European life insurance has been available in Switzerland for several decades now. For clients resident mainly in EU member states and depositing or having their assets managed in Switzerland in particular, life insurance has become a tool that is often unavoidable. As a means of tax planning, transferring assets and organising wealth management, the use of life insurance and other capitalisation tools has accelerated and they have become increasingly popular in the Swiss wealth management market, particularly since the disappearance of banking secrecy and the introduction of the automatic exchange of information in which Switzerland participates.
Given that this clientele is typically increasingly mobile, and that families are becoming more and more cross-border from one generation to the next, the question of the ‘portability’ of insurance services often arises. The insurance contract is subject above all to the regulatory, insurance and tax framework of the policyholder’s country of residence at the time of taking out the policy, but what happens in particular when the policy is transferred on death to beneficiaries resident in another country, or when the policyholder moves house or changes tax residence? In particular, what about the need to take out an insurance policy that meets the requirements of one’s country of citizenship rather than residence, or to plan a cross-border succession? While harmonisation within the European Union and the resulting recognition of the criteria for qualifying an insurance transaction allow for a great deal of flexibility within the EU Member States, what about the case of Switzerland, where many EU citizens live or reside and are considering leaving Switzerland, passing on their assets to their heirs outside Switzerland, or even the case of European citizens, whether or not they have taken out insurance and are planning to move to Switzerland for professional or personal reasons?
Experience has shown that this type of question arises mainly in the following three cases, which can be reviewed:
- The case of a European resident planning to move to Switzerland and already taking out life insurance to manage his assets.
- European or Swiss citizens planning to leave Switzerland in the short term to settle in the European Union, whether for professional reasons, retirement, family reunification or for obvious reasons of tax residence qualification.
- The case of a person resident in Switzerland whose heirs are resident in European countries with high inheritance tax rates, such as France.
Let’s take a brief look at the issues involved and the solutions that life insurance can provide in each case:
1. The case of a European resident planning to move to Switzerland:
This is often the case when a new Swiss resident moves to Switzerland from a jurisdiction in the European Union where he or she had taken out life insurance for asset management purposes. This is also the case for people who come to live in Switzerland to benefit from the country’s various advantages. If a person does not settle in Switzerland under the lump-sum taxation system, the central aspect to be considered when planning a move to Switzerland is the recognition of the insurance contract or the concept of an insurance transaction in Switzerland. The central point of the process, once established in Switzerland or preferably just before settling there, is to ensure that the contract is ‘tax-tight’ from the point of view of capital income. This is normally done by applying for a Ruling from the tax authorities in the canton of residence. However, in many cantons, while the concept of foreign insurance has often been recognised almost identically to that of a Swiss insurance contract (protection of capital income and tax deferral), the downside is that in the event of a total or partial surrender, the tax authorities consider the entire gain realised on the evolution of the claim as income distributed by the insurer and do not tax it accordingly. The nature of the management of the contract’s underlying assets also plays an important role: The more oriented it is towards fixed income, the more valuable the contract will be. Another key factor is the policy’s inheritance or beneficiary clause: if the beneficiaries remain at home (i.e. do not come to Switzerland), the policy retains all its value as a means of inheritance and will of course one day allow them to return to the EU or leave for Switzerland. On the other hand, in the event of significant capital gains accumulated on arrival in Switzerland, as part of an underlying management strategy geared towards capital gains, with no real inheritance or cross-border issues at stake, the insurance policy “imported from the EU” will have little value in Switzerland and will often be surrendered
2. European or Swiss citizens planning to leave Switzerland in the short term to take up residence in the European Union:
Taking out an insurance policy is essential here in order to meet a number of objectives: to ensure that the tax treatment of income and capital gains on the management of their assets at destination is as low as possible, while at the same time putting in place a transfer solution and, above all, keeping their financial advisers, manager or family office at their side and maintaining the custody of their financial assets in Switzerland.
The two key questions in this case are which jurisdiction to choose when leaving Switzerland (within or outside the European Union) and when to take out the insurance (before or after leaving Switzerland), with the tax regime in Switzerland also playing an important role.
From the point of view of jurisdiction, the use of European life insurance will of course only be of value in the event of departure for a European destination. Beyond that, the matter will be assessed on a case-by-case basis. In addition, as with point 3 below, the time at which you take out the policy will also depend on the tax system: as described below, taxation on expenditure means that in some cases you can access the European insurance policy from Switzerland, i.e. before departure. This means that you can arrive at your destination with structured assets in the form of an insurance policy and, in principle, without any tax effects or friction. On the other hand, if you are a Swiss citizen or resident in Switzerland in the ordinary course of business, and you do not use Swiss insurance mechanisms, you will have to wait until you leave Switzerland before you can pay your assets to the insurer in the form of a premium. This in no way prevents the insurance operation from being prepared in advance of departure from Switzerland, so that the premium can be paid on arrival in the new country of destination. It should be noted that preparation also includes, in certain cases, depending on the destination chosen and therefore the future tax system, the purging of certain capital gains accumulated before departure from Switzerland to release the counterpart in cash to the insurer immediately after departure.
3. The case of a person resident in Switzerland whose heirs are resident in a European country:The central question here is whether you have access to “European” life insurance as a Swiss resident. From the point of view of tax status, a distinction needs to be made between two situations: are you taxed on expenditure or on the ordinary tax roll? The distinction is important here, because in the case of taxation on a ‘lump-sum’ or expense basis, the conversion of a movable asset (a securities portfolio, for example) into an insurance policy merely involves the transformation of an asset into a claim against the insurer. This has no impact on the taxpayer’s tax position. In this respect, and mainly for the purposes of planning the transfer from Switzerland to heirs or beneficiaries in the European Union, the use of or access to European life insurance will have an added value that is all the greater because, in the event of the policyholder’s death, it will be possible to rely on the lower taxation of life insurance in terms of transfer. By way of example, the now classic and well-known case of a transfer or inheritance from Switzerland to France since France abandoned its tax treaty on inheritance nearly 7 years ago: assets transferred by inheritance would be taxed in France at nearly 45% as a direct line of descent, whereas the same assets transferred by insurance would be taxed at no more than 31.25%, and often even less. Access to European insurance for Swiss lump-sum residents is permitted and tolerated, and some Luxembourg insurers do indeed offer this solution within a well-defined framework.
On the other hand, for residents on the ordinary roll, European life insurance will have no added tax value in Switzerland because it does not meet Swiss requirements, mainly from the point of view of payment of the federal stamp or recognition of the tax deferral mechanism or death cover that characterises life insurance in Switzerland more than in many other European countries. As a result, European insurers will not accept Swiss residents taking out European insurance and will not be involved in such cases. Swiss third-pillar mechanisms, in particular non-linked contracts, will be used to obtain the equivalent. However, you will have to meet Swiss requirements, particularly those relating to medical examination and death cover, payment of the stamp and the age limit for taking out the policy (66). When leaving Switzerland, many cases show that the destination country, particularly in Europe, recognises the concept of insurance and grants local advantages in this area, particularly from a tax point of view. Here, too, everything depends on the country of residence of the heirs.
In conclusion, as we can see, there is no magic formula or “one size fits all” here. On the contrary, each case will have to be assessed on its own merits, as the nature of the insurance transaction depends on its classification and recognition. It is therefore preferable to seek the assistance or expertise of a tax expert, or even tax experts in the countries of departure and destination, to ensure that the concept of insurance is treated fairly, as it is certainly not understood in the same way on either side of the border between Switzerland and the European Union.
Published in collaboration with Amadeus Capital S.A
