JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

Swiss Variable Annuity

QUESTION: On 2/2/2005 you stated: "One of the less expensive ways to move some money offshore and to legally defer the payment of taxes is with an offshore variable annuity."

1. If I open a Variable annuity with a Suisse insurance company vs. a
Liechtenstein insurance company will I save an initial 1% tax?

2. Am I correct in understanding that interest and dividends on investments in the variable annuity are tax deferred until the time I start receiving distributions or will I need to report this income annually even if I do not receive a distribution?

3. Do I need to file papers with the IRS telling them that I have a variable annuity with a Suisse Insurance Company?

REPLY: Before responding to your questions, I need to point out that my reference to an annuity being "less expensive" was in relation to the formation and annual administrative costs and not to the amount that might be required by the insurance company as a minimum premium.

1. There is a 1% premium tax that is required for premiums paid to foreign life insurance companies for the purchase of an annuity or life insurance policy. On page 30 of the U.S.-Swiss tax treaty (See  http://www.irs.gov/pub/irs-trty/swiss.pdf), it states that annuities are subject to tax only in the contracting state, but it does not specifically refer to a premium tax. I searched with Google for information on "Swiss Premium Tax" and didn't find any useful guidance in the first four pages.

2. Based on current U.S. tax law, there is no tax due on the accumulation of investments within a tax qualified variable annuity contract until the account owner begins to receive distributions. There should be no current tax on dividends, interest or capital gains received by the insuranance company with respect to a variable annuity contract. However, when distributions are received, otherwise tax favored income such as qualified dividends or long term capital gains will be treated as ordinary income. But -- the amount of after tax capital paid for the annuity will be recovered tax free over the term of the annuity or the lifetime of the annuitant. The caveat here is that the contract must satisfy the U.S. tax law definition of a variable annuity contract even though the contract is issued by a foreign company. A more detailed discussion of this issue is included in my report on Offshore Variable Annuities which is available on the Offshore Press subscribers' web site.

3. A Form 720 is required to report premium payments (quarterly) and to remit the 1% premium tax. If that tax and form is not required because of a treaty, the taxpayer is required to file a Form 8833 "Treaty Based Return Position" with their tax return. For more about that form see http://www.offshorepress.com/AICPA/form8833.htm

In addition, a representative of the Treasury Department regards any foreign  annuity as a financial account that must be reported on the Foreign Bank Account Report (TDF 90-22.1) by June 30th. I think that position is understandable with respect to variable contracts, but it doesn't make sense to me with respect to fixed return contracts. However, the Treasury Dept. hasn't asked me for my opinion.