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Despite a recent pact between Switzerland and the United
States to share tax evasion information, Swiss franc fixed annuities
have been attracting a lot of U.S. dollars of late. Sources estimate
that Americans have been putting about $2 billion annually into the
Swiss insurance instruments, due to the falling dollar, inflation fears
and the need to protect assets from creditors.
It’s no wonder. While U.S. fixed deferred annuities yield about 2
percent to 3 percent, Swiss franc fixed annuities have generated a total
return of more than 8.5 percent annually over the past five years,
according to Swiss Guard International, a Zurich-based brokerage firm.
Of course, this factors in currency appreciation against the U.S.
dollar.
“Our business and business of other Swiss brokers has increased,”
says Darrell Aviss, Swiss Guard International managing director. “We
have a lot of business people, professionals and doctors that are
investing because they want to be protected from frivolous lawsuits.”
Whether this trend will continue is uncertain, however, after a number
of Swiss banks have stopped accepting deposits from, or opening
accounts, for U.S. customers, according to a July 21 article in The
Wall Street Journal. Swiss insurance companies are being cautious
due to the problems with UBS, a Swiss investment bank that had been
under investigation by the IRS. The bank and the U.S government are
negotiating a settlement. The bank was ordered to provide information to
the IRS on about 52,000 U.S. clients who may have been involved in U.S.
income tax evasion. The two countries agreed in June to fight tax
evasion through information sharing. Nevertheless, the Swiss Government
said it would not permit UBS to turn over the names.
As is well known, the Swiss have a tradition of secrecy when it comes to
dealing with investors’ money. In Switzerland, there are no foreign
reporting requirements or forced repatriation of funds. Under Swiss law,
an annuity cannot be seized by any court-ordered collection procedures
instigated by creditors.
Although Swiss franc investments may be attractive in uncertain economic
times, only a fistful of insurance companies can issue fixed rate
annuities to Americans. Among those: Pax Insurance, Basel; Generali-Life
in Adliswil; Forces-Vives, Lausanne, and Swiss Life, Zurich.
Unlike U.S. fixed annuities, Swiss fixed annuities are not tax-deferred.
A U.S. taxpayer owes taxes on both income and any foreign currency value
appreciation. However, Swiss annuities are not subject to Swiss taxes.
And they are exempt from the 35 percent withholding tax that Switzerland
imposes on account interest received by foreigners.
Swiss franc fixed annuities lack the 10 percent penalty that U.S.
annuities have on withdrawals before age 59 ½. Plus a Swiss-U.S. double
taxation treaty eliminates the 1 percent U.S. excise tax on the purchase
of foreign insurance products.
Swiss insurance companies are not currently required to issue 1099
interest and dividend forms to the U.S. IRS. Nevertheless, policyholders
just report fixed annuity income and currency gains on their U.S. tax
returns, based on IRS rule 1.1275-1.
Although more details need to be worked out, a recent U.S. Swiss
agreement requires the countries to share information on potential tax
evaders and could change the way taxes are reported. Leonard Witman, a
Florham Park, N.J. estate tax attorney and Rutgers University law
professor, predicts discussions between the United States and Swiss
could lead Swiss insurance companies to issue IRS 1099 forms on U.S.
accounts.
“The (tax) information between the U.S. and Swiss is going to be
expanded tremendously," Witman says. “We [the U.S. government] can’t
raise taxes, but they can raise revenue by increasing enforcement. The
IRS is hiring new agents to raise revenue.”
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