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Tax-Efficient Investment Strategies: Essentials for Success

Thursday, 29 Februar 2024

Monde Economique by Achille Deodato, CEO Indigita SA and Romain Potet, CEO BRP Tax SA

Taxation is an unavoidable aspect of our financial landscape. While it is universally acknowledged that income tax, corporate tax, and VAT are necessary to fund all the infrastructure and essential services crucial for the proper functioning of the state, such as education, healthcare, social welfare, and security, the intricacies of personal taxation, especially in the realm of financial products, can significantly impact investors' wealth. Navigating the complex terrain of taxation on movable assets requires a nuanced understanding of the implications associated with investment choices, especially in an increasingly internationalized economy where individuals domiciled around the world invest in financial instruments issued abroad. Moreover, tax authorities excel at regularly changing tax rules based on expected revenue or the pace of various referendums.

In recent years, investors have demonstrated heightened sensitivity to tax-related considerations, prompting financial institutions to recognize the imperative of integrating tax implications into their investment proposals. Failing to do so not only exposes investors to potentially punitive taxation but also subjects financial institutions to civil liability for inadequately advising on tax-neutral investment strategies within a mandate.

Consider, for example, the scenario where a bank recommends a financial product that is structured in a tax-detrimental manner for a client's tax obligations. Such oversight can result in unwarranted tax liabilities for the investor and also raise questions about the institution's duty of care from a civil law perspective.

It now falls upon banks and wealth managers to discern tax-suitable investments, especially when catering to an international clientele. This requires a comprehensive understanding of national tax regulations in different countries, particularly when investment portfolios are held abroad.

Indeed, the taxation of returns and capital gains varies depending on the investor's domicile. It is also necessary to consider the increasingly numerous special tax statuses, such as lump-sum taxation, which involve rigorous investment management, often by considering the principle of territoriality as well as withholding taxes on foreign tax distributions.

Faced with these complexities, financial institutions are compelled to rely on a blend of tax expertise and digital tools capable of processing vast amounts of data. While refraining from providing explicit tax advice, they must exercise diligence to avoid recommending tax-toxic products that could jeopardize the financial well-being of their clients. Proactive planning from the early stages of portfolio structuring can mitigate commercial and civil risks by avoiding harmful taxation while optimizing the after-tax performance of investments.

In practice, financial institutions must conduct a preliminary analysis for any financial product they intend to offer to their clientele. This analysis aims to determine whether the type of product and/or its structure are suitable from a tax perspective. Although the institution is not legally obligated to inform the client of this process, it serves them well by ensuring a more informed investment proposal.

Checks and analyses of this kind are usually carried out within wealth planning and centralized management departments or can also be automated within banking systems. However, providing client advisors with a platform that can immediately identify whether a product is tax-efficient or not can also prove to be an additional asset. An advisor with an international private clientele must, indeed, be familiar with the essential elements of tax systems applicable to their clients. These preliminary checks prevent any management action whose tax consequences would be detrimental to the point of jeopardizing the success of a financial product placement. This principle falls within the scope of their duties as wealth managers without constituting tax advisory services.

In conclusion, the imperative of tax-efficient investment strategies cannot be overstated in the pursuit of financial success.

As investors grapple with the complexities of their taxation, financial institutions play a crucial role in guiding them towards appropriate investment paths. By integrating tax considerations into investment proposals and leveraging digital tools to navigate the labyrinth of regulations, financial institutions can enable investors to navigate confidently towards their goals.

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