Key Takeaways
- • KPMG flags that Swiss pension funds investing in US alternative assets may face US tax filing obligations and liabilities if allocated Effectively Connected Income (ECI), with potential FIRPTA withholding on US real estate exposure.
- • Qualified Foreign Pension Fund status can mitigate FIRPTA-related US withholding taxes and filing obligations, and a blocker vehicle may reduce US tax exposure when risks are identified upfront.
- • Many Swiss pension funds hold alternatives directly on balance sheet and bear Swiss stamp transfer tax of typically 15bps on acquisition and disposal, prompting growing consideration of a separate Swiss single-investor fund for alternatives.
- • Swiss pensions typically receive 0% withholding on dividends and interest under most Swiss double tax treaties, yet custodians often fail to apply reduced rates or reclaim over-withheld tax, leaving excess leakage often unknown to the fund.
Summary
According to KPMG, the tax implications for Swiss pension funds making alternative investments can be complex and are often not on the radar of the funds themselves. The firm highlights several recurring issues, beginning with US investments. Under US tax rules, an allocation of Effectively Connected Income from a US investment would require the Swiss pension fund to file a US tax return and potentially settle US tax liabilities. Investments with exposure to US real estate, so-called FIRPTA assets, may trigger US withholding taxes and filing obligations, though these can be mitigated if the fund qualifies as a Qualified Foreign Pension Fund. KPMG strongly recommends tax due diligence before any US alternative investment, noting that structuring through a US tax blocker vehicle can reduce the impact where risks are identified early. Non-compliance, late filing, or unpaid US tax can lead to penalties and an IRS audit.
On structuring, KPMG notes that Swiss pension funds typically hold traditional equity and bond investments through a Swiss single-investor fund, such as a Swiss FCP, largely to save Swiss stamp transfer tax, since Swiss funds are exempt counterparties. Regulatory restrictions generally prevent using these structures for alternatives, so many funds have held such assets directly, bearing stamp transfer tax of typically 15 basis points on both acquisition and disposal. KPMG reports that a significant number of Swiss pension funds are now considering a separate single-investor fund for alternatives, such as a Swiss FCP or Swiss LP, and says the new Swiss L-QIF regulatory form may create further opportunities.
Finally, KPMG addresses double tax treaty access. Swiss pension funds generally benefit from favourable withholding rates, often 0% on dividends and interest, under most Swiss treaties. However, documentary requirements have become more burdensome, particularly for single-investor fund structures. As a result, custodians may not apply reduced treaty rates at source or proactively reclaim over-withheld taxes, leaving funds with excessive leakage that often goes unnoticed. KPMG says regular health-checks can identify such cases and recover refunds, and notes its firm has direct experience with this scenario.
On structuring, KPMG notes that Swiss pension funds typically hold traditional equity and bond investments through a Swiss single-investor fund, such as a Swiss FCP, largely to save Swiss stamp transfer tax, since Swiss funds are exempt counterparties. Regulatory restrictions generally prevent using these structures for alternatives, so many funds have held such assets directly, bearing stamp transfer tax of typically 15 basis points on both acquisition and disposal. KPMG reports that a significant number of Swiss pension funds are now considering a separate single-investor fund for alternatives, such as a Swiss FCP or Swiss LP, and says the new Swiss L-QIF regulatory form may create further opportunities.
Finally, KPMG addresses double tax treaty access. Swiss pension funds generally benefit from favourable withholding rates, often 0% on dividends and interest, under most Swiss treaties. However, documentary requirements have become more burdensome, particularly for single-investor fund structures. As a result, custodians may not apply reduced treaty rates at source or proactively reclaim over-withheld taxes, leaving funds with excessive leakage that often goes unnoticed. KPMG says regular health-checks can identify such cases and recover refunds, and notes its firm has direct experience with this scenario.
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