Excise Tax

 In contrast to most other foreign annuities, Swiss annuities are not subject to the 1% US excise tax on the purchase of foreign annuity and insurance premiums, as a results of the adoption of the new Swiss-US double tax treaty in 1998. This applies to all premiums paid to an insurance company domiciling in Switzerland from a citizen of the US. 

Foreign Fixed Annuities Income Tax 

  A Swiss fixed annuity is an insurance contract and additionally a debt instrument which is "a promise to pay a sum certain". Many foreign fixed annuities have ceased to be tax deferred in the US and accordingly the owner of a Swiss fixed annuity (or any other foreign annuities that may be viewed as debt instruments) must pay tax on any income accrued, inclusive of currency gains should the annuity be in a foreign currency denomination.

 Tax experts agree that due to the loss of tax deferral, the 10 per cent penalty for early withdrawals does not apply to distributions prior to age 59 1/2, including loans against the policy. It is therefore possible to take tax free withdrawals from a Swiss fixed annuity at any time that the policy owner so wishes.

Foreign Variable Annuities Income Tax Deferral

A policy with death benefits is not necessarily a  debt instrument

Internal build up of a  foreign variable annuity is tax free. Death benefits included in policies do not make the annuities debt instruments, that is "promises to pay a sum certain". As a result, these are not tax deferred under Code Section 1275 and they do not represent debt instruments because the only promise to pay a designated sum is only applicable when the owner dies. There is definitely no guarantee of a particular sum should the owner choose to cash in the policy while he is still alive.

 The following two conditions must also be met for tax deferral, in addition to the above criteria for determining whether or not a variable annuity is a debt instrument:

1. The variable annuity cannot be self-directed. Income from a variable annuity is tax free if the owner is not managing the investments nor his advisers on his behalf ("self-directed annuity"). The owner is however permitted to choose the category for investment but may not choose the actual investments themselves as if he does so he will be treated as an owner of the underlying assets in which case the income generated by such assets is subject to tax.
2. The variable annuity must be diversified. The inside buildup of a variabe annuity is only tax free if the underlying assets are sufficiently diversified as defined by the US tax code. In order to meet this diversification rule, the account must comply with the following and portfolio rebalancing is required at least quarterly:
   • No more than 55 per cent of the value of the total assets of the account is represented by any one fund
   • No more than 70 per cent of the value of the total assets of the account is represented by any two funds
   • No more than 80 per cent of the value of the total assets of the account is represented by any three funds
   • No more than 90 per cent of the value of the total assets of the account is represented by any four funds
     

The tax deferral status of a Swiss variable annuity has consequences for early withdrawal, similar to the US contracts. However the Swiss variable annuities offer a combination of asset protection, a choice of asset allocation strategies as based on the risk profile of the investor combined with other needs, and tax deferral for US investors. All of which makes the Swiss variable annuity an ideal long-term investment that can harness the power of compound growth for an individual's retirement portfolio.