You know what sucks? Getting advice from your advisors that is in their best interest rather than yours. Unfortunately, it happens far too often.
I was recently reminded of this when I was contacted by a friend and client of mine. He had been advised by an advisor who was an acquaintance of his to move a company of his from Switzerland to a popular EU jurisdiction (Country A) in anticipation of the sale of a subsidiary in the EU.
The advisor’s argument for moving the company to Country A was that it was in the EU, like the country in which the subsidiary to be sold was located, and would, therefore, result in more favorable taxation.
The problem with his advice was that it wasn’t really true and was potentially hazardous.
First, it is questionable whether the tax outcome would have been better with a Country A company than a Swiss company. The reason being is that Switzerland has an expansive network of tax treaties that generally allocate taxing rights on the disposition of shares to Switzerland. And, if certain conditions are met, which in this case they were, those capital gains are tax-free in Switzerland. Additionally, Switzerland is party to the EU Parent-Subsidiary Directive, which generally allows dividends to flow withholding tax-free between party countries. As with capital gains, dividends received by Swiss companies are tax-free if certain conditions are met.
Second, moving the company from Switzerland to Country A would risk running afoul of the Multilateral Instrument’s (MLI) Principal Purpose Test (PPT). The PPT essentially says that if one of the principal purposes of a transaction—like moving a company from Switzerland to Country A—is obtaining tax benefits, then the tax benefits can be denied.
Based on my analysis, Country A and Switzerland would likely produce the same tax outcome—i.e. no tax. And, even if Country A did produce a better tax result, it would only be very slightly better. Long story short, it definitely wasn’t worth the risk of moving the company and running in to PPT issues; especially since the existing structure was mature and tested and provided certainty.
The client decided to heed my advice and do nothing. He left his Swiss company in place, sold the subsidiary, and reaped the benefits his structure had been providing for years.
So, why did the other advisor recommend such a high-risk strategy? While we will never know for sure, we believe it was because the advisor’s holding company management platform had an office in Country A and not in Switzerland, and because he’d benefit from having such a high-profile client on his platform.
As advisors, we have a duty to do what is in our client’s best interest, not our own. I am not suggesting we do things to our own detriment, I am just saying we shouldn’t do something to our client’s detriment to our benefit.
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