Switzerland
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 will apply in Switzerland through a separate agreement reached between the country and the EU, under which Switzerland will apply a withholding tax (initially at 15%) 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 will be 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.
This section of the site describes the key Swiss banking and investment fund sectors.
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:
- Securities funds, meaning funds which invest in publicly-issued and traded shares;
- Real-estate funds;
- 'Other' funds, which includes funds of funds, money market funds and hedge funds.
Foreign funds are permitted under the reciprocity provisions.
The Federal Banking Commission (FBC) is responsible for licensing and supervising investment funds. The new law introduces 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.
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.
Banking
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.
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.
The Swiss banking sector is 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.
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 US$7m for non-compliance, and in the six months after it came into force assets totalling $124m 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 to the information-sharing required as part of the EU's withholding tax directive and without which it will not be 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 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 cases of 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."
In November, 2004, the Swiss government indicated that a referendum on the Savings Tax Agreement was unlikely, and that the legislative process needed to approve the adoption of the Directive and the Bilaterals II agreements was proceeding smoothly.
In comments made after a regular meeting of finance ministers from countries in the European Free Trade Area, Dutch Finance Minister Gerrit Zalm revealed: “The Swiss minister made us happy by informing us that everything was well underway with the savings (tax) agreement.”
The possibility that the Swiss government might have been obliged to put the treaties to a referendum had cast doubt over the implementation of the directive. However, Swiss Finance Minister Hans-Rudolf Merz, who was also present at the EFTA meeting, assured ministers that this would not be the case. “He did not expect a referendum in Switzerland on this issue, so that was a very comfortable communication from his part," Zalm revealed.