It is difficult to find a subject of a tax nature which raises so many passions as that of bank secrecy. It is true that, in this field, principles and symbols confront in the most evident manner.
On one side, there are those who consider that the state must know everything, and that tax collection must not curtail individual rights. On the other, there are those who insist that private life is a value which must prevail over tax policy considerations.
It is extremely difficult to actually reconcile these two points of view, as it comes to choose between the interests of the state or the ones of the individual. Of course, in theory, this question should never be put on the table, as the state is supposed to protect the individual’s rights – but this is all theory today, as it is obvious that states and individuals have developed by having opposing interests.
Furthermore, from one country to another, the protected values are different, as are the legal frameworks. The only common thing: all of them have tried to reach a balance between secrecy and the interest of the state.
Since 2008, and especially after the last G20 summit, an international trend forced the most heavily taxed states to try to eliminate bank secrecy (and every other kind of secrecy); most of the countries had no choice but to review their bank secrecy regulations in order to comply with this trend.
This is how grey and blacklists have been created, and it is also how most of the bank-secrecy protective countries were forced to take several steps back. Switzerland is a perfect example.
There is no doubt: bank secrecy is suffering under a massive attack from governments. Whether directly, by changing the legal provisions specific to bank secrecy; or indirectly, by imposing new obligations to the different actors of the financial sector; governments are forcing banks to comply with an unprecedented number of obligations related to recording financial transactions and even disclosing suspicious transactions to the authorities. J. Wakefield described this situation perfectly when she wrote, in her well-known contribution Follow The Money, that banks had, by law, to “turn into law enforcement agents and give officials access to personal financial information without a warrant or subpoena.”
Bank secrecy is trapped in a vast regulatory and law enforcement network. Even worse, sometimes states will use stolen data or outright aggression in order to achieve ‘transparency.’ It is difficult to forget the example of the Swiss bank which had to collaborate with US authorities in order to avoid the revocation of its licence in the US.
Bank secrecy is also trapped in the international crisis; the causes of which are multiple, but the first of them being the incapacity of modern states to deal with their public finances and the bad management of public funds causing a constant need for new liquidity. These needs generate new taxation measures.
Given that governments collect almost half of their taxpayers’ benefits and spend more than half of them, it is obvious that taxes will rise as, in this economic model, governments are trying to balance budgets by increasing income rather than decreasing spending.
The real problem is that these policies generally lead to a market failure, as private markets are gradually rendered unable to allocate services or goods in an efficient way, as high taxes affect income distribution.
Evolution of optimisation
It is under these circumstances that bank secrecy is currently considered more as a means to commit fraud than an individual right; is it also because they are considered under this scope that offshore jurisdictions are attacked.
It is in this difficult context that tax optimising had to evolve, as taxpayers cannot afford to become the passive spectators of this situation: solutions must be found, provided that legal provisions must also be respected, as fraud is in any case not an option.
It is obvious that to do so, taxpayers will not try to hide their money, but will instead move it to a country that levies taxes more leniently, or to use it in the most tax-optimised way. Funds will depart to places like Singapore and Hong Kong, which are not concerned by the savings guideline; or to Luxembourg, a country where lawmaking is done in an ingenious and innovative way, and where a number of interesting tax rules do not depend on the status of the bank secrecy regulation.
In years to come, a number of different attitudes and approaches to tax optimisation will emerge.
In the first place, taxpayers will try to use the favourable provisions of the law of their actual country of residence. For example, in Belgium, the taxpayer’s little-to-profit principle provides that any taxpayer has the right to choose the most suitable route in order to generate the least taxes, as long as the legal consequences of this way are respected; this principle prevails in Belgium over the principle of “substance over form.”
Furthermore, Belgian holding companies can benefit, under certain conditions, from the exemption of the withholding tax on dividends and capital gains, while at the same time deducting the interest of the loans taken out by the company – even if these loans were taken in order to acquire shares.
When the legal system of the country of residence appears insufficient to satisfy the taxpayer’s planning needs, he will probably establish in a country with lower taxation.
For example, a major shareholder will consider moving to Belgium, where he will have to pay only 15 percent on the Belgian-source interest and 25 percent on dividends, while avoiding tax on capital gains and wealth tax.
As for (professionally inactive) wealthy individuals, they will likely move to Switzerland and benefit from the Swiss lump sum taxation system, paying thus exclusively every year, under certain conditions, a fixed amount, calculated on the rent paid or the rent value of their property in Switzerland, without any kind of relation to their real income or wealth.
Or the taxpayer could consider settling in Israel, where foreigners who establish there and nationals who return can benefit from tax exoneration for a 10-year period after the date of immigration to Israel.
Nevertheless, as it is not always easy to leave one’s country of origin, sometimes only the capital will travel abroad. Most of the time this will be transferred to different structures of a foreign jurisdiction, such as the SPF Private Wealth Management Company of Luxembourg – intended for individuals and patrimonial entities, and ideal for important holders of shares and equity portfolios wishing to benefit from a zero percent constitution capital duty of one percent, and an exemption of income, communal and wealth tax.
The inheritance can also be transferred to a discretionary and irrevocable trust. Israeli trusts are extremely interesting because of their advantageous tax situation since, insofar as the settler and the beneficiaries are foreign residents, the assets held by the trust will be considered to be held by a foreign resident. The consequence will be that the income and non-Israeli benefit of the trust (and sometimes even certain investment income of Israeli origin) will not be taxed in Israel.
As for companies, important possibilities of tax planning and optimisation can arise from the use by companies or groups of companies of Belgian and Luxembourg companies.
More particularly in Luxembourg, the professionals of the investment can use professionals-oriented companies, such as SICAV; and specialised funds of investment, which are given total income, communal, commercial and wealth tax exoneration.
Professionals will also consider the constitution of a Soparfi (company of financial participations), which can benefit from the provisions of double taxation convention and those of the directive mother-subsidiary guideline, and whose financial transactions (dividends, capital gains) can, under certain conditions, be exonerated from any kind of taxation.
The struggle against bank secrecy does not mean that taxpayers are powerless; on the contrary, they still have effective means of action against the increasingly aggressive national and international tax provisions.
Taxpayers, whether companies or individuals, cannot just hope that a better regulation of public finances will lead in the future to lower taxes and a subsequent return of the traditional value of protection for private life.
Confronted with a government which seeks more and more transparency without showing any, taxpayers have no other choice than to put in place an effective strategy of tax and asset planning.
Our role at Afschrift is to help our clients achieve these targets.