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Wealth management
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Family Office
in Switzerland

Michael Baer,
business expert

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CH-8001 Zurich
Tel: +41-44-771-2500
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Family Office Business (“FOB”)

The governance of family business can be very complex due to the crucial role played by the family and the family dynamics that are often present.

The key elements affecting forms and functions of family business include:
The governance structure, which a family can adopt taking into account
    the circumstances of each family and its business, management and
    ownership succession, conflict of interest, family shareholders with
    different income expectations and relationships between the family
    and non-family executives.
The family business board and its directors.
Two-tier boards for larger family businesses.
Various entities (family office, charitable foundation, venture capital
    or enterprise fund) or bodies such as family counsel and family and
    shareholders meetings.
The needs (particular the wealth management needs) of a family, which owns a substantial family business, are often serviced by a family office.
Family Office
The modern concept of a family office is believed to be born in the US. Nowadays the concept is fully established in Europe with Switzerland, London and Monaco as the most popular centers for location of family offices and rising popularity in Asia and in the CIS countries.
The family office provides the family with a range of services including:
Investment management (asset allocation, manager
    selection and monitoring, risk management)
Estate protection and succession planning
Accounting, tax and banking services
Management of family real estate, other assets (such
    as aircrafts, yachts) and staff.
Transport and travel services for family members.
Administration of the family’s charitable activities.
A family behind a very large family business might employ full-time professionals to provide family office services exclusively to it.
The operating cost of a fully-integrated family office may vary from US$1 million to US$ 2 million a year (not including fees to outside service providers). Therefore, maintenance of a single family office would be economically feasible for families with assets over US$ 200 million. In practice, most families with their own family offices are worth at least US$ 500 million.
Other families (generally families with US$20 million to US$100 million in assets) may outsource family office services by engaging a “multi-family office” to provide for these services. The multi-family office is an organization which provides family office services to more than one family. The key issue to consider when using a multi-family office is to keep the right balance between economic efficiency and the flexibility and confidentiality in decision-making.
A successful family office should have a clear strategy and well defined scope of objectives taking into account the family’s business governance, history, size, and values.
The family office is therefore used to centralize management of the family’s private and business interests or, on the contrary, to facilitate the separation of private family affairs from the family’s business interests. The latter may be preferable for a number of reasons such as managing conflicts of interests, confidentiality and security.
The governance structure of family business will also determine the legal form and location of the family office, how the office is organized and staffed, the structure for initial funding, operating costs and their allocation among family members.
Tax is integral to the structure and all activities of family offices and effects decisions involving investment allocation, structuring of wealth/assets holding entities, distribution strategies and succession planning.
Tax Efficient Family Office
The key elements to consider for tax efficient family office structure and its maintenance would relate to:
Location and legal form used for the family office.
Nature of services provided by the family office and relationship
    between the office and its beneficiaries (i.e. individuals/members
    of the family or various corporate entities owned by the family)
    and their tax status.
The costs sharing structure, its financing and implementation.
Depending on the location, various legal forms may be available for the family office and the tax cost of the office are likely to be affected by the following provisions:
Transfer pricing legislation for certain functions performed or services
    provided by the family office.
Tax rules governing the financing and/or treasury solution.
Tax deductibility of fees paid for the services of the family office
    and rules for deductibility of such expenses for corporate entities
    and individuals vary widely. Some countries just deny the amount
    as a tax deduction if it is paid by individuals.
Benefits in kind provisions where services received by individuals
    for which no payments was made is viewed as a benefit subject
    to income tax.
VAT charge for the services provided by the family office.
In addition to the structure used for the family office, the tax cost associated with their main activities, including investment management, assets holding or allocation strategies as well as management of staff of the family office should also be considered.
Tax Efficient Investments
Families may have different objectives for investments and choose different classes of assets to achieve these objectives. Some may wish to maximize cash flow; others may wish to leave a large legacy to their children or to charities.
The family wealth may be increased by making direct investments in another business, real estate development, venture capital or private equity. Other investments may include publicly-traded securities, art collections, aircraft, yachts and other luxury items.
The family office has to align the family’s investment plan with strategic tax planning to ensure that investments chosen for the family are structured properly to optimize overall tax position of the family members, for which the following must be considered in detail:
Form of the returns (capital, dividend or interest income) and
    associated tax rules. The relevant provisions governing the
    reclassification of income / capital must be examined in detail.
Tax treaties, loss utilization and tax deferral strategies.
Estate / inheritance or gift taxes.
In a constantly changing tax environment asset allocation strategy should not be based solely on returns and level of risk – it should also take into account taxes and consider after-tax returns rather than gross returns from investments.
Efficient and Flexible Holding Structures
The holding structure for the asset will affect the overall tax efficiency of an asset. Therefore to develop a tax efficient holding structure a number of considerations should be taken into account and profit repatriation strategies play a key role for which it may be necessary to introduce intermediary entities such as one or more holding companies between the asset and the beneficiary.
The choice of a holding company will depend on the type of the asset, its location as well as tax status and legal form of the beneficiary.
In most cases tax efficient holding structures rely on applicable double tax treaties therefore it is crucial to consider:
Impact of treaty shopping.
    Treaty shopping has come under greater scrutiny in recent years. It
    is defined as the routing of income arising in one country to a person
    in another country through an intermediary country to obtain “an
    unintended tax advantage of tax treaties”. Treaty shopping can be
    achieved through direct or stepping stone conduits.
    Some countries consider the treaty shopping unacceptable, for which
    they have specific anti-treaty shopping provisions either under their
    domestic law, and/or under the relevant double tax treaty.
    The structure therefore must be based on sound business reason with
    substantive business activities and the most important concept to
    counter treaty shopping remains the concept of “beneficial owner”.
Revision of treaties.
    Treaties may be revised from time to time therefore it is crucial to
    monitor such developments to be able to modify the structure if
Formal clearance / compliance procedures to claim treaty relief.
    The compliance procedure and requirements vary from country to
    country and it is crucial to be aware of the procedure and meet
    the relevant filing requirements and deadlines.
Tax Efficient Financing of Investments
Depending on the ownership structure, commercial considerations and regulatory restrictions financing may take the form of debt or equity or a combination of both.
Tax considerations associated with debt financing generally include deductibility of interest expenses and taxation of interest income.
Tax implications on equity financing may include capital and stamp duties and capital gains.
In certain cases, complex hybrid financing instruments (combining features of debt and equity) may be implemented.
Tax Efficient Asset Management
Decisions making, management and planning are critical to activities of the family office. These activities must be structured and implemented properly to ensure that the taxable presence of the relevant entities and/or members of family business boards as well as allocations of the taxable profits meet the objectives of the family business and tax planning strategy.
In particular, consideration should be given to:
Jurisdictions offering beneficial tax regimes or special exemptions
    to certain activities (e.g. asset management).
Correct composition of the business board and directors as well
    as investment committees of the structures concerned.
Key decision making structure and its implementation.
International Mobility
Family members may have personal and business interests as well as investments in a number of jurisdictions or may wish to relocate to another country or obtain an alternative passport through investments.
The family office should carefully plan relocation of family members , consider tax residency rules and reporting obligations in multiple jurisdictions and their impact on the overall tax position of the family office and its activities.
The change of residence may lead to several tax consequences. The host country will normally subject the taxpayer to tax from the day residence is established. Tax liabilities may also be imposed on the day the taxpayer first arrives in the jurisdiction even though the residence is established later.
On the other hand the home country may continue to tax ex-resident for a certain number of years on a specific type of income.
Double taxation issues are most likely to arise, for which an advance and careful planning must be considered and implemented to mitigate tax burden on the cross-border activities of the family.
Protection and Transfer of Wealth
Protection of wealth and its transfer to future generations of the family is one of the key responsibilities of the family office. The family office may use trusts or foundations or slightly complex structures involving private trust companies to protect the wealth and regulate relations between the family members and its generations.
Generally, such mechanisms may also be used as a tax planning tool to defer taxation of income generated in the trust / foundation.
Two issues must be addressed:
Management of the trust / foundation structure (should beneficiaries /
    settlor retain too much control over their assets, this may undermine
    tax efficiency of the whole arrangement).
Tax implications for beneficiaries, associated with distributions to
    beneficiaries during the life of a trust / foundation and upon its
    winding up.
Tax Compliance
Tax compliance procedure, including filing and document keeping requirements should not be ignored.
To mitigate tax costs associated with any transactions undertaken by the family members and family businesses, tax enquiries / investigations and claims for the relevant treaty benefits the compliance procedure must be managed properly.
Increased Scrutiny
As high net worth individuals (HNWIs) control large number of entities, tax revenue at stake is substantial and such individuals have the opportunity to undertake a tax planning that may be perceived to be aggressive by certain fiscal authorities.
Following the global crisis, governments and international organizations started to pay close attention to tax planning and exchange of tax related information.
The Organization of Economic Co-operation and Development (OECD) suggested that tax administrations should create dedicated HNWI units to focus on the activities of HNWIs and related entities.
US and UK followed the OECD recommendations and set up such dedicated units in 2009. Other countries are expected to follow them.
Family offices are therefore likely to face more enquiries and investigations into their operations and structures under their management.
Source – «GMB Tax»

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