IFLR Magazine November 2016

Author:Dr. Daniel Lehmann and Michael Abegg
Profession:Bar & Karrer

Group financing Interest paid on bonds as defined by the Swiss Federal Tax Administration (SFTA) for Swiss withholding tax (WHT) purposes, which may also include certain types of syndicated loans, issued by a Swiss tax resident debtor is generally subject to WHT at a rate of 35%. This may have an adverse impact on the competiveness of the Swiss capital market.

The significant adverse tax consequences of the qualification as a Swiss bond have raised questions regarding the differentiation between Swiss financing and foreign financing. A proforma issuance through a foreign subsidiary without sufficient substance (i.e. a special purpose vehicle) qualifies as Swiss financing triggering adverse WHT consequences as if the bond were issued by the Swiss parent company. However, for debt financing through a foreign group entity with sufficient substance, the SFTA have developed rules defining the requirements for a possible re-characterisation of a foreign bond as a Swiss bond.

Bonds issued by foreign subsidiaries with downstream guarantee

A downstream guarantee from a Swiss parent enables a foreign subsidiary with a low credit rating to raise capital benefitting from lower interest rates. This is due to the unlimited guarantee of the parent company with a higher credit rating. Therefore, the conditions of the SFTA for not assuming a Swiss bond are quite strict.

Currently, the following two requirements, which must both be met, result in a possible re-characterisation of a foreign bond as a Swiss bond issued by a foreign subsidiary with sufficient substance:

down-stream guarantee from a Swiss parent; and What is known as the direct or indirect harmful use of proceeds in Switzerland. Legally speaking, a foreign bond could only be attributed to a Swiss parent in the case of tax avoidance. However, in practice, because of the significant effect of a possible re-characterisation, these two requirements are used as safe haven rules. In borderline cases, the exact meaning of the conditions is often unclear and hence the qualification is clarified in the form of a tax ruling request filed with the SFTA.

(a) Down-stream guarantee

As guarantor, the Swiss parent is not treated as a direct debtor under a financing agreement. However, in the event of a default, it is unconditionally and directly liable vis-à-vis the investors for the re-payment of the principal and the payment of interest. Even a keep-well agreement with a less formal commitment of the Swiss...

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