Switzerland Update: U.S. Estate Taxes can also Affect Non-U.S. Persons

The U.S. also has far-reaching estate taxation internationally. According to the law, U.S. estate taxes may be due even if neither the testator nor the heirs are U.S. persons.

In the summer of 2011, the Council of States instructed the Federal Council to renegotiate the 1951 agreement between Switzerland and the United States on the avoidance of double taxation in the area of estate and inheritance taxes. Since then, however, nothing has happened in this regard.

Certain allowances under US legislation have been increased as of 2018. For example, the new allowances (for 2023) amount to USD 12.92 million for individuals and USD 25.84 million for married couples. The lower allowance of USD 60000 has not been adjusted.

Testator is a U.S. person

If the testator is a U.S. person, the entire (worldwide) estate is subject to a progressive tax rate of up to 40% (from USD 1 million). The tax-free allowance of USD 12.92 million (for individuals) or USD 25.84 million (for married couples) can be claimed. Accordingly, there is no obligation to file a U.S. tax return if the total estate (before deduction of liabilities and before the addition of gifts made from 1977 onwards) falls below this value.

Neither heir nor testator are U.S. persons

Even if neither the testator nor the heirs are U.S. persons (so-called non-resident aliens), the U.S. estate tax can apply if the estate contains assets that are considered to be located in the U.S. (so-called U.S. situs assets). This includes real estate in the United States, movable property located in the United States, but also shares in U.S. companies, investment fund shares, if the investment fund has been incorporated as a company under U.S. law, and certain debts of U.S. debtors. In this case, too, only the tax-free allowance of USD 60,000 applies, unless a double taxation treaty provides for a more advantageous provision.

The Convention between Switzerland and the United States for the Avoidance of Double Taxation in the Field of Estate and Inheritance Taxes restricts the levying of U.S. estate taxes (but not gift taxes) as follows: When levying the estate tax in the case of a testator who was not a U.S. person at the time of his death but a Swiss citizen or resident in Switzerland, the U.S. will grant the special tax exemption, which would be granted under their law if the deceased had been a resident of the United States. The higher allowances therefore apply. However, these allowances do not apply absolutely, but only to the extent of the ratio of US situs assets to total assets.

An example calculation

For example, if the total estate is USD 20 million, of which $2 million is invested in US situs assets, the allowance is one-tenth of USD 12.92 million, i.e. USD 1,292 million (individual) or one-tenth of USD 25.84 million, i.e. USD 2,584 million (married couple).

Thus, in the first case, USD 708,000 (2 million minus 1.292 million) will be taxed with up to 37% US estate tax, in the second case there will be no taxation, as the applicable allowance of USD 2,584 million exceeds the value of the taxable US situs assets of $2 million.

If the testator was domiciled in a Swiss canton that levies inheritance tax, double taxation results in the first case. There is no provision in the existing agreement with the United States that the estate tax paid in the United States can be offset against the cantonal inheritance tax.

In principle, the executor is responsible for paying the U.S. estate tax, if such an executor has been appointed. If the heirs do not report their tax liability and the executor does not comply with the obligation to report, anyone who is in possession of the testator’s assets is considered an executor.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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