Schweiz- Suisse - Switzerland

Tax treatment given to swiss annuity

Swiss annuities enjoy tax free status in switzerland. Let us make a quick comparison....

1. Swiss Withholding Tax (35%) Exempt
2. Capital Gains No
3. Excise taxes No
4. Inheritance tax No
5. Stamp duty No
6. Swiss Income taxes No
7. US tax deferral no (fixed annuity)
yes(variable annuity)
8. US Withholding tax Exempt
8. US Income tax yes

For U.S Citizens

Normally, IRS requires you to file Form 720 for 1% excise tax (which is 1% of premium paid) if you buy a foreign held annuities. But the recent tax treaty with switzerland eliminates this tax. If you plan to withdraw your payments before 59 1/2 yrs, IRS might penalise you to pay additional 10% of the already taxed earnings.

Income on Foreign Fixed Annuities Can Be Taxable

Most foreign fixed annuities are no longer tax deferred in the United States (see Internal Revenue Service regulations, Tax Treatment of Certain Annuity Contracts," Internal Revenue Code (Code) Sections 163(e) and 1271 through 1275). Under the rules of Code Section 1275, a Swiss fixed annuity is a debt instrument, that is, a ,,promise to pay a sum certain, in addition to being an insurance contract. Accordingly, the owner of a Swiss fixed annuity (as well as other foreign annuities that are seen as debt instruments) pays tax on the income that accrues, including currency gains if the annuity is denominated in a foreign currency. Most tax experts agree that as a result of the loss of tax deferral, distributions prior to age 59 1/2, including loans against the policy, are not subject to the 10 percent penalty for early withdrawals. Thus it is possible to take tax-free withdrawals from a Swiss fixed annuity whenever the policyholder chooses.

lncome on Foreign Variable Annuities Can Be Tax Deferred under U.S tax law

Death Benefits in Policy Do Not Make It a Debt Instrument . The inside buildup of a foreign variable annuity continues to be tax free. The death benefits included in the policies do not make the annuities ,,debt instruments“ (promises to pay a sum certain) and, therefore, are not tax deferred under Code Section 1275. They do not constitute debt instruments because they promise to pay a designated sum only if the owner dies. There is no guarantee of a particular sum if the owner cashes in the policy while he or she is alive.

In addition to the above criteria for determining whether a variable annuity is a debt instrument, two further conditions need to be met for tax deferral.

1. The Variable Annuity Must Not Be Self-Directed . The income from a variable annuity is tax free if the owner (or his or her adviser) is not managing the investments himself or herself (a so-called "self-directed" annuity). Owners are permitted to choose investment categories, but under the self-directed annuity rules they may not choose the actual investments. If they do, they are treated as the owners of the underlying assets and the income generated by those assets is taxable.

2. The Variable Annuity Must Be Adequately Diversified . Finally, the inside buildup of variable annuities is tax free if the underlying portfolio is adequately diversified as defined in the U.S. tax code. An account meets the ,,diversification rule“ if

a. No more than 55 percent of the value of the total assets of the account is represented by any one fund;
b. No more than 70 percent of the value of the total assets of the account is represented by any two funds;
c. No more than 80 percent of the value of the total assets of the account is represented by any three funds; and d. No more than 90 percent of the value of the total assets of the account is represented by any four funds.

To make certain that variable annuities comply with the diversification rule at all times, portfolio rebalancing is required on least a quarterly basis.

The tax-deferred status of Swiss variable annuities has consequences for early withdrawal just as do U.S. contracts. Swiss variable annuities, however, offer a combination of asset protection, a choice of asset allocation strategies based on an investor‘s risk profile and other needs, and tax deferral for U.S. investors. This makes them ideal long-term investments that can harness the power of compound growth for a retirement portfolio.

Note*: The information provided above cannot be interpreted as legal or professional advice. Please consult your tax advisor for more information.

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