Switzerland offshore business sectors

Switzerland's well-known attractions as a home for money are based on its widely perceived safe-haven status which is a direct consequence of its iron-clad banking secrecy provisions, the ever-appreciating value of the Swiss Franc, and the country's long history of neutrality which has kept Switzerland free of the ravages of war and has given it a political and economic stability unrivalled in continental Europe. More recently the country's decision not to join the European Union has made it a major beneficiary of investment funds fleeing high taxation and the effective ending of banking confidentiality in the EU under the Savings Tax Directive.

The Savings Tax Directive applies in Switzerland through a separate agreement reached between the country and the EU, under which Switzerland applies a withholding tax (35% since July 1, 2011, 20% from July 1, 2008) to returns on savings paid to the citizens of EU Member States, and which in various other ways is less onerous than the original Directive.

Although bank interest and dividends are caught by the Directive, payments made by what are called 'residual agents' (including for instance trusts) are apparently excluded in the Swiss agreement, which is not the case in Member States.

In 2008, the authorities and the Swiss financial sector established a framework for the dialogue on the future direction of Switzerland's financial centre, which includes seeking improvements to the tax regime for hedge fund and private equity managers.

The 'Financial Centre Dialogue Steering Committee', set up for this purpose, held its first meeting in early 2008, the focus of which was the adoption of a joint work schedule and the prioritisation of topics raised by the private sector and the Confederation. Working groups were set up to deal with various topics, and these will examine existing and new proposals for measures to improve the conditions of the financial centre, and implement them where appropriate. A working group will also examine the fiscal and regulatory framework regarding hedge funds and private equity.

Agreement was reached on enhancing dialogue on a cross-sector strategy for Switzerland's financial centre, at a meeting between Federal Councillor Hans-Rudolf Merz and the heads of associations in the financial sector in November 2007. The Financial Centre Dialogue Steering Committee was established for this purpose.

The Financial Centre Dialogue Steering Committee was chaired by the Director of the Federal Finance Administration, Peter Siegenthaler. The authorities were also represented by the Swiss National Bank, the Swiss Federal Banking Commission, the Federal Office of Private Insurance and the Federal Tax Administration. The financial sector was represented by the Swiss Bankers Association, the Swiss Insurance Association, the Swiss Funds Association and the Swiss Financial Market Services. The Financial Centre Dialogue Steering Committee were due to meet three or four times a year.

In September 2008, due to the financial crisis the realisation grew that the policy towards the financial market needed to be changed. In May 2009 the Federal Council accepted a proposal from Konrad Graber, a member of the Council of States, for a report to be compiled on a strategy for future policy towards the financial market. The “Working Group on Strategy”, consisting largely of the previous members of the Financial Centre Dialogue Steering Committee, and chaired by Peter Siegenthaler, director of the FFA, was set up to support the task. A number of hearings were held up until late autumn of 2009 with various representatives of the industry. The Federal Council’s report “Strategic Guidelines for Switzerland’s Financial Market Policy” was published on 16 December 2009.

In September 2007, the Swiss Bankers Association, the Swiss Insurance Association, the Swiss Funds Association and Swiss Financial Market Services (formerly known as the SWX Group, the SIS Group and the Telekurs Group) published the "Swiss Financial Centre Master Plan" drawn up as part of a joint project. The goal of the master plan is to strengthen and develop the international competitiveness of the Swiss financial sector.

On January 1, 2009, the Federal Act on the Swiss Financial Market Supervisory Authority (FINMA), which the Swiss Parliament approved on June 22, 2007, went into full legal force. The effect of the Act is to merge three bodies – the Federal Office of Private Insurance (FOPI), the Swiss Federal Banking Commission (SFBC) and the Anti-Money Laundering Control Authority – into a single supervisory authority.

This section of the site describes the key Swiss banking and investment fund sectors.

Switzerland Investment Fund Management

As a magnet for investments, Switzerland had historically been one of the locations in which investment funds business had developed, but in the '80s, when the modern explosion of funds under management began to take on massive proportions, Switzerland found itself left out. The fact was that Switzerland had been overtaken by its competitors such as Luxembourg which offered more flexible regulatory structures, lower taxes, and access to the lucrative EU market on preferential terms.

The Swiss responded with a wholly new parcel of legislation, reduced taxation, and more sophisticated attitudes to investor protection. The Investment Funds Law 1995 loosened the restrictive investment guidelines that had been a feature of the previous law, replacing them with much greater transparency in order to maintain investor protection.

The new law established the principle of reciprocity, permitting the local licensing of funds which are established in regimes with acceptable regulatory regimes; in particular, this applies to the EU. An agreement with the EU to allow Swiss funds to operate under the UCITS guidelines (ie to market themselves freely in the EU) form part of the Bilateral Agreements between the EU and Switzerland; unfortunately for Switzerland, the EU/Switzerland Savings Tax Directive agreement does not exclude UCITS funds from application of the Directive - in the EU internal version of the Directive, UCITS funds are outside the Directive.

The Investment Funds Law recognises several different types of fund, and applies differing prudential requirements to them:

Umbrella funds are permitted, and there are special rules for limited-circulation funds.

Foreign funds are permitted under the reciprocity provisions.

Until 2009, the Federal Banking Commission (FBC) was responsible for licensing and supervising investment funds. The new law introduced a separation of fund management, which for a local fund must be undertaken by a Stock Corporation, and the custodial function. The custodian must be licensed under the Banking Law. Any entity distributing fund shares must be authorised by the FBC. The FBC's role was swallowed up in FINMA when it took over financial regulation in January, 2009.

See Law of Offshore for a fuller statement of the licensing and supervisory regime for investment funds under the new law.

It seems that the new legislation has been successful in attracting a much wider range of foreign funds to Switzerland; but it is not clear whether an upsurge in locally-established funds will now take place given the application of a withholding tax to UCITS funds under the Savings Tax Directive.

In 2007, the Swiss Federal Banking Commission (EBK), the then independent regulator of the Swiss banking industry, expressed its support for changes to the Swiss tax and legal system to encourage more hedge fund managers to base their activities in Switzerland.

The trust business is witnessing rapid growth in Switzerland, having more than doubled in size over the past five years. In 2007, as well, Switzerland ratified the Hague Convention on the Law Applicable to Trusts and their Recognition. The Swiss Association of Trust Companies was officially launched on Tuesday, 11 September, 2007, in Zurich and on Wednesday, 12 September in Geneva, in a bid 'to encourage the professional and ethical development of an industry in full expansion in Switzerland'.

In a report turning the spotlight on the development of the Swiss hedge fund market, the EBK observed that while Switzerland is home to some of the world's biggest hedge fund customers, the Swiss hedge fund industry itself is tiny compared with the main centres of New York and London, with only an estimated 50 hedge fund managers located in Switzerland out of a global total of 9,000 hedge funds.

The EBK stated that more than 5% of the assets invested in Switzerland are invested in hedge fund products, but about one third of the estimated US$600 billion invested in funds of hedge funds comes from Switzerland, making it the world's second-biggest hedge fund investor after the United States.

In November 2007, the SWX Swiss Exchange launched a new segment for exchange traded structured funds (ETSFs), which, according to the exchange, combine the investment flexibility of structured products with the legal security provided by investment funds.

In contrast to ETFs, which track a specific index, ETSFs involve a traditional investment instrument that is combined with a derivative or baskets of underlying instruments from various asset classes, such as shares, bonds or commodities. Depending on how the fund’s assets are structured, it is possible to participate in the underlying instrument(s), optimise yield, or protect the invested capital.

Dozens of London-based hedge fund managers are reportedly relocating to Switzerland to escape new tax rules affecting non-domiciled individuals residing in the UK.

In December 2007, David Butler, founding member of Kinetic, an investment management consultancy, stated that at least 40% of his hedge fund clients have expressed alarm at new tax rules affecting non-domiciles, announced in the pre-budget report, and Switzerland, with its favourable tax climate for wealthy investors, has emerged as the natural alternative for some managers.

"We are seeing literally dozens and dozens of hedge fund managers moving some of their operations, at least, to Switzerland,"

He went on to claim that two-thirds of his hedge fund clients have already moved their entire operations to Switzerland, while others have moved at least 20% of their businesses, including research operations, marketing, distribution, and some fund management activities.

Should this trend continue, Butler predicted that soon, the UK will be used by hedge funds for just finance and back office operations, with key value operations shifted offshore.

More evidence of this trend came in the form of an announcement by Krom River, a London-based hedge fund, in September 2008 that it was to relocate its headquarters to one of Switzerland's low-tax areas in an attempt to reduce the company's tax bill.

The company, which had been running for two years and had accumulated assets in the region of GBP453m, relocated its office to the canton of Zug, a move that will not only save the company in tax, but also allow its fund managers to pay tax at 10% instead of the 40% top rate on the bulk of their income in the UK.

Although a relatively small dot on the global hedge fund map, Switzerland is currently vying to become a premier location for hedge fund managers, and a week previous to Krom's announcement, the Swiss government paired up with some of the country's financial trade groups to announce it was set to alter the country's complicated tax laws by offering hedge fund managers exclusive tax breaks in a bid to encourage more hedge funds and private equity groups to settle in Switzerland before opting for other locations, such as London or New York.

A further announcement from the country's Finance Department noted that the country's Federal Tax Administration is to clarify the tax-related problems linked to performance fee and carried interest, which will therefore provide the operators concerned with the legal certainty they require for tax planning, in addition to making Switzerland a more desirable investment option.

The proposal does not require new legislation in order to be implemented and could generate thousands of jobs and boost the economy if it is accepted.

Statistics released by Swiss Fund Data for Swiss funds for 2009 show that the first four months of the year saw inflows of CHF11bn. From May onward, outflows were recorded month on month, resulting in an aggregate outflow of CHF6.7bn. As a consequence, the market share of money market funds dropped from 23.2% to 18.4%. The decline in market share continued in 2010, albeit at a slower pace and stood at 16.16% at the end of 2010.

These statistics cover only the assets of the funds authorized for sale in Switzerland, and therefore reflect only a part of the collective investment schemes held by investment clients, which are likely to also include considerable amounts of products that are not offered publicly. Swiss Fund Data suspended its market statistics publication for 2010 and began to report monthly figures from March 2011 onwards.

Latest monthly figures are for April 2011 and are available on the new Swiss Fund Data website. They show a market share for money market funds of 12.69%, compared to 17.69% twelve months prior, while the real estate market share stood at 3.75%, slightly up from the 3.34% the previous year. Equity funds rose steadily between April, 2010 and April, 2011, recording a rise of 9.77% to 34.67%

Real estate funds have enjoyed steady inflows of new assets from capital increases since the end of January 2008. "Coupled with the appreciation in holdings, this resulted in a pleasing increase in assets of CHF1.7bn or around 10%. As an addition to domestic funds, Switzerland’s big banks have set up real estate funds abroad with investment policies with an international focus, and are also successfully selling these products outside Switzerland," the release explained. All in all, the assets invested abroad in real estate funds of Swiss providers amount to around CHF10bn, bringing the total volume of their real estate funds to around CHF28bn. This fund posted considerable performance gains in 2009 and the market share rose by 5.4% in 2009.

Assets invested in the funds comprising the other funds category increased by CHF4.5bn between April, 2010, and April, 2011.

In March, 2009, changes to article 31 of the Ordinance on Collective Investment Schemes (CISO) came into effect which removed national regulations known as ‘Swiss Finish’ and brought the Swiss regulatory regime more into step with EU norms.

The Financial Market Supervisory Authority (FINMA) initiated the consultation process about the suppression of the Swiss Finish with the approval of the Federal Department of Finance on September 16, 2008. According to the government the suppression of the Swiss Finish on March 1 should contribute to repositioning the Swiss funds market and promoting Swiss collective investment schemes, making Switzerland an increasingly attractive jurisdiction for hedge funds to domicile. The Federal Council has also initiated changes to the taxation regime to make Switzerland a more attractive location for fund managers both on a corporate and a personal level.

Switzerland is the world's largest private banking center. It is home to over 500 major banking institutions and is estimated to hold up to 35% of the world's private wealth. Assets under management of Swiss banks are estimated to top CHF10 trillion.

In recent years a combination of legislative measures and market forces have re-orientated the Swiss banking services market so that banks cater less and less to the traditional small-to-medium-sized private accounts and more and more to large professional clients for whom sophisticated services are being offered at competitive prices.

One of the driving forces behind these changes has been Switzerland's desire to be seen internationally to be playing a meaningful part in the war against organized crime and money laundering.

Until 2009, the Swiss banking sector was regulated by the Federal Banking Commission (FBC) under the Banking Law of 1934, as amended most recently in 1999. Banking is defined to include all deposit-taking activity, but does not include the issuance of bonds or securities trading. The offices, branches, agencies and permanent representatives of foreign banks are covered by the law. Banks are licensed by the FBC. See Law of Offshore for details of the licensing process, and the FBC's supervisory regime. As of January, 2009, the FBC's role was swallowed up in the newly-created FINMA.

The Banking Law contains stringent provisions to ensure secrecy, which are echoed in the FBC's regulations, and are an important component of Swiss banks' appeal to investors and depositors. The secrecy provisions are subject to limited exceptions contained in the domestic and international legislation that Switzerland has adopted as part of its campaign against money-laundering.

The key pieces of legislation in this respect are the Money Laundering Act 1998 and the Federal Act on International Mutual Assistance in Criminal Matters 1983. The Money Laundering Act in particular has been very effective: it allows penalties of up to USD7m for non-compliance, and in the six months after it came into force assets totalling USD124m were seized. See Law of Offshore and Other International Agreements for further details of these two pieces of legislation.

In June, 2004, new anti-money laundering regulations spelling the end of the legendary numbered account in its traditional format came into force. Although the ordinance requiring, among other things, the ending of entirely anonymous money transfers abroad, was introduced in 2003, the one year transition period ended on June 30, 2004.

In 2001 the European Union began negotiations with Switzerland to attempt to gain agreement for the information-sharing required as part of the EU's withholding tax directive, without which it would not have been effective.

Although the EU declared the Savings Tax Directive a done deal at the beginning of 2003, at least as regards its own members, the reality at the end of the year regarding negotiations between Brussels and Switzerland was that while the EU was trying to make passage of 'Bilaterals II' dependent on a dilution of Swiss banking secrecy, the Swiss were refusing even to begin the process of legislating for the Savings Tax Directive while 'Bilaterals II' remained unsigned.

By February, 2004, the EU was ratcheting up the pressure, with public statements by EU ministers urging Switzerland to change its position. But then Swiss Finance Minister, Hans-Rudolf Merz was sticking to his guns on the issue of separate negotiations regarding security cooperation and tax fraud (part of 'Bilaterals II'). Switzerland had insisted from an early stage that they wanted an opt-out in the area of judicial cooperation, and was continuing to hold its ground on the issue of the Savings Tax Directive, insisting that compromise was reached on the judicial issue before it signs up to the measure.

Finally in May a compromise was reached over the 'Bilaterals II' requirement for information exchange and judicial cooperation over crime, with Switzerland agreeing to provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but - crucially - being exempted from providing such assistance in casesof direct taxation.

This was enough for the Swiss to be able to accept the Savings Tax Directive, but Brussels had to put off the implementation date of the Directive until July, 2005, to allow time for the Swiss parliamentary process to grind out the necessary legislation. Switzerland's chief international tax negotiator, Robert Waldburger had warned that: "From the Swiss point of view, it's impossible that the January 1, 2005 date will work. If everything goes really well, parliamentary approval in Switzerland will take 12 to 14 months." After last-minute haggling by Italy and Belgium, the Directive entered into force in July 2005.

In January 2009, a Swiss Bankers Association report reflected on Switzerland's success in gaining status as a leading global wealth management centre.

The report stated that the tradition of high-end services, the availability of skilled staff, and a redictable regulatory environment have all contributed to Switzerland’s leading position among global wealth management centres.

"Switzerland provides wealth management banks that are a pillar of market positioning in an increasingly brand-conscious industry. Merging tradition and entrepreneurial spirit has winning ways and, clearly, a profitable edge," the report said.

The report assessed how Switzerland compares to its global peers, in what ways Swiss wealth management banks differentiate themselves, and which strategic responses to industry threats and opportunities they have espoused.

With 9.1% of global assets under management (AUM), Switzerland is among the world’s leading trio of wealth management centres, alongside the United States and the United Kingdom.

It is the world’s leader in offshore private banking, with a market share of 27%. The country’s largest banks, UBS and Credit Suisse, rank among the world’s largest wealth management firms.

At the end of March 2011, AUM in Switzerland (securities holdings in bank custody accounts) reached CHF654 billion, 9% below the height of CHF714 billion in October 2007.

In March, 2009, as part of his marked enmity towards Swiss banking secrecy, German Finance Minister Peer Steinbrueck ordered German banks with Swiss subsidiaries to close any accounts - notably those of Liechtenstein foundations - considered to be 'lacking in transparency'.

Also in March, the Swiss Federal Council announced that Switzerland intends to adopt OECD standards on administrative assistance in tax matters in accordance with Article 26 of the OECD Model Tax Convention. The decision will permit the exchange of information with other countries in individual cases where a specific and justified request has been made. The Federal Council has decided to withdraw the corresponding reservation to the OECD Model Tax Convention and to enter into negotiations on revising double taxation agreements. Swiss banking secrecy remains intact, said the Council.

Lowtax Jurisdictions

Switzerland: Offshore Business Sectors

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