Offshore

Will Swiss Wealth Management Be Affected by the Abolition of Swedish Wealth Tax?

Emma Rees, 11 April 2007

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WealthBriefing recently reported that the Swedish wealth tax is to be abolished this month.

WealthBriefing recently reported that the Swedish wealth tax is to be abolished this month. The tax, which is applied on top of income tax at a maximum rate of 1.5 per cent, applies to savings of over SEK1.5 million ($217,000) for single people and over SEK3 million ($433,000) for married couples or partnerships.

The abolition of the tax seems long overdue as it raises relatively little for the government – under SEK5 billion per annum – from just 2.5 per cent of Swedish tax payers. However it’s impact has been huge and estimates suggest that private capital of up to SEK800 billion ($116 billion) has fled abroad in recent years to escape punitive tax and social services costs.

Sweden is third (behind France, Belgium and China) in the Forbes Tax Misery & Reform Index 2006. This study offers a global view of the top marginal rates of taxation by looking at a sum of six tax rates – Corporate Income, Personal Income, Wealth Tax, Employer Social Security, Employee Social Security and VAT/Sales tax.

Wealthy Swedes have sought to avoid tax in various ways. Ingvar Kamprad, the founder of IKEA and one of the world’s richest men with a $23 billion fortune, reportedly lives in Switzerland and has set up overseas foundations to control his wealth.

Tennis player and five-time Wimbledon winner Bjorn Borg moved to tax-haven Monaco in the late 1970s, which is also home to other Swedish sports stars. Stefan Persson, one of the owners of fashion retailer H&M, also threatened to leave the country in the 1990s because of the wealth tax and was said at the time to have been granted an exemption.

We asked wealth management consultants Scorpio Partnership for their views on the impact of the abolition of the Swedish wealth tax to tax havens such as Switzerland and Monaco.

Catherine Tillotson, partner, said: “Sweden is a highly taxed nation, with the highest rate of income tax at around 60 per cent. The wealth tax is just one of a number of high taxes on individuals and their companies. Also, this is not a tax amnesty, which means that the impact is likely to be limited on jurisdictions such as Switzerland. When Italy had its full tax amnesty in 2001, the Swiss private banks anticipated the move and offered alternative onshore banking facilities so that overall the amnesty only had a marginal impact on business for Switzerland’s banks. Sweden's reform does not apply retroactively and is marginal so will be unlikely to persuade those who are offshore to repatriate or those facing that decision to remain onshore.”

Ms Tillotson said that having discovered the advantages of offshore banking, the Swedish tax exiles affected will unlikely to be quick to move back onshore, where private banking services are often more limited because of the smaller market. She also points out that it is difficult to repatriate offshore assets and bring them onshore due to complicated tax structures such as custodian and trust arrangements that need to be unraveled.

Veit de Maddalena, head of Switzerland and acting global CEO of Rothschild told WealthBriefing:

“The move to abolish wealth tax in Sweden does not come as a surprise. While most countries would like to broaden their tax nets, with many indirect moves to do so, ‘tax competition’ is at the forefront of their minds. Foreign investment is generally sensitive to tax rates. Sweden is only one of a handful of OECD countries which taxes wealth and clearly doesn’t want to lose any competitive edge. Swedes have traditionally avoided or reduced exposure to the wealth tax by purchasing certain wealth-tax-exempt shares, or investing in agriculture, or by moving to England! We don’t expect to see any real impact on the behaviour of Swedish clients, although it will be interesting to monitor whether Norway follows suit.”

A number of European countries have dropped wealth taxes in the last few years, including Denmark, the Netherlands and Finland. Luxembourg and Spain are the only other EU countries that impose a wealth tax according to the Swedish government, although the Forbes Index also records a wealth tax in France, Italy, Greece, Norway, Switzerland and India.

It seems it might be a case of too little too late. Catherine Tillotson said: “Perhaps 7-10 years ago, it might have had more impact as the Scandinavian countries were particularly vibrant economies. Around the time of the opening of the Malmo Bridge connecting it to Denmark, Sweden was an economic honey pot, in the midst of the tech boom. At that time, there might have been more incentive for people to return, but now there seems little reason for wealthy Swedes to uproot their families from the less highly-taxed places they have made home.”

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