Tax deduction of asset management costs in Zurich

At some point – at the very latest on preparing their tax return – anyone who opts to have their assets managed by a third party has to consider what exactly can be deducted under “asset management costs” and what the rules are for deducting actual or flat-rate costs.

What costs can be deducted using the actual cost method? There is no straightforward answer to this question as many banks and asset managers charge an all-in fee. This includes mixed costs that are not broken down into individual services, making it impossible for both the client and tax authority to determine the level of deductible or non-deductible costs.

Non-deductible costs primarily relate to financial and investment consultation services or the buying/selling of securities and the associated commissions, fees, broker fees and commercial fees.

The actual costs incurred by third parties for the passive management or custody of moveable assets are the only ones to be accepted as asset management costs according to accounting rules. These relate to the costs of a safe deposit box or safe, custody fees and fees for preparing tax documentation (tax statements).

Besides the method of deducting actual asset management costs, the canton of Zurich (like some other cantons) offers the option of applying a flat-rate deduction for the management and custody of securities by third parties, i.e. without providing evidence of the actual costs. The following practice applies up to and including the 2017 tax period: for portfolios with a value of up to CHF 2 million, the flat rate is 0.3% (up to a limit of CHF 6,000) of the portfolio assets under management.

Eligible securities are equities, bonds and financial products such as investment funds. However, bank balances, loans, trust assets, fixed-term deposits and interests in own companies are excluded.

For portfolios managed by third parties with a value exceeding CHF 2 million, the flat rate of 0.3% is only permitted if the flat fee that has been paid cannot be broken down, is equal to or higher than the amount of the flat-rate deduction and corresponding documentation can be provided. 

Adjustment to the practice of deducting asset management costs

The practice of applying flat fees of 0.3% for portfolios managed by third parties with a value of up to CHF 2 million has not changed. However, as of the 2018 tax period (beginning with the 2018 tax return), the Zurich Cantonal Tax Office is introducing a change to the tax deductibility of flat fees. The new practice affects portfolios worth more than CHF 2 million managed by third parties with flat-rate management fees that cannot be broken down into deductible and non-deductible costs. In such cases, it is now possible to deduct CHF 6,000 plus half of the flat fees charged by the bank after the CHF 6,000 has been deducted.

Here is an example of the charges involved for a CHF 5 m portfolio with costs of CHF 30,000:

This change is the result of a ruling by the Zurich Tax Appeals Commission dated 31 January 2017. In this case, taxpayers applied for the deduction of actual deductible costs that had been paid in addition to indeterminable flat fees totalling CHF 945,000 on a portfolio worth some CHF 417 million. The Zurich Tax Office reduced this amount on the basis that it was less than the flat rate of 0.3% of the portfolio’s value (CHF 1,251,000). As a result, an amount of only CHF 200,000 was applied at the authority’s discretion.

The Zurich Tax Appeals Commission ruled that this interpretation was unduly disadvantageous to taxpayers paying a lower flat fee and approved the deduction of the declared costs. The commission also found that the previous directive should be revised.

Written by:
Melanie Hutter