What is an investment club?
Generally, investment clubs are formed by investors who join together to acquire securities of their own choice with relatively small amounts, that do not justify a regulated investment fund. The members of such clubs usually pay an agreed amount periodically into the common pool. These funds are invested in securities on an ongoing basis. Therefore, investment clubs are typically organised a simple partnerships. They do not advertise publicly and do not issue share certificates. According to the provisions of the Collective Investment Schemes Act (CISA) of 23 June 2006, they are not to be counted as investment funds.
What is the most efficient way to set up an investment club?
SwissTaxExpert and the Swiss law firm LEXR offer a comprehensive package to incorporate an investment club.
How are investment clubs treated for income tax purposes?
For direct tax purposes, an investment club cannot be considered a taxable entity. Thus, members must declare their share of the club’s assets and its income (regardless of any distribution) in their personal tax returns.
In the case of very active investment clubs with multiple reallocations of the securities portfolio per year and in particular with the use of derivative financial instruments, the tax administration classify the club activity as “commercial securities dealing”. This would have the consequence that the capital gains, price gains and currency gains would also have to be taxed as income by the club members and, in addition, AHV contributions would have to be paid on them. The number of transactions should therefore be kept within reasonable limits.
Can investment clubs reclaim Swiss withholding taxes on their investments?
As a simple partnership, the investment club is not entitled to a refund of the aforementioned taxes. These claims are primarily to be asserted by the individual members personally, in accordance with their share of the common assets and their income, with the withholding tax authority responsible for them.
For this purpose, the club treasurer shall annually issue to each member a certificate containing the following information: Name and residential address of the participant; his share of the assets and effectively realised income (irrespective of any distribution); pro rata charging of withholding tax and additional tax retention USA with the gross income to be stated in the refund applications. The certificate must also state that it is to be attached to the refund application as a supporting document.
If no more than twenty persons have entered into an investment club agreement in order to jointly invest in and manage securities, the Federal Tax Administration (FTA) may, on the basis of Article 60 paragraph 1 of the Enforcement Ordinance of 19 December 1966 on the Federal Withholding Tax Act (FTAA) and subject to conditions and requirements to be determined by the FTAA, allow them to claim a refund of the withholding tax deducted from the income from the securities from the Confederation by means of a joint application, under the following conditions:
- The club must undertake to enclose the relevant annual financial statements with a list of securities (including any foreign securities) as well as a list of members with the following information to the FTA without being asked to do so:
- Name and residential address,
- Canton initials,
- Share of assets and effectively realised income per member (irrespective of any distribution).
- The club must grant the FTA the right to audit the club’s accounts.
- If the withholding tax is reclaimed by the club as a whole on the basis of the simplified procedure, the club members must be informed that they must declare their share of the income in the securities register in the column income exempt from withholding tax in order to avoid double refunds.
The circumstances reported in accordance with letter a) shall be disclosed to the competent cantonal tax authorities so that they can check the declarations of the participating members for direct taxes.
Can investment clubs reclaim foreign withholding taxes?
The simplified procedure can also be applied for the refund of the additional tax withheld in the USA as well as the withholding taxes from Germany, France, the Netherlands, Austria and Sweden, insofar as these taxes are refundable according to the double taxation agreements concluded by Switzerland with these states. The claim naturally only extends to the share of members resident in Switzerland. The refund applications and the supporting documents must be submitted to the FTA and not to the cantonal tax offices for forwarding to the foreign fiscal authorities.
Other states with which Switzerland has concluded a double taxation agreement might reject this simplified procedure. For the withholding taxes levied in these states, each club member has the right to submit a personal application for a refund of the tax levied on his share of the income to the tax authority responsible for that member.
Can the investment club obtain tax credits for non-refundable foreign withholding taxes?
Since an investment club is not a tax subject, it is not entitled to a lump-sum tax credit.
However, the individual club member has the possibility to apply for his share of the limited foreign withholding taxes on dividends and interest with form DA-1 at the cantonal tax authority responsible for that member. It should be noted, however, that the non-recoverable taxes for the individual club member from club and private property must amount to at least CHF 50 in total.