The last 18 months have seen major developments in a number of areas of Swiss law. Much of this concerns the onward march of transparency and regulation in the financial and wealth management sectors. The Swiss corporate tax regime, which has attracted some international criticism, looks finally to be reformed, after a degree of national opposition. In addition, there have been developments in the family law field.
Corporate Tax Reform
The steering body, comprised of federal and cantonal representatives has adopted recommendations on what is known as ‘balanced tax proposal 17’ (TP17). This replaces the 3rd Corporate Tax Reform, which was rejected by the Swiss people. TP17 includes in particular:
• Patent box: the introduction of a mandatory patent box in accordance with the OECD standard at cantonal level.
• Research and development deductions: the additional deduction for research and development (R&D) costs may not exceed 50 per cent of the actual costs. The deductions should focus primarily on personnel expenses.
• Maximum burden: the tax relief on profits arising from the above may not exceed 70 per cent.
• Partial taxation of dividends: the partial taxation of dividends from qualified participations (minimum stake of 10 per cent) should be 70 per cent at federal level and at least 70 percent at cantonal and communal level.
• Sufficient federal compensation should be made available to the cantons to align their corporate tax rates in the 12 per cent to 14 per cent range.
If TP17 proceeds, a new federal law should be proposed, and Parliament can discuss and vote upon the law in its 2017 autumn session. This law could enter into force in 2019 or possibly 2020, depending on discussions with the OECD and the EU.
The Swiss Banker’s Code of Conduct
Swiss banks' Code of Conduct with regard to the exercise of due diligence (CDB 16) became effective in January 2016 and was updated in 2017. Banks, securities and financial intermediaries must comply with CDB.
CDB16 was adopted following the Anti-Money Laundering Act (AMLA) related regulatory amendments. Its most notable effects include:
a) the improved transparency of non-stock exchange listed operating legal entities, including the requirement to identify the controlling person;
b) the requirement to identify the beneficial owner of holding companies and real estate;
c) introducing new Forms: (Forms K (controlling person), I (insurance wrapper) and S (foundation) in addition to the familiar Forms A and T); and
d) the identification of ordinary partnerships.
As far as trusts are concerned, the revised Form T requires the settlor, the (class of) beneficiaries, and the protector to be identified. The form also requires: (i) a declaration on the type of trust (discretionary or non-discretionary) and its revocability; (ii) information on the ultimate economic (non-fiduciary) settlor of a pre-existing trust if the trust results from a restructuring of a pre-existing trust (re-settlement) or a merger of pre-existing trusts; and (iii) information on protectors, if any. CDB 16 has been revised and now requires the identification of:
(a) all beneficiaries who are entitled to fixed interests in the trust or foundation's assets, and
(b) all living discretionary beneficiaries:
I. who have received distributions in the past and who are not excluded from any future distributions;
II. who are individually identified as beneficiaries within the constitutional documents of the trust or foundation (i.e. by-laws, supplementary by-laws, regulations, trust deed, letter of wishes, etc.); and
III. who belong to a class of beneficiaries as per the constitutional documents of the trust or foundation (e.g. descendants of the settlor/founder) and are alive and individually identifiable at the time of establishment of Form T/Form S.
Broadly, this requirement does not extend to discretionary beneficiaries whose entitlement is purely conditional (i.e. a prospective future class) or subject to a date or timing requirement.
Two New Draft Acts
FIDLEG stands for the two new draft acts on Financial Services (FSA) and Financial Institutions (FIA), which are in the process of being finalised before the Swiss Parliament, and are currently expected to enter into force in January 2019. These acts will considerably change the Swiss regulatory landscape, particularly as regards those financial services providers who are currently not regulated (except for AML purposes). This would include independent asset managers and trustees. Under the FIA these providers will be subject to a general obligation to obtain a license from the Swiss Financial Market Supervisory Authority (FINMA). They will also be subject to prudential supervision delegated by the FINMA to privately organised and FINMA-licensed supervisory organisations.
FIDLEG will provide for different levels of protection depending on the type of client, with the possibility to opt out. The regulatory framework will include: (i) new rules of conduct for financial service providers; (ii) registration obligations for client advisors and foreign service providers carrying out cross-border activities in Switzerland; (iii) additional prospectus requirements in connection with public offerings of securities in Switzerland; (iv) new requirements on adequate organization; and (v) new rules to facilitate clients access to justice.
One of the objectives of FIDLEG is to satisfy the so-called ‘third country provisions’, embodied in the updated Markets in Financial Instruments Directive (MIFID II) and Markets in Financial Instruments Regulation(MIFIR), which explains why most of the provisions are very similar to those of the EU financial services regulations. There remain some differences, but these are technical in their nature. For instance, FIDLEG does not oblige (mere) investment advisors to obtain a license. However, these advisors will be subject to the provisions of the (FSA). Also, unlike MIFID rules, trailer fees and rebate payments will continue to be allowed. This is on condition that specific and detailed requirements on transparency and consent are met.
Complying with the regulatory requirements imposed by the implementation of FIDLEG will burden financial service providers with significant costs. As a consequence of this, mergers and consolidation within the sector are to be expected.
Automatic Exchange of Information
During its meeting on 16 June 2017, the Federal Council adopted a proposal on the introduction of the automatic exchange of financial account information (AEOI) with 41 countries and territories (the Federal Decree). This is in addition to the 38 countries with which Switzerland has already committed to automatic exchange. The Federal Decree follows the final guidelines on AEOI issued by the Swiss Federal Tax Administration, and is intended to implement the Common Reporting Standard in Switzerland.
On 5 July 2017, the Swiss Government sent a dispatch to Parliament containing its proposals on the exchange of information with these 41 countries. Parliament will be asked to decide on the implementation of these plans and, if approved, data collection will start as of 1 January 2018, with the first exchange scheduled for 2019.
One important feature of the Federal Decree is the emphasis on confidentiality (for the right reasons) and personal security. Following the comments made during consultations, the Federal Decree envisages that the Federal Council will prepare a situation report before the first exchange of data with the 41 countries. This first exchange is planned for autumn 2019. As part of that process, the confidentiality and data security standards and provisions of these countries will be assessed. How those standards and provisions will work in practice is one of the many unknowns in this AOEI world. This is likely to be a significant challenge for the Swiss and other governments. Though not entirely clear at the moment, it should be noted that Swiss domestic legislation already incorporates an obligation for financial institutions to notify clients prior to sharing information with partner jurisdictions (subject to few exceptions). Although the Department of Finance has confirmed its commitment to data protection safeguards, it is unclear at the moment as to how the Swiss Government will establish the relevant parameters to achieve this objective.
Landmark Court Decisions: Tax Disclosure
Out of the thousands of decisions issued by the cantonal courts and the Swiss Supreme Court (SSC), three (at least) should be noted.
The Geneva Justice Court (ACJC/1585/2016) has ruled that banks cannot block a client account on the basis that the client has not proved his tax compliance in his country of residence. Clients have a right to the restitution of their assets at the end of the contractual relationship with the bank.
The SSC has held (2C_893/2015) that international mutual assistance can be further granted to a French request for information about a UBS client's bank account, despite the request probably being founded on stolen data. The case began in 2010, when a former marketing agent for UBS' operation in France collected a list of 600 of the bank's customers, and sent it to the French tax authorities.
The Court stated that the Franco-Swiss double taxation treaty should be interpreted strictly, and that there was no basis for refusing the international request for assistance.
In holding thus, the SSC had to disregard the Swiss Administrative Tax Assistance Act of 2013, which specifically states that stolen data must not be used in international tax assistance procedures. The Court's view was that, if the 'fruit of the poisonous tree' doctrine applied to data thefts committed abroad, it would have an extraterritorial effect, which would violate the Swiss legislators' intention in drafting the 2013 Act.
One month later, the SCC was presented with another request for information from the French tax authorities based on stolen data, but this time the data was stolen by an employee of HSBC Switzerland. In this case the SCC held (2C_1000/2015) that assistance could not be granted as said request violated the principle of good faith.
The SSC noted that following the data theft at HSBC, negotiations between France and Switzerland were halted and were only completed after France had issued a written statement stating that the HSBC data would not be used in connection with any requests addressed to Switzerland. The SSC therefore concluded that Switzerland could in good faith rely upon the promise made by the French government.
Second, in the HSBC case, in contrast to the case underlying the SSC’s first decision, data was actually stolen in Switzerland from a bank located in Geneva, and not in a French subsidiary of a Swiss bank. In the HSBC case, therefore, the information exchange request from the French authorities was based on information obtained in violation of Swiss law. This meant it was based on facts that fall directly within the scope of Swiss criminal law and the jurisdiction of the Swiss criminal authorities.
The second decision therefore follows the logic of the first decision, and concludes that the Federal Tax Administration cannot provide administrative assistance for any request from foreign tax authorities based on a theft of data that was punishable in Switzerland.
The Swiss Civil Code has been revised to enable, as from 1 January 2018, second parent adoption of stepchildren for married couples and those in a same-sex civil partnership. The couple will be able to fully integrate the stepchild into the family and make succession and guardianship provisions. However, the adoption of children where neither adult is the genetic parent is not possible for same-sex couples or for those in a de facto partnership.
The Swiss pension system relies upon three ‘pillars’, the second of which consists of a mandatory, occupational pension scheme, funded by both employer and employee contributions. Under Swiss law, this second pillar must be divided equally between spouses on divorce (Art. 122 CC). Prior to 1 January 2017, those spouses who were already receiving retirement benefits received an indemnity based on an estimate of the equivalent of second pillar contributions. In certain cases, this indemnity did not appear to be an adequate division of marital assets; spouses who had not worked, or who had not worked full-time, were often disadvantaged.
The modified provisions mean that the second pillar is now divided equally, even if one spouse is already in receipt of some form of pension. In these cases, a lifetime annuity has replaced the indemnity scheme.
In addition, splitting the second pillar will now be done once divorce proceedings are instituted, rather than when the divorce is pronounced. A Court order will, in most cases, be required. Under certain circumstances the judge may avoid this splitting, such as with the parties’ mutual consent or a perceived unfairness.
Foreign Certificates of Inheritance
In a decision reported in late 2016, the SCC (5A_355/2016) considered whether a certificate of inheritance established by an Egyptian court should be refused recognition in Switzerland on the basis that the recognition of the certificate would be manifestly incompatible with Swiss ‘ordre public’. The SCC considered that the recognition of the certificate of heirs – citing the brothers and sisters of the deceased to the exclusion of the deceased’s surviving non-Muslim spouse – would violate the national prohibition of discrimination based on religion, which is a principle of Swiss ordre public.
Private Client Partner. Grégoire advises families, entrepreneurs, financial intermediaries and sport individuals on cross-border private client, family law, philanthropy and sports matters. Grégoire acts as executor of high-net worth estates. He also advises clients who are living in, or looking to relocate to, Switzerland. Grégoire specializes in asset structuring and estate planning, charitable trusts and foundations, as well as commercial law for family-owned businesses. He has particular expertise working with international families who are looking for effective governance structures through which to organize the long term transition of wealth, including family businesses. Grégoire's clients include wealthy families, boards of trustees, trust companies, business owners, sports individuals and agents.
Dr Michael Wells-Greco LLM
Head of Geneva Office
Partner – Corporate & Commercial. Advises public and privately owned companies on all aspects of corporate transactions, including mergers & acquisitions, takeovers, joint ventures, financing and general commercial advice. He also frequently advises clients about regulatory requirements applicable to trustees and asset managers.
Charles Russell Speechlys
Cheltenham, Doha, Dubai, Geneva, Guildford, Hong Kong, London, Luxembourg, Manama, Paris and Zurich.