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Offshore Company Formation: switzerland company formation

offshore company formation

 Introduction/summary

Switzerland has double taxation agreements = DTA with most other countries. Freedom of establishment in the European Union is not applicable. For approval of the permanent establishment according to tax laws, a commercially equipped business operation must be installed in Switzerland, and active business must be transacted in Switzerland. In addition, it is possible to install a branch of a European company. Such a branch will be treated like a Swiss GmbH without the obligation to pay CHF 20,000 capital stock. This legal form is taxed with only 8.5% in the tax law domicile privilege.

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Handbook for InvestorsHandbook for Investors
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The following services are included in our complete packages:

Forming of the company, entry in the commercial register of the country, apostille, notarially certified translations of certificates into English, unless official language

  • Nominee director: An attorney in the formation country will act as nominee director of the company (to the outside) and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust). The director does not have any account authority.

  • Nominee shareholder: a tax office in the formation country will act as nominee shareholder (to the outside) of the company and transfers all rights and obligations internally to the actual beneficiary (notarial deed of trust).

  • Domicile of the company in the formation country: deliverable postal address, availability by telephone, telephone and fax, mail forwarding service

  • Account opening: bank account for the company at a renowned major bank in the formation country, internet banking, VisaCard and cheques. Only the founder of the company is authorized to have access to the account.

  • General power of attorney to the founder: Only the founder receives a notarially certified general power of attorney for the company.

  • Recommendation of a renowned tax office in the formation country, for book-keeping and accounting

  • Internet-homepage of the company hosted on a server in the formation country: 5 pages for presentation of services/products, feedback form, imprint, e-mail address. May be extended at any time.


Branch office of an EU company or US INC in Switzerland

Services:

·         Entry in the commercial register of the country, apostille, notary and local court

·         Nominee branch manager: A person with fiscal residence in Switzerland will act as a branch manager to the outside. In the event of domiciled companies: permanent representative.

·         General power of attorney to the beneficiary / client

·         Opening of a business account in Switzerland incl. credit and EC card, online banking

·         LCT service package: 40-page handout “Management Support for Your Company Abroad“ including contract and invoice specimen, important notes and reference.

·         Recommendation a Swiss tax consultant

·         Sales tax identification number for Switzerland

·         Extra service liable to charges > real domicile of the company in Zug, Switzerland **: Proper telephone number, incoming calls are personally taken with the company’s name, fax, signboard, mail forwarding service, temporary lease of office or conference rooms (against extra charge) or different procedure (see below**)

  Switzerland is a 'code' country, and business entities are governed by the Civil Code. As in all civil law jurisdictions, formation and administration of companies tends to be considerably more bureaucratic than in common law jurisdictions. Although the Civil Code is at Federal Level, businesses are domiciled in a particular canton. Each canton maintains a Commercial Register (Registre de Commerce), and the mandatory entries in the Register of subscribers, directors, capital structure etc have strict legal force. The Register is a public document.

The forms of business entity with legal personality are the Stock Corporation and its variants (dealt with below), the Limited Liability Company (Societe a Responsabilite Limite), and the Limited Partnership (Societe en Commandite). These last two are not much used by foreign investors. General Partnerships (Societe en Nom Collectif) and Sole Proprietorships (Raison de Commerce) are also possible.


The Stock Corporation

The Stock Corporation ("Societe Anonyme" or "Aktiengesellschaft") is the form almost universally used by foreign investors and has the following characteristics:

  • The minimum number of subscribers is 3;
  • Nominee shareholders and nominee subscribers are permitted;
  • The minimum authorized share capital is 100,000 Swiss Francs of which either 20% or 50,000 Swiss Francs (whichever is the greater) must be paid up by way of a deposit of funds in a bank account; the bank will not relinquish control over these funds until the company registration certificate has been issued;
  • Share capital cannot be increased by more than 50% of the authorized capital at any one time;
  • Shares can be ordinary shares, preference shares, voting shares or non voting shares and can be issued at a premium; bearer shares are permitted;
  • A majority of directors must be Swiss nationals and must be domiciled in the country;
  • All directors must be shareholders whether they are the beneficial owners of those shares or hold as nominees (the holding of one share as a nominee is sufficient to meet this requirement);
  • The company must have an auditor and a registered office;
  • A person whose name appears in the articles of association signs on behalf of the company.

A company must have an auditor, and accounts must be filed each year with the Companies Registration Office. Small companies can prepare abbreviated accounts which do not have to include the level of turnover.


The Holding Company

The 'Holding' Company is a Stock Corporation with a particular tax status (see Offshore Legal and Tax Regimes). Holding companies benefit from reductions in corporate income tax and capital gains at federal and cantonal levels, and from a reduction in net worth tax at cantonal level.

The Swiss holding company was a particular target of the OECD's 'unfair tax competition' initiative, and in 2004 an agreement was reached between Switzerland and the OECD whereby information about holding companies would be shared by Switzerland in circumstances where there was prima facie evidence of fraud.

For federal tax purposes a company is defined as a holding company if it holds either a minimum of 20% of the share capital of another corporate entity or if the value of its shareholding in the other corporate entity has a market value of at least 2m Swiss Francs (known as a "participating shareholding"). The reduction in the level of corporate income payable tax depends on the ratio of earnings from "participating shareholding" to total profit generated.

Although the definition of a holding company varies among cantons, broadly speaking a corporate entity is a holding company for cantonal corporate income tax purposes so long as it either:

  • derives 51%-66% of its income from dividends remitted by the subsidiary; or
  • holds 51%-66% of the subsidiary's shares.


The Domiciliary Company

Domiciliary Companies are Stock Corporations that are both foreign-controlled and managed from abroad, have a registered office in Switzerland (i.e. at a lawyer's premises) but have neither a physical presence nor staff in Switzerland. They must carry out most if not all of their business abroad and receive only foreign source income . The use of domiciliary companies can result in savings in corporate income tax levied on income and capital gains and net worth tax. See Offshore Legal and Tax Regimes.


The Auxiliary Company

An Auxiliary Company is essentially a Domiciliary Company which in addition may carry out a certain proportion of its business in Switzerland. Auxiliary Companies are possible in only seven cantons, and do not benefit at federal level. Treatment varies according to canton, but in most cases an auxiliary company may have Swiss offices and staff and be in receipt of Swiss income (which is taxed at normal rates). Most income though must be from a foreign source. See Offshore Legal and Tax Regimes.


The Service Company

Service Companies are Stock Corporations whose sole activity is the provision of technical, management, marketing, publicity, financial and administrative assistance to foreign companies which are part of a group of which the service company is a member. Service companies may not in general derive income from third parties (i.e. companies outside their corporate group). Service company status is obtained by way of an advance cantonal tax ruling (there is no benefit at federal level). See Offshore Legal and Tax Regimes.


The Mixed Company

Mixed Companies are Stock Corporations which have the characteristics of both domiciliary companies and holding companies but which do not qualify as either. There is no benefit at federal level, but at cantonal and municipal level there are corporate income tax benefits if the mixed company meets the following conditions:

  • the company is foreign controlled;
  • a minimum of 80% of its total income comes from foreign sources;
  • the company has close relationships to foreign entities.

See Offshore Legal and Tax Regimes.


The Branch

Branch offices, whether of foreign companies, or of Swiss companies in other cantons, must be registered in the Commercial Registry of the canton in which they are located. The branch must have a nominated, Swiss-resident representative.

Branches need not publish their annual financial statements, but branches of foreign corporations constitute 'permanent establishments' from a tax point of view, and will therefore be taxed on local source income both at federal and at cantonal level as if they were resident corporations. There is no withholding tax on transfers of branch profits to its foreign parent.

 

SWITZERLAND DOMESTIC CORPORATE TAXATION

Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas other taxes are concurrently levied at cantonal, communal and federal levels. Although the rate of tax levied at a federal level is consistent, that levied at a cantonal level varies from canton to canton. (There is currently legislation in the pipeline that aims to terminate this variation, and to reorganise the division of responsibilities and of revenues between the federal and cantonal administrations, but the timescale of change is not yet settled). Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in all tax planning.

In 2005 the EU put a warning shot across the bows of the cantons by threatening the tax regime in Zug, one of the more attractive cantons to foreign companies.

In a letter sent to the Swiss Mission in Brussels in October, the EU congratulated Switzerland on its decision to extend the free labour accord with the European Union. However, the letter also went on to point out that certain parts of the Swiss corporate tax regime "may be incompatible" with Switzerland's obligations under the agreement.

"The legislation in question, that is enforced in Zug and [canton] Schwyz, is said to grant fiscal advantage to undertakings for... economic activities taking place outside Switzerland," the letter stated.

Zug denied that its corporate tax regime breaches a 1972 Free Trade Agreement between Switzerland and the European Union. Guido Jud, head of corporate tax in canton Zug, said that he was "surprised" by the EU's viewpoint.

"The rules on taxation in Switzerland have not changed recently so we do not see why, in 2005, there should be suddenly be a problem," he stated.

Currently, the tax rate for companies in Zug ranges from 14% to 17%.

The federal government has played down the affair, saying the letter was merely a request for information rather than a formal complaint against the tax regime.

By international and OECD standards Swiss tax rates are relatively low.


Scope of Corporate Income Tax

For corporate income tax purposes a company is deemed resident in Switzerland if it is either incorporated in Switzerland or effectively managed from there. Thus a UK-registered company whose effective seat of management is in Switzerland is a Swiss resident company for corporate income tax purposes.

The General Assessment Rule is that resident companies are assessed on their worldwide income except for profits generated by enterprises, permanent establishments and real estate situated abroad, whereas non-resident companies are only assessed on profit generated by enterprises, real estate and permanent establishments situated in Switzerland as well as interest on loans secured on Swiss real estate.

Corporate income tax is levied at a federal, cantonal and communal level. The level of corporate income tax payable varies amongst the cantons but at present Zug and Fribourg are considered the best cantons in which to locate trading and holding companies respectively.

Corporate income tax payable to the federal authorities may be tax deductible for the purposes of an assessment to cantonal corporate income tax and vice versa.

Advance tax rulings on the level of corporate income tax payable are available and are advised as a matter of prudence.

Generally speaking capital gains are taxed as corporate income at federal, cantonal and municipal levels.

The Swiss branch of a foreign company pays the same rates of corporate income tax on profits, income and capital gains as would be paid by a Swiss-resident corporate entity. Profits remitted abroad by the branch are not subject to any tax in Switzerland.


Rates of Corporate Income Tax

Corporate income tax is levied at federal, cantonal and municipal levels.

The basic federal tax rate is 3.63% of taxable profits with an additional percentage based on a formula which relates trading profits to net worth (i.e. capital and reserves). The maximum rate of 9.8% is arrived at if profits exceed 23.15% of net worth.

Cantonal tax rates vary between 17% and 35% and like the federal tax are progressive, using a scale based on the relationship of profits to net worth.

Municipal tax on corporate income is calculated as a small proportion of cantonal tax.


Calculation of Taxable Base

There are substantial differences between the federal government and cantons, and between individual cantons, in the calculation of taxable income. The following list of broadly applicable rules must be checked in any given situation:

  • GAAP principles apply to most aspects of the tax computation;
  • Group or consortium relief does not exist in Switzerland;
  • Losses can be carried forwards for between 4 and 7 years, but not backwards;
  • There is no controlled foreign company tax legislation of the type which exists in both the UK and the USA;
  • Capital gains made by a non-resident parent company on the sale of its shareholding in a Swiss subsidiary are not taxable in Switzerland (unless the Swiss subsidiary owns real estate in Switzerland);
  • The payment of loan interest by a resident or non-resident subsidiary to a Swiss parent company is free of any corporate income tax in Switzerland;
  • Provisions for future employee retirement liabilities are tax deductible;
  • Income or capital gains accruing to a resident or non-resident company on the rental or sale of Swiss real estate (including the sale of shares in a company which owns real estate in Switzerland) are subject to corporate income tax at both federal and cantonal levels;
  • Income and capital gains from foreign immovable property are exempt from corporate income tax;
  • The profits of the foreign branches of a Swiss company are exempt from corporate income tax in Switzerland as are any capital gains made on a sale of a branch;
  • The losses of the foreign branch of a resident company can be set off against the profits of the resident Swiss company.
  • Where there is no double taxation treaty in place withholding taxes deducted in a foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland. See Double Taxation Treaties.


Stamp Duty

The federation has the exclusive right to levy this tax. The rates are as follows:

  • 1% on the issue of shares where the value of the shares is over SFr 250,000 including cases in which shares are issued at a premium. A loan made by a shareholder to the company without any consideration is also subject to this tax. The tax is also payable on the nominal value of shares where a majority shareholding is transferred as a consequence of a liquidation irrespective of the fact that the shares have virtually no market value in the circumstances. The issue tax is not payable by the Swiss branch of a foreign company.
  • A rate of 0.15% on the transfer value of shares in Swiss resident companies and 0.3% on the transfer value of shares in non-resident companies where the transfer is effected by "security dealers" which definition includes banks, stock brokers, investment fund managers and other financial institutions. The definition of security dealers is quite wide and includes any company which owns securities with a value in excess of 10m Swiss francs and all intermediaries. The tax is split between the buyer and the seller and is automatically deducted by the dealer.
  • A rate of 0.12% per annum on the value of bonds issued meaning that a 5-year bond pays 0.6% stamp duty.
  • A rate of 0.06% per annum on bank-issued medium term bonds and on the issue of financial paper meaning that a 5-year bond pays 0.3% stamp duty.
  • A rate of 5% on an insurance premium or 2.5% in the case of a life insurance premium paid in one contribution.


Filing Requirements and Payment of Tax

For federal tax purposes the tax year is the company financial year whereas for cantonal and communal tax purposes the tax year is the calendar year. Although the cantonal basis of assessment differs amongst cantons (i.e. it is occasionally annual) assessment is generally on a bi-annual basis meaning that it is based on the average profits of the previous 2 calendar years so that, for instance, the corporate income tax payable to the canton for the period 1st January 2003 to 31st December 2004 is the average of profits for the like periods in 2001 and 2002.


Net Worth Tax

This tax is levied by both the federal authorities and cantons. The tax is based on the value of a corporate entity's assets, normally equal to shareholders' equity (paid-in capital, legal reserves, and other retained earnings, public or otherwise). The rates are:

  • A rate of 0.8% of the company's net worth is levied by the federal authorities annually;
  • A rate of between 0.3% to 1% of the company's net worth is levied by the cantons annually, depending on the canton.
Foreign branches based in Switzerland are only assessed on the value of their Swiss assets for the purposes of this tax. Resident companies are not assessed on the value of any foreign-based real estate assets.


Withholding Tax

The federation has the exclusive right to levy withholding tax. The general rule is that withholding taxes are deducted at source from distributions made by Swiss entities. The rate is 15% on pension fund benefits, 8% on insurance benefits and 35% for "investment income", which includes corporate dividends and interest from bank accounts, bonds & debt instruments.

As from July, 2005, the EU's Savings Tax Directive applies in Switzerland, and a withholding tax of 15% is being applied to the returns on savings of citizens of EU member states.

No withholding tax is levied on royalties paid to foreign beneficiaries.

Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

NB: Switzerland has double taxation treaties with about 50 other countries, and these determine the rates of withholding tax in most cases, rather than the general rules above.


Double-Tax Treaties

Switzerland has Double Taxation Treaties with more than 50 other countries. The general effect of the treaties for non-residents from treaty countries is that they can obtain a partial or total refund of tax withheld by the Swiss paying agent. Although the full amount of withholding tax is deducted at source the difference can be re-claimed by the non resident from the Swiss tax authorities. Where there is no double taxation treaty in place withholding taxes deducted in the foreign jurisdiction on remittances paid to a Swiss entity give rise to a tax credit in Switzerland.

No withholding tax is levied on royalties paid to foreign beneficiaries. Profits repatriated abroad by the Swiss branch of a foreign company do not attract withholding taxes irrespective of any double taxation treaty.

Treaty abuse: A repayment of withholding taxes under the terms of a treaty will be denied where there has been "abuse". Abuse occurs when a foreign-controlled legal entity which is resident in Switzerland fails one of the 4 following tests:

  • The entity must have a reasonable debt/equity ratio (generally the total of all interest-bearing loans should not exceed 6 times the company's equity);
  • The entity must not pay excessive interest rates on debt (for the purposes of this test the accepted rate varies from time to time);
  • The entity must not pay more than 50% of its income as management fees, interest or royalties to non residents;
  • The entity must distribute at least 25% of the income which could be distributed as dividend.
Where any one of the 4 tests are failed the portion of withholding tax deducted and which is deemed refundable under the terms of the treaty is not refunded.

Additionally, treaty provisions do not apply to dividends, interest or royalties paid by a Swiss entity to a German, Italian, French or Belgian entity if the Swiss entity is wholly or partly exempt from cantonal tax under the tax incentives applicable to specific types of company (i.e. domiciliary, holding, auxiliary, mixed and service companies). See Offshore Legal and Tax Regime.

In October, 2004, Swiss President Joseph Deiss agreed with Japanese Finance Minister, Sadakazu Tanigaki, that informal talks would soon begin on the updating of the thirty-year-old double taxation avoidance agreement between the two nations. 

The following are some of the countries which have double-tax treaties with Switzerland:

  • Albania
  • Armenia
  • Australia
  • Austria
  • Azerbaijan
  • Belgium
  • Belarus
  • Bulgaria
  • Canada
  • CIS (ex-USSR)
  • Denmark
  • Egypt
  • Estonia
  • Federal Rep. of Germany
  • Finland
  • France
  • Georgia
  • Greece
  • Hungary
  • Iceland
  • India
  • Indonesia
  • Ireland
  • Italy
  • Japan
  • Kazakhstan
  • Kirghistan
  • Latvia
  • Lithuania
  • Luxembourg
  • Macedonia
  • Malaysia
  • Moldova
  • Netherlands
  • New Zealand
  • Norway
  • Poland
  • Portugal
  • Romania
  • Russia
  • Singapore
  • South Africa
  • South Korea
  • Spain
  • Sri Lanka
  • Sweden
  • Tajikistan
  • Trinidad & Tobago
  • Turkmenistan
  • Ukraine
  • United Kingdom
  • United States
  • Uzbekistan

 

In July, 2005, representatives from the governments of Switzerland and Pakistan met in Islamabad to put their names to a new comprehensive agreement for the avoidance of double taxation.

The agreement, signed on behalf of Switzerland by Denis Feldmyer, Ambassador to Pakistan, and on behalf of Pakistan by Abdullah Yusuf, Chairman of the Central Board of Revenue, will encompass income from shipping, immovable property, interest, royalties and fees for capital gains and technical services.

Under the arrangement, business income will be taxable at the place of permanent establishment and Swiss firms will be given a tax credit in Switzerland on income earned in Pakistan.

The new agreement, initially concluded in 2002, updates the much older previous double tax avoidance agreement which dates back to 1959.


Table of Treaty Rates

The rates shown are those of withholding taxes applied to payments made by Swiss entities or persons to non-resident entities or persons; a zero rate applies to royalties. Although Switzerland recognises the member states of the CIS as successor states to the USSR, and therefore applies its USSR Double Tax Treaty to them, they are not included in the table because the USSR treaty does not contain concessionary rates of withholding tax for dividends or interest.

Country
Dividends, %
Interest, %
Paid from Switzerland
Paid from Switzerland
Australia
15
10
Austria
5
5
Belgium
10/15 (Note 1)
10
Bulgaria
5/15 (Note 1)
10
Canada
15
15
China
10
10
Denmark
nil
nil
Egypt
5/15 (Note 1)
15
Finland
5/10 (Note 2)
nil
France
5 (Note 3)
10
Germany
10/30 (Note 4)
nil
Greece
5
10
Hungary
10
10
Iceland
5/15 (Note 1)
nil
Indonesia
10/15 (Note 1)
10
Ireland
nil/10 (Note 1)
nil
Italy
15
12.5
Japan
10/15 (Note 1)
10
Luxembourg
nil/15 (Note 1)
10
Malaysia
5/15 (Note 1)
10
Netherlands
nil/15 (Note 1)
5
New Zealand
15
10
Norway
10/15 (Note1)
nil
Pakistan
15/35 (Note 5)
15/35 (Note 6)
Poland
5/15 (Note1)
10
Portugal
10/15 (Note1)
10
Singapore
10/15 (Note 1)
10
South Africa
7.5
35
South Korea
10/15 (Note 1)
10
Spain
10/15 (Note 1)
10
Sri Lanka
10/15 (Note 1)
10
Sweden
nil/15 (Note 7)
5
Trinidad & Tobago
10?20 (Note 8)
10
UK
5/15 (Note 1)
nil
USA
5/15 (Note 1)
5


 

Notes:

(1)



The higher rate applies if the payment is received by a company holding directly less than 25% of the capital of the Swiss paying company
(2)
5% if the recipient is a company
(3)
Only 20% is refunded (making the effective rate 15%) if non residents of France have substantial interests in the recipient company, if the recipient company controls at least 20% of the Swiss company and if the shares of either company are neither quoted at a stock exchange nor traded over the counter
(4)
The 30% rate applies to dividends from jouissance rights, participating loans and silent participations. Withholding tax shall not exceed the tax chargeable on the profits out of which the dividends are paid.
(5)
The lower rate applies if the recipient is a company which owns at least one third of the voting stock in the Swiss company
(6)
If the recipient is an individual no refund of the Swiss 35% withholding tax is granted
(7)
The zero rate applies where the payer is a corporate shareholder which has a participation of at least 25% for a continuous period of at least 2 years immediately preceding the distribution. 5% applies where the participation requirement is satisfied but not for the requisite period and 15% is the rate for smaller holdings.
(8)
The lower rate applies if the recipient is a company which controls directly or indirectly at least 10% of the voting power in the Swiss paying corporation
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Other International Agreements

Switzerland has passed its own mutual assistance law, and is also a party to a number of international mutual assistance treaties, some multilateral and some bilateral, including the following:

  • The European Convention on Mutual Assistance in Criminal Matters, 1959;
  • Treaty on Mutual Assistance in Criminal Matters with the USA, 1973;
  • The Federal Act on International Mutual Assistance in Criminal Matters, 1983, as amended in 1997;
  • The European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, 1993.
The Federal Act, particularly since the 1997 amendments, enables the transmission of documents and information abroad for the purposes of criminal proceedings. From the point of view of banking secrecy the following can be said about the current situation:
  • According to a recent decision of the Federal Supreme Court the transmission of such information requires the permission of the Swiss police authorities who must inform the customer about the order and give him a right to appeal;
  • It is not permitted to forward information on persons who are not the subject matter of the investigation;
  • Information will not be given if
    • The foreign authorities might use the information for purposes other than those for which it was requested;
    • The offence alleged is not equally punishable in Switzerland;
    • The requesting state does not offer Switzerland reciprocal treatment in these matters;
    • The offence is related to tax, politics or military matters.
The Swiss authorities now grant administrative assistance as well as judicial assistance. Administrative assistance is regulator to regulator contact as opposed to judicial assistance which takes place between judicial authorities within the scope of civil or criminal legal proceedings.

In March, 2003, the Swiss government announced that it had ratified a legal co-operation agreement with Italy. Although the accord had been agreed four years before, legislation introduced by the Berlusconi government giving Italy the right to dismiss the findings of investigations carried out in other countries, meant that the Swiss authorities were reluctant to ratify the agreement. However, according to a government statemen, a series of recent rulings in Italy's High Court had clarified the situation and allowed the two parties to resolve their differences over legal cooperation.

The Swiss Federal Banking Commission which regulates banks, mutual funds, stock exchanges and security dealers is the regulator charged with rendering administrative assistance. A number of conditions attach to the granting of administrative assistance by the Swiss Federal Banking Commission namely:

  • The foreign authority must be recognized by the Commission as a supervisory authority authorized to request administrative assistance;
  • The foreign authority may only use the information for the purposes of direct supervision of the institution concerned;
  • The foreign authority must be bound by official or professional secrecy;
  • The foreign body can only re-transmit the information under very restrictive circumstances. This is called the principle of specificity and means that information that was given for the purposes of a criminal offence such as drug dealing cannot be used in proceedings for tax evasion. In practice the foreign authority must confirm that it will not so transmit the information unless required to do so by a competent court against whose decision it will appeal. Since the grant of assistance by the commission is discretionary if specificity cannot or was not guaranteed future assistance may be denied though in practice the commission is always eager to be seeing to play its part;
  • If the information requested gives the name of a client he must be notitfied and given time to contest the decision;
  • There is a right of appeal to the Federal Supreme Court.
Banking secrecy in Switzerland is evidently under threat from the international crusade currently being waged, overtly against money-laundering, but with a sub-agenda of fiscal harmonisation and information exchange. Switzerland is holding fast so far against the tide, but may have to give way in the future to a certain amount of information exchange. Along with Luzembourg, Switzerland refused to sign the OECD's declaration in late 1999 against 'unfair tax competition'. It did sign the unanimous OECD declaration in April 2000 on information exchange and banking secrecy, but stated immediately afterwards that in its opinion it already conformed to the necessary standards.

However, the task of enforcing regulation in the non-banking sector initially proved to be an uphill struggle for the new Money Laundering Control Authority. According to the Swiss Money Laundering Reporting Office's latest annual report, of the 311 reports of suspicious transactions in 2001, only 75 came from the country's 7,000 non-bank financial intermediaries. Of those 75, very few have resulted in prosecution, according to Swiss officials. Then in 2002 the number of suspected cases of money laundering rose sharply, with 652 cases being referred to the Money Laundering Reporting Office - an increase of 56 per cent over the previous year. The ministry said more rigorous control and reporting practices among Switzerland's non-banking sector were the main reason for the increase. The total amount of money suspected of having been laundered fell from SFr2.7 billion ($2 billion) in 2001 to SFr667 million in 2002. Since 1998, only one per cent of reported cases have led to a conviction.

In addition to dealing with the passive resistance of the non-banking sector and staffing shortages at the Money Laundering Control Authority, its chief Dina Balleyguier also faced the challenge of deciding if any other sectors should be brought, doubtless unwillingly, under the umbrella of greater supervision and reporting.

'There are about 10...open-ended questions,' she explained in November 2001: 'One is whether commodities traders must have a license with us; another is whether asset traders with one-man offshore companies should be included. Another is whether someone doing asset management for their family should be included. It's very complicated.'

The Swiss government is also considering extending existing money laundering laws to cover art and jewellery trading companies. Following the introduction of enhanced legislation on traditional financial institutions and banks in Switzerland, laundering funds through non-traditional channels such as art dealers, jewellery traders, and money changers has become an increasing problem for the authorities.

Although Swiss-based asset managers are already overseen by the country's anti-money laundering unit, the goverment has also announced that is considering whether the sector should be put under the authority of the Swiss Federal Banking Commission, which oversees banks, brokers, and investment funds.

Below is a joint response, from The Swiss Federal Banking Commission and the National Bank, to the members of the Financial Stability Forum who complained about the Switzerland's inclusion on an OECD list issued in May of countries whose financial systems posed a risk to global stability.

To All Members of the FSF Berne/Zurich,
5 September 2000
Financial Stability Forum -
List of "Offshore Financial Centres" (OFC)

Dear Mr . . . Mrs

In May 2000, the Financial Stability Forum (FSF) published a list of "Offshore Financial Centres" (OFC) defined with respect to their compliance with international standards in the financial area. This list also includes Switzerland.

Switzerland is an international financial centre with a significant amount of business with non-residents. The same applies to other countries like the USA and the UK. However, it is incorrect to intermingle the typical features of international financial centres, such as the importance of financial business with non-residents, with the characteristics of "Offshore Financial Centres" as established by the OFC working group of the FSF itself (page 9, table 2 of the report). In fact, none of these characteristics apply to Switzerland. In our country:

-Business and investment income is taxed at rates close to the average of OECD countries. The overall tax burden of 33.8% in Switzerland (total tax revenue as % of GDP) is above the OECD average and higher than in the United States (29.7%), Japan (28.8%) or Australia (29.8%).

 
-A withholding tax of 35% applies to all interest and dividend payments of Swiss issuers or debtors, irrespective of the domicile of the recipient. The incorporation regime follows international standards. In particular, there is no regulatory or supervisory distinction between onshore/offshore or resident/non-resident activities. In Switzerland, there are neither offshore-licences nor is there preferential treatment for offshore activities. No shell-branches or brass-plate banks are admitted.
-The supervisory regime for financial services is in line with international standards and G10 standards in particular.

-Regulation does not offer the possibility to create trusts.

-Financial institutions without physical presence in Switzerland can not be licensed by the Swiss Federal Banking Commission (SFBC) and, therefore, can not lawfully operate as such from Switzerland.

-Swiss supervisors have full access to all files and privacy protection for bank customer information is no obstacle to international mutual assistance in criminal matters such as money laundering, corruption, insider trading or tax fraud.

-The volume of non-resident business does not "substantially exceed" the volume of domestic business despite the fact that, in general, the share of international transactions tends to be higher in smaller countries than in larger economies. In terms of funds under management, the share of domestic and foreign securities holders is about equal.

-The financial sector accounts for 11% of GDP.

The FSF argues that many supervisory and regulatory authorities of major financial centres referred to Switzerland as an OFC. This is certainly not an acceptable reason for placing Switzerland on the Forum's list. We urge you to take into due consideration that Switzerland is a G10-member with a regulatory and supervisory regime that is in compliance with international standards. Therefore, it is not understandable why Switzerland should be assessed as an OFC.

Yours faithfully
Swiss Federal Banking Commission
Dr Kurt Hauri Chairman

Swiss National Bank
Dr Hans Meyer Chairman of the Governing Board.

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

Switzerland was politely helpful, offering to extend its 35% withholding tax on resident savings income to non-resident account holders, and to distribute much of the tax collected among EU member states, but the government was adamant that it will not shift on the issue of banking secrecy. The Finance Minister, Kaspar Villiger confirmed this, commenting frequently that: 'Banking secrecy is not negotiable'.

Jean-Baptiste Zufferey, a Swiss tax expert and professor at the University of Fribourg expresses the situation more bluntly: 'It's not because we fear banks would lose business, but most Swiss people have an attachment to the idea that a human being is entitled to financial privacy. It is the problem of foreign countries if they cannot tax their citizens. We in Switzerland don't have to help other countries do their job.'

This posed a serious problem for the EU - not just because the alpine jurisdiction is home an estimated one third of the world's offshore wealth, but because other countries, in particular Luxembourg and Austria, had said that they would refuse to back information exchange plans if Switzerland does not participate. The EU had set the end of 2002 as the deadline for final adoption of its information exchange plans, but Luxembourg's refusal to accept the Swiss compromise position as acceptable meant that negotiations continued into 2003. After last-minute haggling by Italy and Belgium, it was agreed by mid-2003 that the Directive would enter into force in 2005.

The Swiss banking fraternity certainly doesn't admit to any regulatory weaknesses, and is up in arms about what it sees as incorrect foreign attitudes towards Swiss banking. “We cannot have a situation where people claim that in Switzerland, control weaknesses supposedly keep occurring,” Urs Roth, chief executive of the Swiss Bankers Association told an August, 2003 seminar.

"Where Switzerland has excessive regulation compared with the foreign competition, nothing is done about it. In the long run this may produce a widening gap that could be very damaging for our banks and therefore our economy," warned Roth.

In January, 2004, Switzerland and the Organisation for Economic Co-operation and Development reached a long-awaited compromise deal over certain Swiss tax practices deemed harmful by the OECD. Following two days of discussions with the Paris-based organisation’s fiscal affairs committee, Swiss officials agreed to exchange information with other countries on Swiss holding companies, one of a number of issues that has dogged the relationship between Switzerland and the OECD in recent years.

Wilhelm Jaggi, Switzerland's ambassador to the OECD, stated that the agreement represents a “good and balanced solution for all sides." However, he was keen to emphasise that the issue remains entirely separate from the more delicate matter of banking confidentiality.

The two parties also managed to resolve another sticking point involving the issue of administrative notes on how taxable profits are defined by firms. But a third tax issue concerned with the method by which commercial expenses are deducted from tax statements remains unresolved.

Further agreement was reached, however, in the area of transfer-pricing, and the Swiss authorities have agreed to warn domestic firms to abide by OECD guidelines when transferring profits to subsidiary companies.

It has also emerged that the OECD is to undertake further analysis of the tax regimes under which Swiss finance and leasing companies operate.

In May, 2004, agreement was provisionally reached with Switzerland over the implementation of the EU Savings Tax Directive. The Swiss government had agreed the text of the Directive, but refused to sign it until assurances were given by the European authorities that the Schengen agreement on cross-border crime would not force it to compromise its banking secrecy by reporting on tax evasion, which is not a crime in Switzerland.

The agreed compromise is that Switzerland will 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 will be exempted from providing such assistances in cases of direct taxation.

Later in the month, representatives from Switzerland and the European Union signed the nine 'bilaterals II' agreements covering various topics including tax and the free movement of people. They had been held up pending agreement on the Savings Tax Directive.

The agreements concern: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.

A protocol to the existing agreement on the free movement of persons was also signed, extending the agreement to the new EU Member States.

Right wing parties such as the Swiss People's Party, opposed to the plans to cooperate more closely with Brussels on security and other matters, threatened to force a referendum on the issue, but by November it was clear that the government was going to be able to put through the necessary implementing legislation with needing a referendum, and the Savings Tax Directive duly came into force in July, 2005, with Switzerland applying a 15% withholding tax to the returns on savings of EU residents.

 

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