When establishing any kind of business in Switzerland, the first – sometimes only – suggestion made to entrepreneurs by their financial or fiduciary advisers is to set up a joint stock company. Would be entrepreneurs will be offered standard bye-laws and regulations, directors domiciled in Switzerland and external auditors as provided by Swiss law – but will they be happy with this ?
They may not wish to disburse the capital to set up the company; from a legal minimum of CHF 100’000 to 10’000’000 for a financial institution. Nor may they consider it worthwhile disbursing stamp duty of 1% on the nominal value of the shares of the new company or of the market value of the assets allocated to the company, whichever of the two values is higher.
Having to nominate people foreign to the company on the board of directors in order to comply with the statutory majority of persons domiciled in Switzerland may not be the entrepreneurs’ idea of proper management.
Moreover, Switzerland sports one of the highest – if not the highest – withholding tax rates on dividends in the world : 35%. Some of it may be recovered with lengthy administrative proceedings, if the country of origin of the mother company has signed a treaty to avoid double taxation (DTT) with Switzerland. In the best of cases, Switzerland will keep 5% on dividends paid out to the foreign shareholder, which will lessen the net revenue of the investor. In general, the reduced withholding rate will be higher, varying between 10% and 15%.
The branch advantage
In contrast with this, when establishing a branch, no capital need be disbursed by the investor to establish the branch. As long as it is comparable to any of the Swiss legal entities, the Swiss authorities will accept the statutes of the head office.
No changes need to be undertaken in the organization of the company; for example, a foundation that is active as a bank may establish a branch in Switzerland without having to adapt its statutes.
The basic legal environment of a branch in Switzerland is provided for in the Code of Obligations and the Ordinance of the Commercial Register. A branch constitutes a forum for judiciary, administrative, fiscal and commercial matters and litigation. Theoretically, it may function without being registered in the commercial register if it is a small business. However, in practice, nobody wants to deal with a branch that is not registered, because of the lack of public information on the company and the persons they are dealing with.
Getting inscribed in the commercial register is the most difficult process for establishing a branch, not so much because the rules can be complicated, but because civil servants in this administration lack knowledge as to the diverse forms of foreign companies and foreign official documents. Therefore, the foreign company should consult with counsel before submitting documents to the commercial register, in order to make a reasonable choice of what will be presented and translated in view of being inscribed. The designated documents will need to be translated into the official language of the Swiss canton where the branch will be established and certified by a notary public and bear an apostille according to the Hague Treaty.
For the fiscal authorities, the branch must comply with local requirements concerning bookkeeping and maintaining files containing financial data for a period of 10 years. Operations with the head office should be dealt with « at arm’s length » in a reasonable manner so as not to push authorities to recalculate taxable profits. The median tax rate on company profits in Switzerland is around 23%, and most DTT’s provide for exclusion of the profits from the tax base in the country of origin, so that being subject to Swiss tax on profits may not be such a bad idea : the same profit will be taxed less in Switzerland than in the country where the head office is based.
Concerning the status of personnel, the branch must comply with the Swiss social security system, pension plans and local work contract law. Conflict law does not allow for the use of foreign law in employment matters except for international organizations such as the United Nations.
Especially for banks and financial institutions, the branch is required to be independent and comply with banking regulations as if it were an independent entity. It must have its own hierarchy, personnel, structure, money-laundering prevention system, internal regulations, accounting, controllers and external auditors regularly reporting to the Federal Banking Commission. As an exception to general rules, banking regulations require that managers representing the branch must be domiciled in Switzerland. Authorities are particularly picky about outsourcing back office work, because it may endanger data confidentiality. Legal advice is necessary in order to avoid time-consuming misguided decisions.
Ponder the options – then branch out
The insurance business is the only sector where establishing a branch may not be practicable in practice. Demands on foreign companies wanting to practice this business in Switzerland are so exorbitant that most foreign groups have opted for buying Swiss insurance companies.
However. except for the insurance business, establishing a branch should be an option to be seriously pondered when investing in Switzerland.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.