If you are an expatriate who moved to Switzerland and now seeks Swiss nationality, it is important to check the Swiss inheritance rules against the tax regime in your domicile of origin.
The Swiss inheritance rules
Swiss nationals are subject to strict inheritance rules:
- Your estate must be left in large part (usually 50%) to your children, you cannot elect to leave everything to your spouse.
- In return, that part of your estate left to direct descendants or spouse is not subject to inheritance tax in most Swiss cantons.
Inheritance tax in your domicile of origin
Just because you took Swiss nationality, and perhaps even gave up your original nationality, does not mean you are no longer subject to inheritance tax in your domicile of origin.
In many jurisdictions your estate will be subject to a high level of inheritance tax. In order to avoid hardship, there are usually allowed indemnities or tax delays if you leave estate to your spouse.
Your domicile of origin is usually based on a specific test in that country, for example the normal residence of your father when you were 16 years old. It is very difficult to escape your domicile of origin: taking foreign nationality is not enough. You must prove that you have severed all ties with your domicile of origin and replaced them with those of your domicile of choice.
The tax office in your domicile of origin will naturally challenge your domicile of choice as this will be worth a considerable amount to their coffers. It is up to your estate to convince them, in court if necessary, that your domicile of choice overrules that of origin. Good luck with that: any tie, perhaps membership of a professional society, the odd visit, or even subscription to newspapers in this digital world, can be used to demonstrate your ties have not all been severed.
Therefore it is likely you will be exposed to inheritance tax in your domicile of origin. This can lead to unexpected problems for your survivors, especially your spouse.
The trap
In Switzerland, since you (as a Swiss national) are required to pass 50% of your estate to your children, you can enter into an agreement with them to allow your spouse to enjoy and control those assets until he/she dies. But this part of your estate may well not be protected from immediate inheritance tax in your domicile of origin since it has not been passed to your spouse. This means your house, or your company, may need to be sold in order to pay the taxes. This conflict between the goals of Swiss inheritance law and the tax rules in your domicile of origin can therefore have huge negative consequences on your surviving spouse, and your children.
Is there a solution?
There are several approaches that can be taken to minimise the impact of this inheritance tax conflict, none of which are water tight, but may be used in combination:
- Obtain a ruling in your domicile of origin, claiming that your domicile of choice is now Switzerland. This is normally little more than a “current” legal opinion but may have some weight when the time comes. It is far from watertight.
- Gift a major part of your assets to your children now: in many countries if this is done many years prior to your death then they are subject to lower, or no, inheritance tax (e.g. the Seven Year Rule in the UK). When you die the remaining estate will be subject to the 50% rule but this will be a far smaller burden. It is however advisable to gift the assets with an agreement as to how they are controlled, and if your children become bankrupt their assets may be seized.
- Place assets into a trust where they are owned by 3rd party trustees with you, your spouse and your children as benefactors. This is a popular, albeit complex and costly route, requiring great care in setting up.
Whatever approach, it is highly advisable to invest in an analysis of your situation and international inheritance plan. The major Swiss banks and financial institutions are well versed in this subject and can offer an efficient solution: don’t put it off!
…or, don’t take Swiss nationality in the first place unless you have good reason: long term residence with a C-permit gives you most of the rights of a Swiss national, apart from the ability to vote in national polls and elections, and even this right may be given in the near future.
If you can suggest any other (legal) approach to protecting from the tax trap mentioned here we welcome you adding a comment for readers, or letting us know.
As Switzerland’s most trusted payroll provider, Accurity GmbH has over 20 years’ experience providing clients with the best advice about their payroll, pensions and social security and ensuring they make the right decisions. If you would like to speak with one of our team of experts, simply contact us now. If you are an international recruiter or PEO looking to work in the Swiss market, contact our team today to see how we can make Switzerland easy for you!
