A potent combination of high marginal income tax rates, an increasingly hostile approach to non-domiciled individuals and the proposed Directive on Alternative Investment Fund Managers (the AIFMD) is causing a number of managers based in London to consider relocating to a non-EU jurisdiction. Whilst there are a number of options, including going fully “offshore” and setting up in the Channel Islands or the Caribbean, most managers are looking at moving to onshore jurisdictions where they will be subject to a degree of regulation and tax but also benefit from the infrastructure and facilities of an onshore jurisdiction. Those who wish to stay in continental Europe are likely to consider Switzerland which combines not only physical proximity to the EU but also stability, favourable tax conditions and an established financial services sector.
This article looks at the practicalities of relocating to Switzerland, focusing on Geneva and Zurich as chosen destinations.
Do I need to obtain a regulatory licence?
There is no obligation under Swiss law to obtain a licence to manage an offshore fund, although an offshore fund manager based in Switzerland may, if it wishes to, apply for a licenceif (i) the laws of the offshore fund’s place of incorporation permit the manager to be located in another jurisdiction but require that the manager is subject to a foreign supervisory authority and (ii) the offshore fund is subject to supervision comparable to that of Switzerland. Application for the licence must be submitted to the Swiss Financial Market Supervisory Authority (FINMA). The fund manager must fulfil certain obligations, notably (a) insuring an adequate organisation, particularly in areas of risk management, internal controls and compliance, (b) offer sufficient financial guarantees, and (c) run its activities with due loyalty, care and transparency to investors. The principals must also have sufficient professional qualifications to perform their activities and enjoy a good reputation. Major shareholders of the manager must also be able to demonstrate their good reputation and that their influence is not likely to detract from prudent and sound management. Managers will also need to comply with Swiss anti-money laundering procedures by registering with the relevant self-regulatory organisation.
What form should the manager take?
A corporation is the most commonly used vehicle for an asset manager in Switzerland. Corporations must be capitalised with a minimum of CHF100,000 of which at least 20% of each share and at least CHF50,000 must be paid up. However, a hedge fund manager applying for a licence must normally have a minimum paid-up capital of CHF200,000. The capital stock is divided into shares which can be bearer or registered shares. In either case, shareholders’ liability is limited to any unpaid amount on their shares.
Shares are generally entitled to vote but the bylaws of the corporation can establish that the right is not accorded proportionally to the par value, allowing weighted voting. Alternatively, Swiss law also permits the issue of ‘participation certificates’ which are similar to shares but do not have any voting rights. Corporations can also restrict the transferability of registered shares. This provides considerable flexibility to create the desired control and economic arrangements amongst the principals and key employees of the manager.
Swiss law requires at least one authorised representative to reside in Switzerland. This requirement can be fulfilled by either a director or by a manager of the corporation but if this person is not given sole signing power then at least two representatives of the board and/or management with joint signing authority must reside in Switzerland.
Depending on the economic size of a corporation, Swiss law allows for certain minimum requirements and individual adaptations of the auditing requirements to the individual needs of the relevant companies.
What are the immigration restrictions for principals and staff?
According to the Agreement on the Free Movement of Persons signed between Switzerland and fifteen EU member states (including the UK) in 1999, citizens of these EU countries are entitled to obtain a Swiss work permit, no matter what their earnings or status are. They usually must register with the Swiss authorities before they start to work in Switzerland. The situation is different for citizens of other countries who must fulfil several conditions to get a work permit, such as having a high income, high degree of qualification, and demonstrate “added-value” for the employer.
What is the tax position?
Any consideration of the tax position needs to cover federal, cantonal and communal taxes. Switzerland has 26 cantons (member states), each of which have their own individual taxation regimes in addition to the federal tax law, which applies throughout Switzerland. As the taxation regime varies widely among cantons and communes, the choice of domicile can be an important element in Swiss tax planning. Communal taxes also vary and are levied as a percentage of cantonal taxes. This article focuses on the rates applicable in Geneva and Zurich.
Tax on profits
The usual statutory profit tax rate is approximately 24% in Geneva and 21-22% in Zurich.
Withholding tax is levied at 35% on dividends from Swiss corporations but is fully recoupable for Swiss tax residents, allowing tax resident principals and employees to take dividends from the manager free of withholding tax. These dividends would then be subject to income tax. For shareholders of the manager who are not Swiss tax residents, the withholding tax cannot be recovered unless tax treaty relief is available.
Issuance Stamp Tax is levied at 1% on the issuance of all the share capital of a company in excess of the first CHF1,000,000. VAT is usually not applicable for asset managers providing financial services to an offshore hedge fund.
A corporate equity tax, applied by most of the cantons including Geneva and Zurich is levied at a rate of approximately 0.5% of the capital stock, reserves and any expenses not allowed as a tax deduction by the authorities.
In order to render the Swiss financial market more attractive, Federal and Geneva tax authorities are considering the grant of tax privileges in the form of concessionary tax rulings to fund management companies wishing to establish their seat in Switzerland/Geneva. Discussions are underway.
Principals and employees of Swiss corporations are subject to an income tax, which varies depending on the annual income and the status of the employees and the permitted deductions. For example, the rate usually ranges in Geneva from 30%-35% (annual incomes of a single person between CHF200,000 and 300,000), with a maximum tax rate of 42% (from CHF600,000). Zurich applies slightly lower tax rates than Geneva (2-3% below).
Persons holding qualified participations (at least 10%) in Swiss fund managers can benefit from a tax reduction of 40%-50% on the dividends received. Furthermore both Federal and Geneva lawmakers are currently considering offering tax incentives to attract principals of fund managers to establish their business.
Offshore Status of the Fund
A non-Swiss hedge fund is not subject to any Swiss tax and there is no attribution of Swiss tax residence to a Cayman fund simply because the fund manager is based in Switzerland.
How will the AIFMD affect me if I relocate to Switzerland?
The position will differ depending upon whether or not your organisation also retains a manager within the EU. Assuming that no EU manager is retained within the group then the AIFMD position will be that of a non-EU manager and the majority of the AIFMD will not apply. It seems likely, however, that there will be restrictions on marketing funds managed by the new Swiss manager into Europe. The exact position is yet to be determined but it may inhibit marketing of the manager’s funds into the EU.
Obviously relocating will involve transferring the management contract from the current manager to the Swiss manager, which will require consent from the boards of the relevant hedge funds. They will be required to assess whether this is in investors’ best interest and whether the Swiss regulatory regime is appropriate. The principals and shareholders or members of the manager may also have to consent, although there are clearly strong fiscal incentives for them to do so. Finally, regulatory consent will typically need to be obtained for the winding up of the EU manager.
Clearly relocation is a big decision, particularly with the risk of the AIFMD creating “fortress Europe” for those managers outside the EU but the benefits, both in terms of avoiding undue interference in fund management and lowering the effective tax rate of principals and key employees of the manager, are significant.
It may make sense to consider the pros and cons of relocating in advance, to avoid having to make a decision in haste as the complex regulatory and fiscal position in Europe comes to a head.
Dale Gabbert is a Partner at Reed Smith LLP, London. He has been a full time funds lawyer since 1996, gaining experience in-house with JP Morgan and in private practice in London and New York. Kharim Khoury is a Partner at Chabrier and Partners, Geneva. He specialises in international commercial, banking and finance matters including litigation and dispute resolution.