Abstract

Synthetic cash, which is a pure product of financial engineering, can be defined as a combination of financial instruments that provide (before tax) a performance equal to that of a traditional monetary deposit but without the use of a debt or interest payment instrument. This article discusses the taxation of synthetic cash in Switzerland and shows that synthetic cash can generate tax-free income when adequately structured. This also creates a tax incentive for sophisticated private investors to avoid taxes by holding synthetic cash rather than monetary deposits. In addition, the article explores the various defense mechanisms available to the Swiss tax authorities when fighting against synthetic cash. Finally, it examines virtual currencies, which have recently emerged and could constitute the next generation of synthetic cash.

Key words: Taxation, cash management, financial engineering, tax avoidance.