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London's Hedge Fund Managers Flee To Switzerland Over Tax Changes

by Jason Gorringe, Tax-News.com, London

04 December 2007


Dozens of London-based hedge fund managers are reportedly relocating to Switzerland to escape new tax rules affecting non-domiciled individuals residing in the UK.

According to the Financial Times, David Butler, founding member of Kinetic, an investment management consultancy, stated that at least 40% of his hedge fund clients have expressed alarm at new tax rules affecting non-domiciles, announced in the pre-budget report, and Switzerland, with its favourable tax climate for wealthy investors, has emerged as the natural alternative for some managers.

"We are seeing literally dozens and dozens of hedge fund managers moving some of their operations, at least, to Switzerland," Butler was quoted as observing by the FT.

He went on to claim that two-thirds of his hedge fund clients have already moved their entire operations to Switzerland, while others have moved at least 20% of their businesses, including research operations, marketing, distribution, and some fund management activities.

Should this trend continue, Butler predicted that soon, the UK will be used by hedge funds for just finance and back office operations, with key value operations shifted offshore.

Under the shake-up of the non-domicile tax rules announced by Chancellor of the Exchequer Alistair Darling in October's pre-budget report, UK residents who are non-domiciled will now also have to pay an annual charge of GBP30,000 to ensure that they contribute in respect of the foreign income and gains which they keep abroad, and on which they do not pay UK tax. The charge will apply if they’ve been resident here for more than 7 years. Users of the remittance basis will also lose their tax-free personal allowances. In addition, tax advisors are warning that companies and offshore trusts set up by non-doms are being targeted by the UK government as part of new anti-avoidance rules.

Presently, London remains the undisputed European hedge fund capital, and is second only to New York in the asset management stakes. According to International Financial Services London (IFSL), a private sector organisation which promotes the UK's financial services industry, London's share of global hedge fund assets increased from 10% to 21% between 2002 and 2006, making London one of the fastest growing hedge fund centres.

The 900 hedge funds located in London accounted for four-fifths of European based hedge fund assets in 2006, and if figures for funds of funds and US hedge funds with a trading desk in Europe are taken into account, London's share was more than 90%.

Factors underpinning London's strong position include its local expertise, the proximity of clients and markets, a strong asset management industry and a favourable regulatory environment. But other European financial centres are beginning to catch up, especially in terms of their regulatory environment, Switzerland included.

While the Swiss hedge fund industry is miniscule compared with London - there are only an estimated 50 hedge fund managers located in Switzerland - the Swiss Federal Banking Commission (EBK), an independent regulator of the Swiss banking industry, has expressed its support for changes to the Swiss tax and legal system to encourage more hedge fund managers to base their activities in Switzerland.

In a recent report turning the spotlight on the development of the Swiss hedge fund market, the EBK observed that Switzerland is home to some of the world's biggest hedge fund customers. According to the EBK, more than 5% of the assets invested in Switzerland are invested in hedge fund products, but about one third of the estimated $600 billion invested in funds of hedge funds comes from Switzerland, making it the world's second-biggest hedge fund investor after the United States.

The report suggested that changes to the tax and legal framework for hedge fund operations in Switzerland would encourage growth in the country's fund management industry and attract more fund managers. "Aligning the today unfavourable tax conditions with those of the most important foreign locations could facilitate the settlement of hedge funds managers in Switzerland," it stated.

Moreover, Switzerland's personal income tax system could be a strong lure for UK-based hedge fund managers. This system allows wealthy non-national investors and celebrities to effectively negotiate their own tax rate with Swiss cantonal governments, as long as they agree to reside in the country for part of the year.

The UK government says the new tax measures are targeted to protect competitiveness by ensuring that secondees to the City are not affected (the majority have left the UK by 7 years). However, Butler's revelations in the FT are further evidence that the changes are not being well-received by the City.

Tax and wealth advisors are warning that the new rules could be potentially disastrous for the UK finance industry, and are urging the Chancellor to rethink the proposals.

"While it may be tempting to seek to raise additional tax from non-doms in this way, it needs to be recognised that the non-dom population are, by definition, highly internationally mobile and in many cases can choose to invest in foreign rather than UK businesses and assets," John Barnett, a spokesman for the Chartered Institute for Taxation warned in a statement last week.


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