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Old 08.04.2021, 15:29
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Taxation of recovered debt

Purely hypothetically, a friend of mine had just recovered a debt, which he had already written off (unofficially, he just stopped to pursue it) a couple of years ago due to hopeless situation. He has never reported said debt to CH authorities for that reason. A debtor back in 2015 disappeared from all the radars, missed the due date by 50+ months and had only resurfaced in March 2020. Surprisingly, the guy was just in a spiritual retreat somewhere in India and is happy to pay now. For the sake of simplicity, lets say there is no interest and the currency of contract is USD.

Is there any way for my friend to report this debt repayment to Steueramt not as income for 2020, but as a debt repayment for a debt emerged prior to becoming a tax resident in Switzerland?

The extra credits question: would that be much different, if the debt(s) would be nominated in BTC and ETH, which got a little appreciation since than?

Thanks in advance for any thoughts on the subject. That friend of mine has a tax advisor in Zug and are fully aware of other ways to flow in debt repayments, including options to get said debt repaid into installments through some double Delaware LLC with Zug holding sandwich. But he wants to avoid that, unless the tax difference is unreasonable.

Last edited by evop; 08.04.2021 at 16:36. Reason: grammar
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Old 08.04.2021, 15:34
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Re: Taxation of recovered debt

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Purely hypothetically, a friend of mine had just recovered a debt, which he had already written off (unofficially, he just stopped to pursue it) a couple of years ago due to hopeless situation. He has never reported said debt to CH authorities for that reason. A debtor back in 2015 disappeared from all the radars, missed the due date by 50+ months and had only resurfaced in March 2020. Surprisingly, the guy was just in a spiritual retreat somewhere in India and is happy to pay now. For the sake of simplicity, lets say there is no interest and the currency of contract is USD.

Is there any way for my friend to report this debt repayment to Steueramt not as income for 2020, but as a debt repayment for a debt emerged prior to becoming a guy became a tax resident in Switzerland?

The extra credits question: would that be much different, if the debt(s) would be nominated in BTC and ETH, which got a little appreciation since than?

Thanks in advance for any thoughts on the subject. That friend of mine has a tax advisor in Zug and are fully aware of other ways to flow in debt repayments, including options to get said debt repaid into installments through some double Delaware LLC with Zug holding sandwich. But he wants to avoid that, unless the tax difference is unreasonable.
If it's repayment of a debt for something that occurred in 2015 before being Swiss tax resident it's not income at all or relevant to taxation in CH, except possibly for wealth tax
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Old 08.04.2021, 15:39
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Re: Taxation of recovered debt

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If it's repayment of a debt for something that occurred in 2015 before being Swiss tax resident it's not income at all or relevant to taxation in CH, except possibly for wealth tax
Yes, that is in theory. The friend is just worried, that if he gets an equivalent of 1M USD to his bank account, that may require some paperwork to be accepted as a debt repayment by ZH Steueramt. Or just an explanatory letter would be enough?
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Old 08.04.2021, 15:44
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Re: Taxation of recovered debt

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Yes, that is in theory. The friend is just worried, that if he gets an equivalent of 1M USD to his bank account, that may require some paperwork to be accepted as a debt repayment by ZH Steueramt. Or just an explanatory letter would be enough?
He may need some explanation for his bank too, so an audit trail will likely be needed in any case.
If your friend is able to write off 1M USD just like that it's likely to be insignificant to his wealth & income so probably won't even be noticed, however a note on the tax return explaining would probably save any further questions.
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Old 08.04.2021, 16:11
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Re: Taxation of recovered debt

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If it's repayment of a debt for something that occurred in 2015 before being Swiss tax resident it's not income at all or relevant to taxation in CH, except possibly for wealth tax
I'd say it doesn't matter how long ago or where the person was resident. It was his money all along yet he didn't have it (to pay wealth tax on it). Wouldn't that be a bit like owning art, on which you don't pay taxes either, neither while you own it nor when you sell it. (But on the money you made on it you will pay wealth tax from then on).

Therefore I'd say, the only taxable thing on repayment is the interest, which OP took out of the discussion.
And yes, one better has the paper work to prove it's repayment of depths if it is a large, obvious amount.
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Old 08.04.2021, 16:43
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Re: Taxation of recovered debt

Not enough information to comment sensibly. There are "debts" in the form of loans, and "debts" for unpaid rent or commercial transactions.

I rented out my flat in Valais for 4 years to a guy who suddenly became both demented (Alzheimer's) and insolvent. It took seven months at least after he stopped paying rent to evict him, and that was so even though he vacated a couple of months earlier. The court in Sion gave him a extra month even though the movers had come and gone. Apparently he hadn't returned the keys yet; he eventually did.

The dishwasher had to be replaced (800 CHF I think). The parquet floor on the ground floor had to be replaced (5,000 CHF). Ground floor wall had to be repainted. Lawyers had to be paid (1,200 CHF). I got 2,600 out of the security deposit for all of that.

Went to IKEA and furnished the whole place, including delivery and putting stuff together for the 3 bedrooms, salon, dining room, 6,000 CHF. A TV from Fust was 1,400 CHF. Until I'm able use it I'm renting it out through a holiday rental agent on site. Then I had to pay 1,000 to an electrician to combine the WiFi and cable TV for two flats (Swisscom was happy for me to do that, but I had to pay 3 months in lieu of notice to Teledis when they wouldn't: for them, if there's a separate electric meter they want a separate account and 186 CHF every 60 days. I pay Swisscom 90 CHF a month, they send a bill by email and I pay with a US credit card.)

OK: There's a "debt" but nothing to write off except for actual unreimbursed expenses. All handled differently for Valais, UK and US tax.

If at some future date the PR of the guy's succession (he was a bachelor, I'm sure he died; he had one relative, a nephew) shows up with money it gets treated as a reversal of the debt it replaced. Over the years as a UK landlord this happened all the time: if the deposit is forfeited to me in a future tax year by agreement or after arbitration, I treated it as rent at that time. Or if it covered deductible damage then as property income reversing dilapidation or depreciable property, or whatever. I work on a cash basis: if I did accrual then it might be different. If it's rent it's rent in the year I got it. If a tenant pays late then it's a nuisance for the accounts but it gets onto the tax return for the year received. I keep two sets of books: calendar year and ecclesiastical (UK tax) year and use year average foreign exchange rates: it's on Excel sheets so easy to change the rate as it happens.

In the USA there is a wicked way to get at a deadbeat: file a 1099-C "cancellation of debt income" taxable at ordinary rates. One of my many daughters was ill and instead of the bank (HSBC as it happens) reminding her or anybody who would answer the phone that there was an unpaid credit card bill and several thousand dollars in an idle checking account, they sold the credit card debt for pennies (WSJ today has a page one article on that: "Big Debt Collector Stayed Tough Despite Pandemic: Sherman Financial, unlike peers, filed more lawsuits after lockdowns") and gave the cash in the account to the State Unclaimed Funds Bureau (she got it back eventually from the State). Eventually her brother opened a letter from the credit outfit and he offered to settle the $2,000 debt for $1,000. No wonder they jumped at that offer: they usually settle for 10%. Anyway they issued a 1099-C which didn't matter since my daughter was then unable to work.

It's years later, she was better, moved to the UK (where she was born), got a "liar's loan" mortgage and bought a flat. She signed the papers in a pub and got £270,000 credit the next day to buy a place: she bought a flat at auction which she still has. She has never earned enough to pay off the mortgage without my help: but the current bank-rate based interest is 0.39%.

Long after the ten years had gone by Chase refused her a US credit card but after an appeal and sending over a copy of her mortgage statement her US credit union gave her a credit card at 6% interest and $5,000 limit. Both low, but she now has good rental income from the flat and a huge cash subsidy from DWP for her autistic child, and a part-time job. And a UK Amex card. And for what it's worth, the kid is bilingual, goes to a French school and French is his preferred language that he speaks to me in. Autistic, with DLA, but at the top of his class, like Alan Turing or Greta Thunberg. OK, that's not debt, but an interesting sidelight of how one can survive debt. Next step: get him to learn German. There must be Swiss summer camps for that. He's 8 now and of course is Swiss.

BTW the banker who gave her the mortgage was fired and, I am told, went to prison. But that had nothing to do with our mortgage.
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Old 08.04.2021, 17:22
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Re: Taxation of recovered debt

it likely is going over check for terrorist sponsor groups and money laundering checks - should be easy to clarify based on wealth and income however bank be obligated to report that to the authorities which in turn would check how did one come into possession .
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Old 08.04.2021, 17:28
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Re: Taxation of recovered debt

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it likely is going over check for terrorist sponsor groups and money laundering checks - should be easy to clarify based on wealth and income however bank be obligated to report that to the authorities which in turn would check how did one come into possession .
Transactions above 10k are noted, very few transactions are investigated unless some RED flags show up. Authorities would be investigating many monthly salary payments let alone bonus's.
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Old 08.04.2021, 18:59
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Re: Taxation of recovered debt

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Transactions above 10k are noted, very few transactions are investigated unless some RED flags show up. Authorities would be investigating many monthly salary payments let alone bonus's.
One year I filed seven FBARs listing the same one million dollars relating to property transactions where funds in a corporate trust account had numerous beneficiaries.

Absolutely no result. Each beneficiary declared as necessary his/her own interest on a 1040. The funds came from a YS inheritance and paid off a U.K. mortgage.

Nobody cares until the DoJ wants you for something else. Over the years I’ve seen many clients wait out the statute of limitations. Form 8938 has made that riskier: no SOL for that.

And now the U.K. wants to copy the FATCA system?
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Old 08.04.2021, 19:18
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Re: Taxation of recovered debt

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Yes, that is in theory. The friend is just worried, that if he gets an equivalent of 1M USD to his bank account, that may require some paperwork to be accepted as a debt repayment by ZH Steueramt. Or just an explanatory letter would be enough?
Five years ago, a lawsuit was won by my wife and two others against her uncle (for debt), EUR 850k, paid into their Swiss accounts no questions.

Tom

Last edited by st2lemans; 08.04.2021 at 20:06. Reason: added info
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Old 08.04.2021, 19:26
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Re: Taxation of recovered debt

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Transactions above 10k are noted, very few transactions are investigated unless some RED flags show up. Authorities would be investigating many monthly salary payments let alone bonus's.
I was referring to 1M$ transaction.

All international above 100k are (source : CS AM) and none regardless of the amount when wired between CH banks.
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Old 08.04.2021, 19:51
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Re: Taxation of recovered debt

So an $x 'debt'/asset exists prior to moving to CH and before filing a Swiss tax return this 'debt' is written off and not declared for wealth tax. The question seems to be how to make this amount appear in the OP's account without suspicion and/or paying as little tax on it as possible. I would suppose it could be seen as a gift. Or it's an asset that was valued at 0 which is now worth $x so $x of capital gain. E.g. you give the $x as an investment. The investment is valued at 0 as the owner did a runner. Now he's back with the money. Doesn't really add up to me.

Wouldn't surprise me if the $x is an offshore account, or a yacht, etc. If you find a way let us know so we can all do it. ;-)
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Old 08.04.2021, 19:54
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Re: Taxation of recovered debt

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Yes, that is in theory. The friend is just worried, that if he gets an equivalent of 1M USD to his bank account, that may require some paperwork to be accepted as a debt repayment by ZH Steueramt. Or just an explanatory letter would be enough?
Does he have documentation of the loan being issued and of his efforts to recover it failing? If so I would hope he should be fine and only wealth tax to pay from the year he has recovered the loan (assuming there was no interest, if interest then income tax on that)

If there is no documentation and I was in the tax department it would raise flags whether your friend has «forgotten» to declare assets. If the repayment is being made in ETH or BTC which have appreciated massively I would also look for some documentation that this was agreed
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Old 08.04.2021, 20:08
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Re: Taxation of recovered debt

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So an $x 'debt'/asset exists prior to moving to CH and before filing a Swiss tax return this 'debt' is written off and not declared for wealth tax. The question seems to be how to make this amount appear in the OP's account without suspicion and/or paying as little tax on it as possible. I would suppose it could be seen as a gift. Or it's an asset that was valued at 0 which is now worth $x so $x of capital gain. E.g. you give the $x as an investment. The investment is valued at 0 as the owner did a runner. Now he's back with the money. Doesn't really add up to me.

Wouldn't surprise me if the $x is an offshore account, or a yacht, etc. If you find a way let us know so we can all do it. ;-)
In my wife's case, it probably counts as inheritance (her mother started the suit, she finished it, international transfer from Italy to CH of CHF 950k)

Tom
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Old 08.04.2021, 20:28
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Re: Taxation of recovered debt

Never a gift. There the question usually is was it really a gift or more likely a taxable tip. Plenty of law cases on that.

I have reversed transactions in different years but with justification. Our firm bought a property in London subject to renovation and our ratification one year later. As it became obvious we were overcharged by our “friends” we renounced the contract the next year. HMRC wanted to tax us as an ongoing project. I had to fax them the contract and proof of retroactive renunciation.

I am active on tax and estate law forums for lawyers. These are not subjects for amateurs and anecdotes including mine are for amusement only and have no scholarly significance.
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Old 08.04.2021, 21:08
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Re: Taxation of recovered debt

One needs to make a visit to Treuhänder and get advise there.

I could see it both ways and tax office may be not the only one looking to the 'forgotten 1m$ assets' - until you wealth today is 40x that - which I could imagine one could simply forget .
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Old 09.04.2021, 13:02
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Re: Taxation of recovered debt

Thank you for all the answers, the friend appreciate them a lot.

The documentation, if not present, is easily recoverable, since parties are in agreement.

Not sure if the multiple old chats and emails would do the trick of proving the attempts to recover, but the story is well known among many mutual acquaintances and business partners. Yet many of the later texts would not be readily provided to the authorities, since they may include (or, more likely, generally consist of) mature language with theatrical exaggerations about the proposed actions towards debtors wellbeing and chakra.
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Old 09.04.2021, 13:07
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Re: Taxation of recovered debt

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Thank you for all the answers, the friend appreciate them a lot.

The documentation, if not present, is easily recoverable, since parties are in agreement.

Not sure if the multiple old chats and emails would do the trick of proving the attempts to recover, but the story is well known among many mutual acquaintances and business partners. Yet many of the later texts would not be readily provided to the authorities, since they may include (or, more likely, generally consist of) mature language with theatrical exaggerations about the proposed actions towards debtors wellbeing and chakra.
If everybody is in agreement, a short explanation from the debtor would clear it up.
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Old 09.04.2021, 14:56
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Re: Taxation of recovered debt

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If everybody is in agreement, a short explanation from the debtor would clear it up.
So if I have an undeclared asset that I liquidate and need to bring under the Swiss taxation system I can just get a friend to say it was money I had lent them and everything will be hunky-dory.
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Old 09.04.2021, 15:19
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Re: Taxation of recovered debt

Huh, I recently opened a side account to move some money out of Postfinance. Guess what, the bank called me to verify how did I got ahold of the money ??! even though it was a transfer between swiss banks with the same account holder name/address.

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I was referring to 1M$ transaction.

All international above 100k are (source : CS AM) and none regardless of the amount when wired between CH banks.
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