents in that country.

Consider just Cyprus, Israel, the UK and Switzerland. These four countries are parties to multiple tax treaties. When companies seek beneficial tax treaties they also seek a good banking system to effect their business transactions. This is the great advantage of Switzerland. Proper structuring of a company utilising the network of tax treaties may yield a very good result, both in terms of legitimate tax planning and in using a good, safe and efficient banking system.

No doubt the Swiss government had in mind this particular issue when it considered the pros and cons of “cleaning house” and implementing its new “white money” policy.

The principle of bank secrecy that has been enshrined in Swiss law since 1934 may be beneficial for many people who are tax compliant and still need to resolve issues like those noted above. One should also acknowledge the professionalism of those Swiss people employed in the banking, accounting and legal professions. Therefore it should not be surprising were the Swiss banking system to continue its success story.

An important question remains: Why now? What happened to the Swiss regulators to make them so concerned with tax matters? We all know the answer.

The recent dispute between the US Internal Revenue Service and the Swiss authorities, which started with UBS and now also includes other Swiss banks, has forced them to disclose to the IRS the names of bank customers who until now enjoyed the benefits of Swiss banking secrecy.

It is not a change of heart when the Swiss suddenly regard tax avoidance as an offence. It is a practical and cool business decision that enables Switzerland to remain a member in good standing of the family of trading nations and avoid a losing battle with the IRS.

This has resulted in what the Swiss regarded as a simple moral question (“Tax evasion versus tax fraud is a moral issue while tax evasion is a legal problem”), becoming a real legal issue that will change forever the nature of Swiss private banking, and may eventually affect other countries as well. The “white money” policy will probably apply to all non-resident accounts in Switzerland, no matter the domicile of the account holder.

Professionals serving the banking industry will soon realise that Switzerland’s change of policy will affect many countries, which will adopt similar policies. These policies will also impact the business of lawyers and other service providers.

If we return to the non-tax issues involved in managing bank accounts in foreign jurisdictions we will see that these professionals would be wise to invest their efforts in estate planning, cross-border succession, international tax treaties and similar legal and administrative work.

This may prove to be a good alternative to the old offshore business.