Answer ... With respect to the payment of interest, under Swiss law, interest payments by Swiss borrowers under collective fundraising transactions are generally subject to Swiss withholding tax (currently at the rate of 35%).
Syndicated facilities agreements qualify as collective fundraising if there are more than 10 non-bank lenders in the syndicate (the ‘10 non-bank rule’). Swiss withholding tax will also be triggered if the Swiss borrower would have an aggregate of more than 20 non-bank lenders (the ‘20 non-bank rule’ and, together with the 10 non-bank rule, the Swiss non-bank rules). Thus, it is market standard to structure a transaction to avoid Swiss withholding tax being incurred.
Accordingly, should the credit agreement be drafted to reflect that there are or could be Swiss borrowers, it must be ensured that there will be not more than 10 non-bank lenders thereunder. Hence, the transfer provisions will impose restrictions on non-bank lenders, which, as standard, will no longer be applicable after the occurrence of an event of default.
The respective transfer restrictions for lenders are rather unproblematic under revolving facilities, given that only banks will typically act as revolving lenders.
If there is a Swiss guarantor in the structure (but no Swiss borrower), the issue still needs to be addressed, since tax concerns might arise where part of the financing is to be on-lent to a Swiss guarantor. Therefore, a structure involving foreign fundraising, on-lending to a Swiss guarantor and security interest/guarantees provided by a Swiss guarantor could be regarded by the Swiss Federal Tax Administration as circumvention of the 10 non-bank rule, which potentially triggers Swiss withholding tax, and particular care must be given when structuring. In April 2021 the Swiss Federal Council has proposed the abolition of the withholding tax on bond interest without any replacement and initiated a respective parliamentary process. If this proposal will come into force, the Swiss non-bank rules as outlined above will be abolished and restrictions in this respect will no longer apply from a Swiss tax law perspective, making it easier for Swiss companies not only to issue bonds, but also to obtain funding in cross-border syndicated lendings.
Also, intra-group financings may trigger certain restrictions:
- on the maximum interest rates (so-called safe harbour rates), chargeable on loans granted to or by Swiss group entities; and
- in light of thin capitalisation rules, the breach of which could trigger Swiss withholding tax.
With respect to the proceeds of enforcing security or claiming under a guarantee which has been granted by a Swiss obligor for obligations of its (direct or indirect) parent (upstream) or sister (cross-stream) company, to the extent that it is not granted on terms which are at arm’s length, Swiss withholding tax may be triggered on dividend payments (currently at 35%) which must be deducted from the gross payment made (see question 7.1). Swiss withholding tax can be recovered (with some delay only) by Swiss secured parties and by secured parties that:
- are located in a jurisdiction that has a favourable double tax treaty in place with Switzerland (providing for a 0% rate); and
- qualify to benefit from treaty protection.
Thus, not all secured parties can recover the Swiss withholding tax and even lenders that can do so will be refunded potentially only with a delay.
Also, with respect to security interest over real estate:
- special real estate withholding taxes may become due whenever a security interest is granted over real estate located in Switzerland; and
- depending on the jurisdiction of the relevant secured parties, applicable double tax treaties may provide for a 0% rate or reduced rates.
Accordingly, should the secured parties be located in jurisdictions with which there is no double tax treaty or the applicable double tax treaty does not provide for a 0% rate, the security provider may request these very secured parties to be excluded from the benefit of such security interest in order to avoid both such tax being incurred and the corresponding usually expected gross-up undertaking, as such tax will be borne by the security provider
Finally, securities transfer stamp tax may be triggered under certain circumstances in relation to the enforcement or transfer of ownership of bonds, notes or other securities.
In its proposal of April 2021, the Swiss Federal Council also proposed to abolish the transfer stamp duty on domestic bonds, without replacement.