At last! Revision of Circular 24 on the Swiss tax treatment of collective investment vehicles released has been saved
At last! Revision of Circular 24 on the Swiss tax treatment of collective investment vehicles released
21 december 2017
Operational Tax News
More than 8 years after its first publication on 1 January 2009, the Swiss Federal Tax Administration (“SFTA”) published on 20 November 2017 a revised version of its Circular 24 (“Circular”) with regard to the Swiss withholding tax and Swiss stamp tax treatment of collective investment vehicles (“CIVs”). There are no substantial changes in the revision and these merely reflect the long-standing practice of the SFTA that has previously been communicated through other channels. This blog post aims at outlining the most material changes to the Circular as well as providing asset managers with recommendations on best practice to prepare.
The following changes have been introduced in relation to Swiss CIVs:
- The use of average net asset value (“NAV”) for calculating the 1.5% expense threshold must be pre-approved by the SFTA and maintained during at least 5 years, after which the approval must be renewed. We note that the use of average NAV should remain exceptional and may only be granted in case of a justifiable request.
- Reimbursement of fees (so-called “fee waivers”), which were originally recorded as expenses by the CIV, must be recorded as negative expenses.
- Interest expenses charged by banks due to negative interest rates (i.e. negative interest) must be displayed separately on the income statement of Swiss CIVs and be treated as fees subject to the 1.5% rule.
- For target funds where taxable income cannot be determined based on the Kursliste or reliable financial statements, this must be approximated by applying a market-conform return (instead of previously a swap rate) to their NAV. We note that there are no strict rules for calculating this return but the calculation methodology applied should, where possible, make use of the net dividend/interest yield of common indices and be a fair reflection of the general investment strategy of the target fund.
- Accumulations from Swiss target funds must be recorded as income (i.e. as if the income had been distributed) in order for Swiss fund-of-funds to be entitled to reclaim the Swiss withholding tax incurred by them on this type of income.
- Two exceptions to the general rule have been introduced, according to which fund-of-funds must show a taxable income of at least the aggregate income from their target funds:
- In case of net negative equalisations (i.e. equalisation expenses in excess of equalisation income), these may be set off against income from target funds. Although in practice these were used to set off only against income from distributing target funds, it is now also possible to offset against income from accumulating target funds;
- In case at the level of a target fund there are no or only very low fees (< 0.2%), income from this target fund may be set off against fees from the fund-of-funds (subject to the fund-of-funds’ individual 1.5% fee threshold). We note that under the previously published practice a threshold of 0.2% for target fund fees did not exist.
For CIVs, which synthetically replicate their exposure using total return swaps or similar contracts, the net dividend/interest yield of the underlying of such derivatives must be captured as taxable income in addition to any other income derived by the fund. The treatment of income derived by securities held as collateral for such derivatives is reserved.
The following changes have been introduced in relation to foreign CIVs:
- Consistent with the changes for Swiss CIVs with regard to the use of the average NAV, the use of a market-conform return and the treatment of synthetic ETFs. Please refer to the above section for this topic.
- Equalisations, which are not booked in the financial statements of a foreign CIV but for which the CIV consistently keeps records of (i.e. in shadow-accounts), may be relied upon to determine the taxable income of such foreign CIV for Swiss tax purposes.
Though most of the changes outlined in this article are merely reflecting the long-standing practice of the SFTA, we would still recommend that they are reviewed in detail in order to ensure correct accounting by Swiss CIVs and reporting by foreign CIVs.