Switzerland has always been considered a safe haven. It is therefore not surprising that Lenin’s bank account, which he opened at the Zürcher Kantonalbank during his stay in Switzerland, had survived World War I, the Russian Revolution, World War II as well as the Soviet Union. The fact that the public is now aware of this account, however, brings a new issue to light.

In the present day, concepts such as globalization, share holder value and digitization have culminated in the subprime crisis and a historically unseen level of national debt. As a result, policymakers began to counteract the low regulation density and loss of power of governments, which free trade, export and market orientation brought with it, in order to prevent future crises and increasing inequality. Accordingly, increased state control of the population is coming to the fore. The automatic exchange of information (AEOI), the abandonment of bank secrecy and higher standards of customer information are the logical measures of the transparency that politicians are striving for. Although the worldwide AEOI may be aimed primarily at preventing tax evasion, its effects are much more serious for the Swiss financial center. The status of supreme security and Swiss banking secrecy are therefore remain only a reality todays James Bond films.

Automatic exchange of information (AEOI)

Switzerland has adopted the automatic exchange of information (AEOI) on financial accounts on the 1st January 2017. Since then, a first wave of information on Swiss bank accounts has been delivered to foreign tax authorities in September 2019 and the agreement has been activated with 97 partner states (as of 1 January 2020). The AEOI standard is to be seen as a consequence of the global financial crisis, which is aimed at combating tax evasion and ensuring fair conditions of competition. In general, both natural and legal persons resident in one of the 97 partner states, who are in possession of a Swiss bank account are affected by the AEOI. The financial institutions are subject to a reporting obligation in respect to every account holder and controlling person (e.g. of trusts and foundations) domiciled in one of the partner states. The bank is therefore obliged to forward all tax-related information of its clients to the Swiss tax authorities, who in turn automatically forward the data to the corresponding tax institution in the country of residence. The information exchanged includes all information necessary to ensure tax honesty and the allocation of assets.

It is an open secret that the introduction of the automatic exchange of information and the simultaneous loss of the Swiss banking secrecy was a means to an end to make the Swiss financial center less attractive to foreigners. With the takeover of the AEOI, Switzerland has lost its notorious and considerable competitive advantage. While Switzerland was threatened with being blacklisted by the Group of Twenty if it failed to cooperate, the USA continues to abstain from participating in the AEOI standard. The US accounts of foreigners therefore remain hidden from the relevant domestic tax authorities, while Switzerland and all major industrialized countries are obliged to pass on banking data of US citizens’ bank accounts to the US tax authorities by means of the FACTA agreement.

It should be noted that the domestic banking secrecy within Switzerland is not affected by the AEOI standard. This means that the banks are not obliged to report bank account holders resident in Switzerland. Whether these account holders are Swiss citizens or not is irrelevant. The Swiss domicile therefore remains popular, as no account information is passed on to the tax authorities as long as Switzerland remains the residence of the account owner. The same applies to countries that have not adopted the AEOI agreement.

The final consolation is the strict measures taken to ensure compliance with data protection. At the present time, the automatically exchanged data may only be used for tax purposes. Any further use or in-depth investigations must be substantiated. Switzerland therefore continues to offer a high level of privacy protection as long as the assets are tax-compliant.

Europe in crisis 

Despite the AEOI, Switzerland continues to represent a safe haven in an otherwise restless Europe. Switzerland’s neutrality, stable political conditions, high economic power and, last but not least, the “safe haven” of the Swiss franc are important factors when considering asset protection. Switzerland’s independence from Europe and its low level of indebtedness provide it with the reserves it needs to get through future economically difficult times without needing drastic measures such as those that are currently being discussed at various political levels in Europe.

However, many other circumstances play an important role when considering the geographical diversification of assets. Today, all European citizens are legally permitted to maintain an account/deposit with a bank domiciled in Switzerland. But do the Swiss banks meet the required criteria that a foreigner expects in terms of quality and security?

This question can certainly be answered in the affirmative.

On the one hand, Swiss bankers enjoy a reputation as the world’s leading asset managers and custodians, while maintaining the highest level of confidentiality. Furthermore, Swiss banks are among the most highly capitalized and secure banks in the world.

In addition, the Swiss financial center, through its historically established global clientele, has always provided internationally orientated services. This applies not only to investments in a wide range of currencies and international products, but also to its function today as a custodian with the competence to prepare tax documents for a large number of countries. This internationality is also reflected in the services, employees, clients and orientation of FINAD.

A further advantage, which should not be underestimated, is that, unlike in Germany, Austria or other European countries, there are no rights for tax offices to inspect bank accounts and assets of investors. However, a foreign investor has to fill out a tax declaration, whereas this may not be necessary for bank accounts in the home country. Another drawback is stamp duty, which is due on every transaction of a security. This is however more than neutralized by the absence of VAT in the country of domicile.

Conclusion

In recent years, small Switzerland with its tradition as an important financial center, has made enormous efforts to meet international requirements for transparency, service and fees. At the same time, they have been able to maintain their lead in the internationality of their services.

Switzerland thus represent an important option for all European investors, especially in these exciting times, when it comes to safeguarding assets through geographical relocation.

 

By Dr. Clemens Gregor