Discussions came as Colm Kelleher tries to pressure Swiss government to back down over proposed capital rules
UBS chair Colm Kelleher and US Treasury secretary Scott Bessent have privately discussed moving the bank’s headquarters to the US, as the Zurich-based lender explores contingency plans to leave Switzerland if the government does not back down on new capital rules.
Kelleher and Bessent held talks in recent months about what a move to the US would look like for the lender, with the Trump administration receptive to welcoming one of Switzerland’s most prized assets, according to three people familiar with the conversation.
The talks with
Bessent are part of an ongoing effort by Kelleher to put pressure on the Swiss government over proposed capital requirements that would force UBS to hold an additional $26bn of capital, a move UBS has described as “extreme” and disproportionate.
The uncertainty surrounding the planned changes has weighed on the bank’s share price, and a public and private lobbying campaign by the lender’s management has so far yielded few results.
UBS has argued that the new requirements go further than those required of global peers and would reduce its ability to compete internationally.
The Swiss government has said it needs to shore up the country’s banking system to avoid another Credit Suisse-style collapse. UBS acquired its crosstown rival in 2023 in a state-orchestrated rescue.
“As we have said repeatedly, we want to continue to operate successfully as a global bank out of Switzerland,” UBS said.
The US Treasury declined to comment.
US regulators have been wary of large lenders redomiciling in the country, given public anger over taxpayer-funded bailouts of banks during the financial crisis. However, the Trump administration has been more open to the idea of attracting European financial institutions.
UBS executives want the bank’s headquarters to remain in Switzerland if they can convince parliament to reduce the proposed hit, according to people familiar with their thinking.
However, they believe they have a fiduciary duty to examine all potential options and are open to the idea of leaving if the proposals do not change, the people added.
Activist investor Cevian Capital, which has a sizeable stake in UBS, said in September that the proposed Swiss capital changes would make it “not viable” to run a large international bank from the country. It added that UBS would have “no other realistic option” but to leave Switzerland if the proposals were not watered down.
The intervention by Europe’s largest dedicated activist investor added weight to the idea that UBS could move its headquarters out of Switzerland, an idea that some in the industry view as a negotiating tactic that is unlikely to happen in practice.
Switzerland’s decision to impose stricter capital rules comes as the US pursues deregulation in various parts of the economy to boost growth and encourage businesses to expand their operations in the country.
The administration has signalled its intent to loosen rules governing banks, with the US Treasury secretary using the growth of private credit as an example that lenders have been “too tightly constrained”. He has also argued in favour of minimising capital and liquidity rules in a bid to free up more space for lending.
The Trump administration’s push to relax bank rules has sparked concern among European authorities that US deregulation will give American lenders an advantage over transatlantic rivals and create risks for the stability of the global financial system.
It is not in the country’s interests for its biggest bank to be uncompetitive
Like many on Wall Street, Treasury Secretary Scott Bessent used a limited partnership to avoid Medicare taxes. Unlike the others, he’s now overseeing the I.R.S.
It was an easy and, by all accounts, legal way to avoid paying thousands, and potentially millions, in federal taxes.
Just set up an investment firm with the right legal structure, and the self-employment taxes that fund Social Security and Medicare could become largely optional.
The tax maneuver was so routine that even after the Internal Revenue Service moved to crack down on it in 2018 — and later won a court opinion blessing its effort — many on Wall Street were unfazed. They assumed that the I.R.S. offensive would inevitably collapse.
Among those who would benefit from an I.R.S. defeat is President Trump’s Treasury secretary, Scott Bessent, a former hedge fund owner and, since August, the acting commissioner of the I.R.S.
Like many firms on Wall Street, Mr. Bessent’s hedge fund, Key Square Capital Management, was set up as a limited partnership. Through that structure, Mr. Bessent avoided paying roughly $910,000 in Medicare taxes on money he made running his hedge fund in 2021, 2022 and 2023, according to a memorandum prepared by Democratic Senate staff for Mr. Bessent’s confirmation hearing in January.
The memo, viewed by The New York Times, was based on a review of Mr. Bessent’s tax returns and also indicated that Mr. Bessent paid Social Security taxes in full.
Mr. Bessent has stood by the tax maneuver. During his confirmation process to lead the Treasury Department, which oversees the I.R.S., Mr. Bessent said he would not follow the I.R.S. position that limited partners like him owed those self-employment taxes.
Instead, he said he wanted to see how ongoing legal challenges would pan out. He pledged to create “a reserve fund to address any contingency related to this issue” and said the amount in question was smaller than the $910,000 described by Democrats. He also committed to winding down his hedge fund.
Mr. Bessent’s decision to not pay the additional tax has now put him in the unusual spot of personally opposing — and having a personal stake in — how the I.R.S. interprets tax law. And since he took office, the Treasury and I.R.S. have backed away from developing regulations to address it.
Under the Biden administration, the I.R.S. and Treasury made it a goal to curb the ability of firm owners to avoid paying self-employment taxes like Mr. Bessent did. In 2023 and 2024, they included the issue on a public list of priorities for further guidance or regulation.
When the Trump administration put out its tax regulation proposals last month, developing plans for collecting more self-employment taxes from owners of limited partnerships was no longer on the list. A Treasury spokesman said the new proposals for regulations — called the Priority Guidance Plan, or P.G.P. — was focused on “burden-reduction initiatives” and implementing the tax law Republicans passed over the summer.
“The secretary was not involved in developing the P.G.P. and played no role in the decision to remove the limited partner exception from the guidance list,” the spokesman said. “As the secretary stated during his confirmation hearing, he will abide by his ethics agreement as laid out by career ethics officials.”
Most Americans steadily pay into Social Security and Medicare through taxes that are withheld from every paycheck. But many wealthy Americans who own businesses can avoid these taxes by directing earnings through limited partnerships or several other types of business entities.
The forgone government revenue is substantial: A Democratic plan to impose a parallel, equivalent tax on these earnings was expected to raise more than $250 billion over 10 years. But it failed to pass Congress during the Biden administration.
“There’s zero question that this is abusive,” Walter D. Schwidetzky, a law professor at the University of Baltimore who focuses on partnership taxes, said of the ability for business owners to avoid self-employment taxes through limited partnerships. “No one of good faith would argue otherwise.”
To those who defend the maneuver, its policy merit is irrelevant. What matters is that the law, in their view, allows for the tax avoidance. “Our job is to follow the law as written, not the law as we think it should have been written,” said Eric Sloan, a tax lawyer and partner at Gibson Dunn.
By backing away from issuing regulations on limited partnerships, the Trump administration has left the policy question to appellate courts. And while the I.R.S. and Justice Department have so far, in court, continued to call for people like Mr. Bessent to pay more in taxes, even a victory on the legal question would be hard for the I.R.S. to actually translate into additional revenue.
Under the Trump administration, the I.R.S. had, as of June, lost roughly a quarter of its work force, a decrease that current and former I.R.S. officials expect will weaken the agency’s ability to conduct time-intensive audits of investment funds. An infusion of funding to the I.R.S. enforcement budget has already been largely canceled, and new expertise at the agency has been lost.
“We really did pull in subject matter experts, I would use the vernacular ‘K Street talent,’” said Daniel Werfel, who served as I.R.S. commissioner during the Biden administration before Mr. Trump took the unusual step of replacing him. “There were a lot of people that had spent their careers developing or advising these partnerships who wanted to give back and help the I.R.S.”
But the Trump administration moved to dismiss new hires across the government, so-called probationary employees, earlier this year. More than 7,000 probationary I.R.S. employees were initially fired. After court challenges, fewer than half eventually came back. The rest left for good.
“I don’t know what happened to them,” Mr. Werfel said.
‘Staple Tax Planning’
By the time Mr. Bessent set out to start his own hedge fund in 2015, he had decades of investing experience. Working for George Soros in two separate stints, he had made splashy foreign currency trades, helping “break” the Bank of England in the 1990s and later, in the early 2010s, reaping huge profits off a wager against the Japanese yen.
Among the many entities associated with the new fund — several of which were incorporated in the Cayman Islands — was the limited partnership that Mr. Bessent has said should shield much of his income from the tax that funds Medicare.
The limited partnership is an old and, for tax planners, reliable legal structure. While newer, more versatile types of business entities are available, including the limited liability corporation, the limited partnership has endured, experts say, largely because of an apparent carve-out in the tax code.
Generally speaking, Americans owe payroll taxes, as well as income taxes, on the money they make working. Most people split payroll taxes, which fund Medicare and Social Security, with their employers. Business owners and the self-employed, on the other hand, have to pay the full freight.
Except for limited partners. Under a 1977 law, limited partners do not necessarily owe self-employment taxes on their earnings. Only money categorized as “guaranteed payments,” which the firm owners can set for themselves, would be subject to those taxes.
This clause appeared to open up the possibility of significant tax savings for people like Mr. Bessent who channeled their earnings through a limited partnership. While the tax that funds Social Security applies only to earnings up to a limit, set at $176,100 this year, the Medicare tax is uncapped. The 2.9 percent Medicare tax rises to 3.8 percent for income over $200,000 for individuals. For investment managers raking in millions a year, even such a seemingly small tax could add up to millions of dollars in additional taxes every year.
So the limited partnership became the entity of choice for many wealthy fund managers and business owners. “When I see an operating business organized as a limited partnership, I tend to assume they did it because it was always a limited partnership and they didn’t bother to change or because a tax lawyer has been involved,” said Mr. Sloan of Gibson Dunn. “It is very standard, staple tax planning.”
In some cases, people use other types of business entities to skirt self-employment taxes. Before he became president, Joseph R. Biden Jr. avoided paying Medicare taxes by funneling earnings from his book and speeches through two S corporations, according to his tax returns. Dr. Mehmet Oz, who leads Medicare and Medicaid, avoided self-employment taxes on income he collected through an L.L.C. between 2021 and 2023, according to a memorandum prepared by Senate Democratic staff members who reviewed his tax returns.
‘Regardless of the Label’
At the I.R.S., partnerships have long been a weak spot. The agency has struggled to hire people with the expertise to pierce through the Russian nesting doll of entities that make up hedge funds and private equity firms.
For each year between 2017 and 2022, 0.1 percent or less of partnership tax returns were audited, according to the most recent I.R.S. data. Over that same time period, between 18 and 60 percent of the largest corporations were audited every year.
Even though the I.R.S. had faced opposition in the past for doing so, trying to address the self-employment tax dodge seemed like a relatively simple way to raise more revenue from partnerships. In 2018, during the first Trump administration, the I.R.S. opened a new enforcement campaign focused on self-employment taxes and limited partnerships.
The I.R.S. view was that people like Mr. Bessent could not claim the tax exemption for limited partners if they were working for and running the firm full time. In a position it would later elaborate on in court, the I.R.S. argued that the exemption was meant only for people who simply invested money in a fund, not the people who ran it.
Within a few years, the I.R.S.’s efforts to make investment fund owners pay Medicare tax came down to a single hedge fund: Soroban Capital Partners.
Founded in 2010, the firm reorganized itself into a limited partnership in 2015, in part to improve the owners’ ability to avoid paying the 3.8 percent Medicare tax, according to records later filed in the U.S. Tax Court. The three owners of the firm earned a combined $145 million over 2016 and 2017, the years examined by the I.R.S. Under the firm’s design, though, just $4 million of those earnings was subject to self-employment taxes, according to the court records.
In an audit that wrapped up in 2022, the I.R.S. said the three Soroban owners in 2016 and 2017 — Eric Mandelblatt, Gaurav Kapadia and Scott Friedman — owed self-employment taxes on the full $145 million. That change could cost the owners as much as $5.4 million in additional taxes, according to an estimate calculated by The Times.
Soroban was not alone. The I.R.S. had soon set out on what it hoped would be a generational revival of its ability to collect taxes. By January 2024, the effort focused on partnerships and self-employment taxes had resulted in 80 audits of wealthy individuals.
The targets were big. In 2023, the I.R.S. finished an audit of Point72 Asset Management, the hedge fund run by Steve Cohen, a billionaire and owner of the New York Mets. The I.R.S. found that Mr. Cohen had, through a limited partnership, avoided paying both Medicare and Social Security taxes on roughly $344 million in earnings over 2015 and 2016. The results of the audit were submitted in the Tax Court, where Point72 is also challenging the I.R.S.
But legality of the I.R.S. position — that simply calling someone a limited partner does not necessarily exempt the person from self-employment taxes — was up in the air. Congress had not changed the provision in the law, and the Treasury Department had not released regulations on the issue. And Soroban had challenged the I.R.S. in the Tax Court, arguing that the federal law allowed limited partners to avoid the self-employment taxes without any strings attached.
In a landmark opinion in 2023, Judge Ronald L. Buch of the Tax Court sided with the I.R.S. He held that whether someone owed self-employment taxes depends on the role the person actually plays in a firm, not the person’s title as a limited partner. In a follow-up ruling this year, Judge Buch found that the three Soroban owners should pay self-employment taxes on the full $145 million in earnings.
“A partner labeled a limited partner who works for the business full time, whose work is essential to generating the business’s income, who is held out to the public as essential to the business, and who contributes little or no capital, is not functioning as a limited partner regardless of the label placed on that partner,” Judge Buch wrote in a ruling this year.
A Diminished I.R.S.
During Mr. Bessent’s time leading Key Square Capital Management as chief executive and chief investment officer, the performance of the fund was mixed, with some investors pulling out their money. But Mr. Bessent himself continued to do well. When he was nominated to lead the Treasury Department, he had assets worth at least $521 million, according to his financial disclosure.
Over the course of the three years reviewed by Democratic staff in the Senate — 2021, 2022 and 2023 — Mr. Bessent avoided taxes much the same way as the owners of Soroban. Of the roughly $25.6 million he made over those years, $1.6 million took the form of “guaranteed payments,” the category of payment that federal law explicitly says is subject to self-employment tax.
It is unclear which of the several ongoing legal cases over the issue Mr. Bessent sees as a bellwether for whether he should pay more in Medicare taxes. The U.S. Court of Appeals for the Fifth Circuit, generally considered a conservative court friendly to business interests, is expected to be the first appellate court to rule. Different results in different circuit courts could, eventually, bring the issue to the Supreme Court.
“What surprises me is that there’s a precedential Tax Court opinion that Scott Bessent seems to say, ‘That’s not good enoughfor me,’” said Karen Burke, a tax law professor at the University of Florida who has written about the limited partnership exemption.
The U.S. government continues to defend the I.R.S. position in court, but it is now doing so with a weaker hand, tax experts said. The Trump administration has moved to disband the Tax Division at the Justice Department, which represents the I.R.S. in appellate court, and many tax lawyers in the department left amid the turmoil there, former officials said. One of the lawyers who represented the I.R.S. in the Fifth Circuit case involving the limited partner question, for example, withdrew from the case and left the government this year.
The I.R.S. has lost not only much of its overall staff, but much of its leadership, too. Several of the agency’s top officials focused on tax enforcement have been pushed out, put on leave or quit. Mr. Bessent is the seventh person to lead the I.R.S. this year.
Congress has also stayed silent on the limited partner question. Republicans did not discuss the issue when they passed a sweeping tax cut this summer.
“There’s not likely to be any tax legislation along these lines any time soon, and there probably won’t be any regulations given the current administration’s dislike of them,” said Monte Jackel, a partnership tax law expert and former lawyer for the I.R.S. “It strikes me that the current administration would like the issue to go away.”
Andrew Duehren covers tax policy for The Times from Washington.
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