The Private Equity Review: Switzerland
i General overview
In 2020, market studies showed that private equity funds remain an essential driver of M&A activity in relation to Swiss small and medium-sized enterprises.2 During the first half of 2020, private equity firms, with financial investors acting as buyers or sellers were involved in around 40 per cent of the deals.3 2019 figures showed a total of around €2.2 billion raised by private equity funds in Switzerland.4
Despite the covid-19 pandemic,5 Switzerland retained its top position as the world leader for innovation by the Global Innovation Index 2020.6 Around 2.3 billion Swiss francs were invested in 266 Swiss start-ups in 2019, which thus received 85.5 per cent more funds than in 2018.7 The information and communications technology, including fintech (ICT) and the biotech sectors played the primary roles. ICT start-ups attracted 1.2 billion Swiss francs in 2019, whereas biotech attracted 624.7 million Swiss francs, a 41 per cent increase compared with the previous 2017 record.
If during the 'hard' lockdown (March to April 2020) a certain number of fundraising activities were suspended or at least substantially slowed down, the subsequent partial lockdowns and travel restrictions had a limited impact on fundraising. Overall, despite the pandemic, Swiss innovative sectors, such as ICT and biotech, remain generally attractive.
ii Legal framework for fundraising
i General overview
The legal framework governing private equity fundraising in or from Switzerland is mainly articulated around the following laws and regulations:
- the Collective Investment Schemes Act (CISA) as supplemented by its implementing ordinances, the Collective Investment Schemes Ordinance (CISO), and the ordinance issued by the Swiss Financial Market Supervisory Authority (FINMA), the CISO-FINMA;
- the Financial Services Act (FinSA) as supplemented by its implementing ordinance, the Financial Services Ordinance (FinSO), in force as of 1 January 2020; and
- the Financial Institution Act (FinIA) as supplemented by its implementing ordinances the Financial Institutions Ordinance (FinIO), in force as of 1 January 2020, and the FinIO-FINMA, in force as of 1 January 2021.
In a nutshell: (1) CISA, CISO and CISO-FINMA focus on the product (i.e., the collective investment vehicle or the 'fund' as such); (2) FinSA and FinSO focus rather on the point of sale (i.e., the provision of the related services); and (3) FinIA and FinIO focus on the authorisation and regulation of service providers, in particular the fund managers or management companies.
ii EU AIFMD impact
The Directive 2011/61/EU (AIFMD) does not apply to Swiss investment fund managers or promoters, and more generally to Swiss-based entities given Switzerland is not a European Union (EU) Member State. In 2013–14, CISA and its implementing ordinances as well as the Swiss Funds and Asset Management Association (SFAMA) guidelines have been largely aligned with third-country requirements set forth in AIFMD. In 2015, Switzerland successfully passed the technical review of the European Securities and Markets Authority (ESMA) in view of EU passporting regime extension.8 Since then, Switzerland has been waiting for a political decision from the European Commission.
iii Overview of FinSA, FinIA and CISA main changes
On 1 January 2020, with the entry into force of FinSA and FinIA, the fund marketing and offering rules have been significantly amended. Among other changes:
- the notion of 'distribution' and the corresponding exemptions set forth in old CISA have been repealed by the entry into force of FinSA, and replaced by the legal concepts of: (1) 'advertising'; (2) 'offer'; and (3) 'financial services' (see Section II.x for details on these concepts) and their respective exemptions. These concepts and the legal definitions associated with them are generally applicable to all financial products that are deemed to be 'financial instruments' as per the FinSA (such as equity and debt securities, structured products, derivatives, structured deposits and bonds). By their very nature, shares, units or interests in private equity funds are typically considered financial instruments;
- the licensing requirement for Swiss distributors has been repealed;
- a new classification of investors was introduced with three segments of clients: the institutional, the professional and the private (retail) clients and possibilities to move along certain of these categories via opting-in or opting-out mechanisms; institutional and professional investors are generally 'qualified investors' under CISA, whereas private clients will typically be qualified as 'non-qualified investors';
- the list of 'qualified investors' under CISA has been revamped and extended in particular with respect to per se professional clients;
- a limitation to the requirement to appoint a Swiss representative and a Swiss paying agent for offers of foreign funds to 'qualified investors'; and
- the application of certain rules of conduct and organisational requirements under FinSA to service providers acting on a local or cross-border basis as well as, under certain circumstances, the obligation for such providers to affiliate with an ombudsman office and to proceed with a registration of client advisers in a new register.
While the changes to the CISA and CISO in connection with the new FinSA and FinIA regime entered into force on 1 January 2020, a two-year transitional period applies for most of FinSA requirements until 31 December 2021. Until that date or before, subject to a full implementation of the FinSA rules of conduct and organisational measures, financial service providers, including foreign promoters, are required to ensure compliance with the former rules (including the entering into distribution agreements). In this context, changes to the former SFAMA guidelines have not yet been recognised by FINMA. It is currently expected that such recognition and corresponding publication of revised guidelines will not be available before the first quarter of 2021. In any instance, during the two-year transitional period, all existing former SFAMA documents may be used.
Affiliation obligation with the ombudsman office is in force as of 24 December 2020 and registration requirement with client adviser register as of 19 January 2021 (see Sections II.x and II.xi for concerned entities).
iv Jurisdiction and preferred vehicle for private equity investments
It is not uncommon for private equity fund promoters that are active in Switzerland to use offshore vehicles rather than Swiss structures. Among other drivers, access to the EU market plays an important role for promoters and using an EU vehicle facilitates the marketing. Tax aspects play also an important role, in particular for the investors, and may be key in the decision of a promoter to set up a Swiss or foreign vehicle (see Section III.ii on Swiss tax aspects).
By contrast to the past, the unregulated nature of the structure plays a less prominent role nowadays in the selection of the jurisdiction, in particular when a promoter wishes to target institutional investors, such as for instance pension funds. In certain cases, limited partners even refrain from investing in limited partnerships based in certain offshore jurisdictions, thus pushing promoters to set up structure in the EU or in Switzerland. Further, it has been noticed that certain 'small' promoters who have set up unregulated vehicles (in particular in EU jurisdictions) tend to consider switching to regulated structures to enlarge their investor basis.
When a foreign vehicle is used, its marketing and offering in Switzerland will be subject to certain requirements set forth in FinSA as well as in CISA, when such vehicle qualifies as a foreign fund under CISA. FinSA requirements will typically apply to the promoter, whereas CISA requirements will concern the product. In practice, foreign LPs can only be marketed and offered to Swiss-qualified investors inasmuch as such funds are typically not eligible for registration for offering or advertising to non-qualified investors in Switzerland.
v Swiss limited partnership for collective investment (Swiss LP)
When Switzerland is selected to domicile the structure, the most frequently used legal vehicle for collective private equity investments is the Swiss limited partnership for collective investment (Swiss LP). A Swiss LP is a closed-end fund subject to a regulatory approval process and subsequent on-going prudential supervision by FINMA. It is based on a partnership agreement. A Swiss LP must issue a prospectus. As it is traditional for limited partnerships, at least one member of a Swiss LP is subject to unlimited liability (general partner), while the other members (limited partners) are liable only up to a specified amount (limited partner's capital contribution). Limited partners must be 'qualified investors', as defined in CISA. Limited partners may not be involved in the day-to-day management of the Swiss LP, but they are provided by law with certain information and governance rights. The general partner (GP) must be a company limited by shares with its registered office in Switzerland and can only be appointed as a GP of a single Swiss LP, unless the GP is authorised under FinIA as asset manager of collective assets (investment fund manager). If certain conditions are met, individuals controlling the general partner may also invest in the Swiss LP as limited partners.
vi Swiss investment company with fixed capital (SICAF) and investment club
A SICAF is a Swiss company limited by shares regulated under CISA. As a rule, a SICAF is subject to regulatory approval and subsequent on-going prudential supervision by FINMA. The sole purpose of a SICAF is the investment of collective capital. However, where a Swiss company limited by shares is listed on a Swiss exchange or when all shareholders of such company are exclusively 'qualified investors' under CISA,9 CISA and the corresponding FINMA authorisation or supervision will not apply to such vehicle. Another exception is applicable to a company structured as an 'investment club' as defined in CISA (which, among other limitations, requires to restrict the club to a maximum of 20 investors).
vii Other available Swiss funds and investment foundations
Pooling of assets via fund structure can also be achieved via open-ended fund structures, such as Swiss contractual funds and Swiss investment companies with variable capital (SICAVs). That being said, except for very specific (and exceptional) cases and subject to initial investment redemption restrictions, such structures are generally not appropriate for illiquid investments, such as private equity, given they provide for on-going redemptions by investors.
Swiss pension funds may also set up specific investment vehicles under the form of Swiss investment foundations, including for investing in private equity. These foundations are not subject to CISA, but to the relevant provisions of the Occupational Retirement, Survivors' and Disability Pension Plans Act (OPA) and those of the Investment Foundations Ordinance (IFO).
viii Partnership key legal terms
The Asset Management Association Switzerland (AMACH)10 and the Swiss Private Equity & Corporate Finance Association (SECA) have produced a model prospectus with an integrated partnership agreement, which should be part of any filing with FINMA in respect of a Swiss LP.11 The GPs and the limited partners generally have a large room for adapting their contractual relationships to their needs.
A typical Swiss law governed partnership agreement will contain the following provisions:
- partnership name and its registered office as well as the corporate name and the registered office of the GPs;
- purpose of the partnership, in particular the type of sector in which the partnership will invest (e.g., biotech, fintech, etc.) and the overall investment strategy; the range of available investment strategies is rather broad and may include, inter alia, seed financing, venture capital, growth financing as well as secondaries or bridge financing;
- duration and possible extension of the partnership, noting that a Swiss LP may be set up for an unlimited period but, in practice, typical duration is often contractually limited between 10 to 12 years with generally a three-year extension;12
- subscription periods (initial and subsequent, including with conditions of admission of limited partners following the initial subscription period);
- total capital commitment and repayment of capital;
- partnership expenses and management fees (during and after the investment period), including management fees offset;
- conditions for admission and withdrawal of limited partners as well as interest transfer restrictions and conditions;
- limited partners information, including reporting duties of the GPs;
- the eligible investments (in connection with (b)), investment policy (including co-investment possibility and conditions), investment restrictions, risk diversification, the risks associated with investment, and the investment techniques (e.g., borrowing) as well as the investment period (typically between five to six years but longer periods are possible);
- delegation of certain tasks by the GPs (such as compliance, accounting and maintaining the limited partners' interest register);
- organisation of the partners' meeting, in particular voting quorum and majority, the delegation of management and representation;
- the appointment of a custodian or paying agent;
- distribution of proceeds (distribution waterfall models and conditions); and
- dispute resolution clause.
Except for a few mandatory provisions to be included in the partnership agreement and in practice generally already covered by the parties, and subject to non-objection by FINMA and mandatory Swiss contract law principles (which are rather flexible), it is possible to include other contractual provisions in the partnership agreement, such as, for instance, additional capital contribution for limited partners beyond their initial capital commitment, management fee stepdown models, key man, GP removal, ratchet-based or other models of carry, clawback, limited partners advisory committee (LPAC), most favoured nation (MFN), liability limitation and indemnification clauses.
ix Key items for disclosure
The Swiss LP and the GP must be registered with the commercial register of the canton where they are domiciled, respectively incorporated. The access to the commercial register is public in Switzerland. The commercial register provides general information regarding the Swiss LP and the GP, such as the capital (including the aggregate amount of the capital commitments of the limited partners), the registered office and the authorised signatories of the GP. The partnership agreement is also filed with the commercial register after its approval by FINMA. However, neither the financial statements of the Swiss LP nor the names of the limited partners nor their corresponding individual commitments are publically available.
In addition, any person or entity acquiring 25 per cent or more of the capital or voting rights of a non-listed Swiss company must notify such company of the acquiring entity's beneficial owner or owners and update such information in case of changes. In a typical private equity structure, the GP takes the relevant decisions regarding the fund and the underlying portfolio of companies. As a result, the individuals controlling the GP (respectively controlling the ultimate shareholder of the GP) should be disclosed as beneficial owners to the Swiss (non-listed) target company if the fund is acquiring 25 per cent or more of the capital or voting rights in such company. If such individuals cannot be identified in accordance with the Swiss disclosure rules, the Swiss company shall be provided with a negative declaration. However, the information disclosed is not publically available in the commercial register and will remain with the target company.
In addition, the SFAMA guidelines on the charging and use of fees and costs (Transparency Guidelines) requiring disclosure of retrocessions and rebates remain relevant under the new CISA regime (as of 1 January 2020). More generally, rules applicable to retrocessions and their disclosure, waivers and reporting and all relevant SFAMA guidelines (including the SFAMA Distribution Guidelines) will continue to apply at least until 31 December 2021 (or before upon full compliance with FinSA); further, transparency and disclosure of retrocessions have been generalised to all financial services providers in FinSA-dedicated provisions.13
Finally, Swiss GPs may also have to disclose information regarding 'total expenses' (TE) based on the guidelines for the calculation and disclosure of the costs of private market funds issued by the SECA.14 According to these Guidelines, TE shall be published on an annual basis and be audited. These guidelines are of particular relevance for Swiss or foreign funds seeking to attract Swiss pension funds investors.
x Swiss marketing rules overview (offer, advertising, financial services and related consequences, exemptions and concepts)
Under the new FinSA paradigm, an 'offer' is defined as any invitation to acquire a financial instrument that contains sufficient information on the conditions of the offer and the terms of the financial instrument. The following cases and activities do not constitute an 'offer':
- the provision of information in reverse-solicitation situations, where no advertising related to any specific financial instrument has been made by the financial service provider or an agent thereof;
- the nominal references of financial instruments, accompanied, where applicable, by factual information (e.g., international securities identification number (ISIN), net asset value (NAV), prices, information on risks, price trends, tax data);
- the mere provision of factual information; and
- the preparation, provision, publication and transmission to existing investors or financial intermediaries of information and documents prescribed by law or contract relating to financial instruments (e.g., general meeting invitations).
'Advertising' is defined as any communication aimed at investors that draw their attention to certain financial services or instruments. Any fund advertising must be clearly identifiable as such and it shall contain a reference to the prospectus and the key information document (KID) (if any)15 and where such documents are available. In line with the exemptions applicable to the 'offer', the following situations and activities do not constitute an advertising:
- the nominal mention of financial instruments whether or not related to the publication of prices, rates, NAV, price list or changes or tax related data;
- announcements as regards issuers or transactions, in particular if they are prescribed by law or by rules specific to trading platforms;
- the provision or transmission by the financial service provider of an issuer's communications to existing clients; and
- articles in the specialised press.
The mere advertising of a foreign LP is assimilated to the offering of such LP triggering FinSA and CISA requirements.
The definition of a 'financial service' under the FinSA includes, inter alia, the provision of investment advice on financial instruments or portfolio management activities, but also the purchase or sale of financial instruments, such as shares, units or interests in funds: any activity addressed directly to certain clients that is specifically aimed at the acquisition or disposal of a financial instrument is considered a financial service (such as activities amounting to 'pure' distribution). That being said, only the provision of information on financial instruments to end investors or clients qualifies as a financial service, meaning that interactions with supervised financial intermediaries (e.g., a Swiss bank) are out of scope.
In addition, the provision of M&A and corporate finance advisory services is typically not deemed a financial service within the meaning of FinSA. In particular, the following activities are out of scope: (1) advice on structuring or raising capital as well as on business combinations, acquisition or disposal of participations and the services associated with such advice; (2) the placement of financial instruments with or without a firm commitment as well as the corresponding services; (3) financing within the scope of services provided in accordance with (1) and (2); (4) granting of loans to finance transactions provided that the financial service provider is not participating or otherwise involved (including by knowing that the loan will be used in connection with a transaction on financial instruments) in these transactions (e.g., the provision of a Lombard loan is typically considered a financial service). Further, the production and distribution of market research in connection with private equity investments is in principle not considered a financial service, unless the research material is presented as a personal recommendation.
In substance, when a financial service is provided, the following FinSA requirements will be triggered:
- client segmentation between institutional, professional and private clients;
- obligation to comply with rules of conduct;
- obligation to comply with organisational measures;
- affiliation with an ombudsman office in certain cases (see Section II.xi); and
- registration of client advisers in a register, except for Swiss financial service providers subject to FINMA supervision, as well as for foreign financial service providers subject to prudential supervision in their home jurisdiction, provided that they only provide financial services to institutional and per se professional clients (see Section II.xi).
Finally, any marketing activity in Switzerland is also subject to the Swiss legislation against unfair competition or business practice, in particular in relation to commercial communication with customers. Under the Swiss Unfair Competition Act (UCA), any behaviour or business practice that is deceptive or that infringes the principle of good faith in any other way with the result of affecting the relationship between suppliers and customers is deemed unfair and unlawful. The UCA could also apply in conjunction with CISA provisions prohibiting the use of confusing or deceptive fund designation.
xi CISA/FinSA main requirements overview
Under the revised CISA, subject to the transitional regime,16 the appointment of a Swiss representative and a Swiss paying agent is only required in connection with offers or advertising of foreign funds targeting qualified investors that qualify as: (1) high net worth individuals (HNWIs); and (2) private investment structures established for HNWIs.
Both types of investors must, however, request to be treated as a professional client via an opting-out to be considered 'qualified investors'.17 If no opting-out is provided, HNWIs and related structures are considered private clients. Concisely, under FinSA revised definition, HNWIs are individuals, who have financial (liquid) assets of 2 million Swiss francs or financial (liquid) assets of 500,000 Swiss francs and experience and knowledge about the specific product.
Other categories of 'qualified investors' include:
- 'institutional clients' (such as banks, securities firms, regulated insurance companies as well as regulated asset managers). These clients may request to be treated as professional clients; and
- 'per se professional clients' (such as pension funds and companies with professional treasury management, large companies and private investment companies with professional treasury management). These clients may request to be treated as private clients.
All institutional and per se professional clients may be approached without having to appoint a Swiss representative and a Swiss paying agent. Certain per se professional clients, namely companies with professional treasury management and pension funds, may request to be treated as institutional clients (opting-out). Swiss and foreign unregulated funds and their management companies, which are not already institutional clients under FinSA, may also request to be treated as institutional clients.
Notwithstanding the foregoing, if the promoter of a foreign LP is targeting HNWIs or corresponding investment structures, which have opted out, it will have to register itself with an ombudsman office. Further, according to a practice published in December 2020 by the client adviser registers, it will also have to register its client advisers (typically sales persons and other officers providing financial services). This registration requirement has been challenged by AMACH and certain professionals given it does not explicitly derive from FinSA provisions but until further notice it will remain applicable (as of 19 January 2020).
Until the end of the transitional period or before, upon full compliance with new rules, any offer or advertising of foreign funds to qualified investors will generally require compliance with the former rules, namely, in particular: (1) the appointment of a Swiss representative and a Swiss paying agent; and (2) the entry into of a written Swiss law-governed SFAMA compliant distribution agreement with the Swiss representative.
In accordance with transitional provisions, such requirements will not apply if only institutional clients are targeted or where the offer would not have constituted distribution under the former regime.
xii Fiduciary duties to investors
'Sponsor' and 'sponsorship' are notions that are not relevant from a regulatory standpoint. In particular, Swiss LPs and more generally Swiss funds are not required to have a sponsor stricto sensu for the purposes of the regulatory approval process or their operations. Notwithstanding the foregoing, limited partners' interests are protected under the terms and conditions set forth in the partnership agreement, which is the contractual cornerstone of all Swiss LPs. The obligations of the general partner, in particular its fiduciary duties towards limited partners find their roots in the partnership agreement as well. In addition, CISA duties of loyalty, due diligence and information (CISA conduct rules), as product-based conduct rules, are applicable to the general partners. The SFAMA Code of Conduct, which remains relevant, provides additional guidance on CISA conduct rules. Finally, contractual provisions limiting or excluding the liability of the GP towards the limited partners, while generally common, are ineffective in case of willful misconduct or gross negligence.
iii Regulatory developments
i Regulatory oversight and fund registration
FINMA approval is currently required prior to launching and operating a Swiss private equity fund irrespective of its legal form. Further to its licensing, the relevant vehicle is subject to the ongoing supervision of FINMA and prudential audits.
In the case of partnership structures, both the Swiss LP and its GP are subject to FINMA licensing and on-going supervision. The licensing process is generally conducted simultaneously for the partnership and its GP. The application is to be reviewed by a recognised audit firm. Individuals controlling the GP and any qualified participants (i.e., any legal or natural person or entity directly or indirectly owning at least 10 per cent of the capital or voting rights in the GP, or who may otherwise have a significant influence) must go through a FINMA fit and proper test. The partnership agreement is subject to FINMA approval but not the prospectus as such, even if it is filed with FINMA.
In terms of timing, for a typical Swiss LP structure, subject to FINMA's workload and in the absence of any unforeseen issue, FINMA will generally provide its authorisation within a three to four-month period once all the required documents are filed. In terms of fees, initial registration is comprised between 10,000 and 40,000 Swiss francs. FINMA further levies a yearly supervision fee, which is computed based on the assets of the Swiss LP.
Swiss management companies or investment managers (asset managers of collective assets) of a Swiss or non-Swiss funds are, in principle, subject to a mandatory licensing requirement in Switzerland under the FinIA. By way of exception, de minimis asset managers are only required to be authorised as invididual portfolio managers and not as asset managers of collective assets. An asset manager will qualify as de minimis if all investors in the relevant fund or funds are 'qualified investors' and if:
- the assets under management (AuM), including those resulting from the use of leverage, do not exceed 100 million Swiss francs;
- the AuM, excluding any leverage, do not exceed 500 million Swiss francs and the fund is closed for a period of five years as of the date of the initial investment; or
- the AuM belong to persons with whom the managers have business (e.g., group of companies) or family ties.
Under certain conditions, Swiss de minimis asset managers of foreign funds may request to be licensed by FINMA as asset managers of collective assets, if such licence is required by the jurisdiction where the relevant fund is domiciled.
Non-Swiss managers of both Swiss and non-Swiss funds with a branch or representative office in Switzerland are also required to register with FINMA in accordance with FinIA requirements. Advisory and marketing activities conducted in or from Switzerland by a fund promoter will often be construed as a financial service subject to FinSA requirements.
Even under the new FinIA regime, non-Swiss private equity vehicles may continue to make investments in Switzerland without being subject to FINMA's authorisation or supervision, provided, however, that such vehicles are not deemed to be effectively administered in or from Switzerland. Substance abroad and residence of general partners, directors or managers may have an impact on the localisation of effective administration in Switzerland. No registration of the foreign fund will be required, unless such fund is marketed or offered to 'non-qualified investors'.
ii Swiss taxation aspects
Taxation rules applicable to Swiss private equity vehicles remain the same as the previous year and the forthcoming introduction of the new Limited Qualified Investor Fund (L-QIF) will not change the situation (see Section IV).
In a nutshell:
- the Swiss LP is treated as a transparent entity for tax purposes and is therefore not subject to Swiss corporate income and equity taxes, except on income stemming from real estate investment located in Switzerland, directly held by the LP;
- the shares (interests) in the LP are taxed as an element of wealth; each limited partner is otherwise taxed on the income realised at the level of the LP, by transparency;
- the Swiss general partner, as a legal entity, is taxed on its annual net profit, mainly made of its compensation (i.e., management fee and carried interest), and on its equity, at normal corporate tax rates (income tax dramatically decreased in most Swiss cantons, as a result of the recent tax reform that entered into force on 1 January 2020; as an example, in Geneva City, the overall effective corporate tax rate was set at 14 per cent in 2020 versus 24.17 per cent in 2019);
- distributions made by Swiss LPs to both Swiss and foreign investors, as well as the undistributed income reinvested at the level of the LP, are subject to Swiss withholding tax (WHT) at a 35 per cent rate, unless such distributions qualify as capital gains or as income resulting from directly held real estate; the LP's accounts must make it possible to differentiate between taxable and non-taxable items;
- WHT refund or exemption or both are available as follows:
- Swiss-resident limited partners will generally receive full refund of WHT, if they declare the income in their tax return (individuals) or account for it in their financial statements (self-employed and companies);
- foreign-resident limited partners may be entitled to a full or partial refund depending on existing double-tax treaties (DTT) entered into between Switzerland and their State of residence; and
- foreign-resident limited partners may also qualify for a full WHT exemption under the affidavit procedure if at least 80 per cent of the LP's income is derived from non-Swiss source investments and the investors are not Swiss residents; this exemption is applicable irrespective of any existing DTT.
These tax principles are also applicable to CISA-regulated open-end funds. On the other hand, SICAFs and other investment companies incorporated as Swiss companies limited by shares and not regulated under CISA are considered non-transparent for tax purposes. Accordingly, such vehicles are subject to corporate income tax and tax on equity (net asset), and distributions (and only distributions or the like, as opposed to reinvested income) to shareholders are subject to a 35 per cent WHT as dividends. In addition, the issuance of shares of a SICAF or another investment company incorporated as a Swiss company limited by shares is further subject to the Swiss issuance stamp duty at a 1 per cent rate. Given this tax treatment, except in certain structures involving a foreign limited partner, SICAFs and other investment companies are rarely used in practice.
iii EU tax regulations impact
The mandatory disclosure regime of certain cross-border arrangements (DAC 6) is not directly applicable to Swiss-based taxpayers or their intermediaries. DAC 6 may, however, indirectly affect Swiss-based groups with operations or structures localised in the EU by imposing on Swiss entities a duty to communicate (at least on a contractual basis) to their European counterparts to allow the latter to comply with the EU requirements. This duty to communicate may also be relevant in the context of funds set-up for HNWIs if certain DAC 6 hallmarks are met. Further, the Anti-Tax Avoidance Directive II (ATAD II) also enters into consideration when structuring private equity investments. ATAD II may affect private equity structures and their investors in the context of cash repatriation, in particular dividend distributions and exits. Careful tax assessment of private equity structures, in particular in the cross-border context. will undeniably play an increasingly important role in the coming years.
iv EU data protection rules impact
Another piece of EU regulation that may affect private equity structures, in particular the general partners, managers and other advisers is the General Data Protection Regulation (GDPR). The GDPR may apply to Swiss-based companies doing business in the EU notwithstanding the fact that Switzerland is not an EU Member State. Even when GDPR is not directly applicable to Swiss companies, it may apply indirectly to them to the extent that EU business partners generally request their Swiss counterparties to comply with GDPR requirements, in particular in case of data processing (including sub-processing) in Switzerland.
In 2020, the Swiss Federal Council adopted the Dispatch regarding the introduction in CISA of the new L-QIF. This newcomer has been designed to increase the attractiveness of Switzerland as a place of domicile for the establishment of funds. The L-QIF and its documentation (e.g., prospectus, partnership agreement, marketing material) will not require an authorisation, licence or a product approval by FINMA, which should in turn facilitate quick launch and cost-efficient structures.
Based on the current draft law, L-QIFs can be set up in the legal form of open-end structures such as the Swiss contractual fund or the SICAV, or as a closed-end structure, namely the Swiss LP (but not as a SICAF). Open-end structures will be required to have a depositary bank. This bank is subject to FINMA supervision and in addition to its safekeeping role, it assumes a control function. Investing in an L-QIF is restricted to 'qualified investors' within the meaning of CISA.
An L-QIF is a flexible product: no limitation in terms of investment possibilities or risk diversification is currently imposed by law. In practice, risk management and limited partners' demands will probably impose certain limitations. However, this flexibility will allow L-QIFs to invest in various financial instruments and strategies, in particular for private equity and venture capital investments but also in more exotic underlyings, such as infrastructure project, luxury goods, wine, art, etc.
Despite the fund itself not being directly supervised by FINMA, it has to be managed by a FINMA-licensed and supervised institution and to be audited. On the tax side, the L-QIF will not represent a revolution to the extent that L-QIF will not benefit from any preferential tax treatment compared to existing fund structures. In other words, the current Swiss tax framework will apply to L-QIF to the same extent it applies to other existing CISA-regulated vehicles.
The revised CISA is currently subject to Swiss parliament review. For the time being, the availability of the L-QIF is expected for early 2022, along with the entry into force of the revised CISA.
Overall, L-QIFs are a welcomed legal development that, associated with traditional Swiss assets such as stable political and efficient legal systems, measured tax regimes and skilled workforce, may offer good opportunities for structuring certain private equity investments.
1 Phidias Ferrari is a partner, Vaïk Müller is a senior associate and Pierre-Yves Vuagniaux is a partner at Tavernier Tschanz.
4 2019 figures (Invest Europe – European Private Equity Activity Report and Data 2007–2019).
5 It should be noted that the Cantons and the Swiss Confederation have implemented specific financing plans in 2020 for assisting start-ups amidst the covid-19 pandemic.
9 CISA also specifies for non-listed companies that the shares must be registered shares.
11 These templates have not yet been updated to take into the account FinSA and revised CISA requirements.
12 A two-year extension has already been observed and promoters are free to structure their extension (i.e., two times one-year extension or one time two-year).
13 Such generalisation corresponds to a legal formalisation of past case law of the Swiss Supreme Court.
15 A KID is required when a financial instrument is provided to a private (retail) client.
16 Where former rules and investor segmentation remain, in principle, applicable.
17 Unless funds units and shares or interests are provided or subscribed under a discretionary or advisory agreement, in which case even a private client may be considered a qualified investor (subject to certain conditions).