A study by KPMG shows that the number of funds which publish tax information for their Swiss investors has increased by over 40% in the last 6 years. What could be driving this recent trend? Read on to find out more about the results of our study.
Investment funds (both Swiss and foreign) are strongly encouraged to calculate and publish certain Swiss tax information on an annual basis so that Swiss retail investors can complete their tax returns properly.
Swiss funds understand this domestic tax reporting requirement very well and all Swiss funds make this tax information available as standard practice. However, funds established outside of Switzerland (“non-CH funds”) are not always aware of this Swiss tax reporting requirement, potentially giving rise to adverse tax consequences for Swiss retail investors if such information is not made available.
The Swiss Federal Tax Administration (SFTA) maintains an online database, publishing this tax information for both Swiss and non-CH funds (so-called “Kursliste” / “Liste des Cours” or “Course Listings”).
KPMG has recently performed a detailed study of the data published on the SFTA’s database over a 6-year period (2013 to 20181). Below is a summary of the key findings from our study, which we believe are particularly interesting for the asset management industry:
The number of non-CH funds authorized for public distribution in Switzerland by the Swiss regulator (FINMA) grew from approx. 7,500 in 2013 to over 9,800 in 2018 (+29%).
However, over that same period the total number of non-CH funds publishing tax information on the SFTA’s database grew by over 43% (from approx. 9,000 in 2013 to almost 13,000 in 2018).
In our opinion, this increasing trend for non-CH funds to publish Swiss tax information is caused by the following factors:
Over the last 6 years, Luxembourg has strengthened its position as the fund domicile location of choice for asset managers distributing into Switzerland (in 2018, over 47% of all funds reported on the SFTA’s database were domiciled in Luxembourg, followed by Ireland with over 15%; Swiss funds were 3rd, representing only 10% of the total fund population).
Other interesting points to note are:
Our study shows a clear trend towards earlier publication of the Swiss tax information; in 2013 the peak period for publications was 6-7 months after the fund’s accounting year-end, whereas in 2018 the peak period shifted to 2-3 months after the fund’s year-end.
This is likely due to the pressure certain Swiss banks applied to the market to have the Swiss tax data published by mid-February after the tax year (so that the tax data could be included in the tax reports which the banks typically issue to clients at the end of February).
This also reflects a growing trend towards calculating the Swiss tax information based on accounting data, rather than waiting until the fund’s financial statements have been audited to commence work on the calculations.
Our study also revealed that, over the 6-year period, the average taxable income (taken as a percentage of NAV) across all funds reported on the SFTA database remained consistent, making up between 1.3% and 1.6% each year.
Unfortunately it was impossible to determine the difference in results between equity funds and bond funds from the information in the SFTA database, but it nevertheless remains interesting that the current low-interest rate environment has not had a significant impact on the overall level of taxable income being reported by funds over the 6-year period.
In cases where no tax information is made available by a fund, the SFTA apply a flat rate tax, which typically is higher than the 1.6% of NAV (e.g. 5%). This is therefore clear proof that there are benefits in performing Swiss tax reporting!
Finally, our study showed a decline in the number of accumulating funds which reported taxable income of ‘CHF 0.00’ over the period. While 23% of funds reported taxable income of nil in 2013, only 18% did so in 2018.
This decline could be explained by (i) enhanced investigations by the SFTA of funds that continuously report taxable income of ‘CHF 0.00’, and (ii) the update of the relevant Swiss tax circulars no. 24 and 25 in late 2017 / early 2018. These tax circulars reinforced the calculation methodology to be applied in certain specific cases (e.g. funds with synthetic replication strategies).
Nevertheless, it remains reasonable for a significant number of funds (e.g. 18% in 2018) to report taxable income of ‘CHF 0.00’. For example, most alternative funds which typically do not focus on achieving income yields but instead only capital growth come to mind.
Overall, it is clear that publishing Swiss tax information is now a “must have” if a fund (whether Swiss or foreign) wants be successful in being marketed to Swiss retail investors.
1 The information published for tax year 2019 is not yet complete (as many funds have not completed their publication yet), hence we did not include the data for 2019 in our study.