The text of an agreement between the Swiss Confederation and the UK on co-operation in the area of taxation has just been published, in the two official languages of English and French. The agreement has not yet come into force – it will be debated in Parliament in both countries.The objective of the agreement is to provide for bilateral co-operation in order to ensure effective taxation. There are three aspects to this:
This note looks simply at the situation of individuals who are resident in the UK and not domiciled here. It does not consider the implications for persons domiciled within the UK. NB: This note assumes that the non-UK-domiciled individual will not want to suffer withholding tax or to disclose details of Swiss assets to the HMRC. The agreement provides a mechanism for non-UK-domiciled individuals to avoid both of these forms of withholding tax.
Swiss Payment Agents
The agreement puts the onus on the Swiss Paying Agent (SPA) to operate the withholding tax provisions. It will apply to banks, securities dealers, and other natural and legal persons resident or established in Switzerland who accept, hold, invest or transfer assets for third parties, or who merely make payments of income or gains for third parties or secure such payments in the normal course of their business. This is plainly wider than simply banks and financial institutions, and there may need to be compliance by more than one Swiss intermediary in respect of a particular account – e.g. bank holding monies for a Swiss trustee.
Identifying “relevant persons”
In order to establish the identity and residence of customers or clients, the SPA will have to keep a record of the name, date of birth, address and residence details in accordance with the prevailing Swiss due diligence obligations at the time when a business relationship is established. Within this overall framework, individuals who have their principal private address in the UK, based on those due diligence records, will be deemed to be resident in the UK for the purposes of the agreement – and so affected by its provisions. They are potentially "relevant persons".Individuals who present a UK passport but who say that they are resident in a jurisdiction other than Switzerland or the UK must obtain a tax resident certificate issued by the tax authorities in the jurisdiction where they claim to be residence. In the absence of that, they will be deemed to be UK resident – and so within the terms of the agreement.
The “beneficial owner”
In order to determine whether a particular individual is a relevant person, the SPA has to look at the situation in the light of the prevailing Swiss due diligence obligations and taking into consideration all circumstances known to it. This may lead the SPA to the conclusion that a UK resident individual is the "beneficial owner" (in the French version the "beneficiaire effectif"). In the case of structural arrangements (companies, trusts, foundations and so on) the entity (as opposed to any individual) will be considered the beneficial owner if it can be proved that it is itself subject to "effective taxation" under the laws of the place where it is established or managed, or if it is treated as "non transparent" with respect to its income under UK law (for example a US LLC). Otherwise, the "beneficial owner" will be the individual identified by the due diligence paperwork. However, if it is not possible to ascertain the beneficial ownership of assets, because of the discretionary nature of the particular arrangements, then there may be no individual who is the "beneficial owner" for these purposes – and so no "relevant person".For the purposes of the annual withholding tax, an individual will not be a relevant person if he is acting on behalf of a relevant person who discloses details to the SPA.
In respect of the one-off withholding tax, a non-UK domiciled person may be able to opt out of the agreement (thus meaning that neither does he have to suffer the withholding tax nor have his details disclosed to the UK tax authorities). This option is only available to a person who was not domiciled anywhere within the UK as at 31 December 2010, and who has claimed the remittance basis of taxation either for the tax year ended 5 April 2011 or the tax year ended 5 April 2012 and (very importantly) in respect of whom this has been verified through the certification process. NB: This assumes that in fact there was no UK tax liability in relation to the Swiss assets. A non-UK-domiciled individual who owes UK tax but who opts out can expect to be pursued fairly aggressively by HMRC if they become aware of the true position.As regards the annual withholding tax, a non-UK domiciled person will be able to avoid these provisions if he claims the remittance basis of taxation for the relevant year and (again) this has been verified through the certification process. The certification in respect of the one-off withholding tax must be provided by a date falling no later than 4 months after the agreement comes into force: this is expected to be 31 May 2013, following coming into force on 1 January 2013.Certification for the annual withholding tax must be provided no later than the 31 March before the beginning of the following tax year (i.e. the year that begins on the 6 April next following): this is a statement of intent for that year – a further certificate will be required after the year end (see below).
The SPA may only accept a relevant person as a non-UK domiciled individual for the purposes of the agreement when it is provided with a certificate produced by a lawyer, accountant or a suitably qualified tax adviser. The certificate must confirm the relevant person is not domiciled within the UK and has claimed the remittance basis of taxation in the period in question (see above). The certifying professional adviser has to confirm that:
There are cases in which a foreign domiciliary does not need to make the annual payment of £30,000/£50,000 to access the remittance basis (although these in practice are rare). It should however be noted however that a certificate cannot be given, it seems, unless a UK tax return has been filed or (in the case of the annual withholding tax) will be filed. For the annual withholding tax a further certificate has to be provided to the SPA on the 31 March following the end of the relevant tax year – presumably (although not specified) confirming what was contained in the tax return for the year.In respect of the annual withholding tax, there are some further points to be noted in the case of non-UK domiciled individuals.First, if the certificate is not provided in the form required by the date specified (31 March before the beginning of the following tax year) and even though the individual may indeed be foreign domiciled, the SPA has to treat him or her as UK domiciled and levy tax for the following tax year at the rates specified in the agreement (28% – 50%).Second, the non-UK domiciled individual is still in principle going to be liable to the annual withholding tax (at rates ranging from 27% – 48%) on:
The individual will have the option to confirm to the SPA that amounts are remitted in a taxable form – in which case the withholding tax obligations will apply to the SPA.The non-UK domiciled individual also has the option to authorise the SPA to disclose to HMRC any income or gains arising from the UK source, and remittances to the UK – in which case the annual withholding tax is not applicable and the SPA will disclose details.
Without prejudice to any other means of getting information (e.g. under the double tax treaty) the Swiss tax authorities are on request to provide information to HMRC if the identity of a UK taxpayer and "plausible grounds" are provided by HMRC. This request does not have to include the name of the SPA. For these purposes "plausible grounds" exist where the UK authorities identify (on a case-by-case basis) a tax risk in relation to the individual, based on an analysis of a range of information such as previous tax returns, level of income, third party information, and so on. So called "fishing expeditions" are excluded – whatever that means. HMRC will have to inform the individual in question about the intended request to Switzerland for information, unless HMRC has "reasonable grounds for believing that this might seriously prejudice the assessment or collection of tax". The Swiss tax authorities can then approach banks and financial institutions who will disclose the existence of accounts and deposits of UK taxpayers. The disclosure is subject to further detailed provisions in the agreement.The agreement recognises expressly that individuals remain free "to book their assets in any State or jurisdiction of their choice". However it goes on to provide that Swiss Paying Agents shall not "knowingly manage or encourage the use of artificial arrangements whose sole or main purpose is the avoidance of taxation" in the UK". If a SPA acts contrary to that last provision, it can be made liable to make a payment equal to the withholding tax that would otherwise have been suffered under the terms of the agreement.
Finally, Switzerland may request reciprocity through the introduction of "equivalent measures" to secure the effect of taxation of Swiss residents regarding assets in the UK – this would it seems primarily involve information exchange and would be the subject of a separate agreement between the two States at a later date.
Please note that this is not intended to be definitive guidance on these complex new provisions. Any individual or a Swiss Paying Agent who may be affected by the agreement should seek expert professional advice.
For further information, please contact David Way, partner Fladgate LLP (+44 20 3036 7370 or firstname.lastname@example.org)