With its COVID-19 Joint and Several Loan Guarantee Ordinance dated 25 March 2020 ("COVID-19 Guarantee Ordinance"), the Swiss Federal Council established a liquidity support scheme for small and mid-sized entities. Unfortunately, start-ups were not eligible for guaranteed credits under the COVID-19 Guarantee Ordinance. Following a first announcement on 22 April 2020, the Swiss Federal Council introduced a new liquidity support scheme for innovative Swiss start-ups on 4 May 2020 ("Start-up Support"). The guaranteed credits will become available as of 7 May 2020. Although highly appreciated, some start-ups might not benefit from the new support scheme.
1. The Start-up Support
Under the Start-up Support, a start-up may obtain a guaranteed loan in an amount equalling one third of the start-up's 2019 current expenses, but not more than CHF 1 Mio. The Start-up Support is essentially an extension of the COVID-19 Guarantee Ordinance, but with own eligibility requirements and a different application process.
2. Eligibility Requirements
2.1 Participation of the Home Canton
According to the press release announcing the Start-up Support, a start-up could only benefit from the Start-up Support if the canton in which the start-up is registered participates in the scheme. The list of participating cantons is available online (https://covid19.easygov.swiss/en/cantons/; as of 4 May 2020, only Neuchâtel and Vaud have announced their participation).
2.2 Individual Requirements
In order to qualify for a guaranteed credit under the Start-up Support, a start-up must meet the following requirements:
- Incorporation date between 1 January 2010 and 1 March 2020;
- Incorporated in Switzerland as company limited by shares (Aktiengesellschaft) or limited liability company (Gesellschaft mit beschränkter Haftung);
- Not part of the agricultural sector;
- Neither subject to bankruptcy or composition proceedings nor in liquidation;
- Suffering significant financial and liquidity problems due to the COVID-19 pandemic;
- No over-indebtedness (Überschuldung) pursuant to article 725 of the Swiss Code of Obligations at the application date for Start-up Support;
- Scalable, science- or technology-based, and innovative business model.
While many start-ups will meet the formal requirements to qualify for the Start-up Support, it is obvious (and also disappointing) that some start-ups may not be eligible. For example, since start-ups in the agricultural sector are excluded, companies with a business model involving urban farming or sustainable food production do not seem to qualify. Besides that, despite the entrepreneurial spirit, money, and efforts put in a venture, companies with a focus on ecological and/or social impact, who often have a non-scalable business model, are deprived from the Start-up Support.
3. Application Process
3.1 Submission and Filing Documents
The application for a guaranteed loan has to be submitted via EasyGov (https://covid19.easygov.swiss/en/forstartups/).
In particular, an applicant start-up has to submit the following:
- Annual financial statements evidencing the current expenses of 2019 (e.g. salaries, rents, costs of patent applications, etc.) or, if not yet available, of 2018;
- Business plans;
- Company details, including contact details;
- Details of lending bank;
- Loan agreements and/or loan applications for loans under the COVID-19 Guarantee Ordinance.
3.2 Review and Approval
Following the submission, the application is reviewed by the designated cantonal office, which may request an assessment by an expert body consisting of leading organizations of the Swiss start-up ecosystem. If the cantonal office deemed an application to be incomplete, it would return it to the applicant start-up for update and re-submission.
Once an application is approved, the guaranteeing organization is notified, which in turn notifies the lending bank. The bank will then pay out the loan.
4. Effects of the Loan
The guaranteed loan granted under the Startup Support has essentially the same effects as any guaranteed loan under the COVID-19 Guarantee Ordinance, in particular, but not limited to, the following:
- The loan is granted for a maximum period of five years, within which the loan has to be repaid, which must be included in the start-up's liquidity planning;
- Payment of dividends and return of investments are prohibited: while this is unlikely to affect start-ups in the near future as dividend pay-outs are usually not realistic in an early stage, it might cause a problem towards the end of the loan term, namely since a violation of this prohibition may also lead to criminal sanctions;
- Until 31 March 2022, the loan is not included in the start-up's debt calculation for the purpose the capital coverage and over-indebtedness calculation pursuant to article 725 of the Swiss Code of Obligations.
The last item could actually prove to be a very dangerous one. Following 31 March 2022, the loan will have to be included in the start-up's debt calculation, although the loan would not yet have to be repaid. Hence, in order to avoid over-indebtedness and therefore a bankruptcy filing, financial planning and the implementation of restructuring measures should be started well ahead of 31 March 2022.
From a Swiss tax point of view, the guaranteed loans qualify as third party debt. An arm's length test is, hence, not necessary (i.e. interest rate test, creditworthiness test, collateral test, and the like). Also, the guaranteed loans cannot fall within the Swiss thin capitalization rules.
Originally published on May 2020
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