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Improved Conditions for Swiss Bond Issues
In September 2011, the Swiss parliament passed the 'too-big-to fail' (TBTF) bill which entered into force on 1 March 2012. The reform bill foresees four core measures for systemically important banks:
tighten regulation on capital base,
meet more stringent liquidity requirements,
improve risk diversification and
provide for organisational measurements to ensure the maintenance of systemically important functions in the case of threatened insolvency.
In terms of capital, the TBTF bill requires systemically relevant banks to hold an equity capital of at least 19% of the risk weighted assets. Nine percent of the risk weighted assets may consist of contingent convertible bonds (CoCos) issued on the capital market. CoCos are considered debt capital, but will automatically be converted into equity (shares or participation certificates) as soon as common equity falls below a defined ratio. Taxand Switzerland explores the impact the TBTF bill will have on the Swiss bonds market.
Amendments to the Swiss domestic tax framework were thought necessary in order to prevent Swiss banks from issuing their CoCo bonds in a foreign jurisdiction, and to increase Swiss competiveness in the international bond market. The tax issues thought to be discouraging the issuance of bonds in Switzerland were: the stamp duty on the issuance of the newly introduced CoCo bonds; the stamp duty on the issuance of new shares upon conversion of the CoCo bonds into equity; and the Swiss withholding tax burden of 35% on interest of Swiss bonds.
The tax measures connected with the TBTF bill have been separated into two packages:
The abolishment of issuance stamp duty on debt instruments, and on participation rights upon the conversion of CoCos, which came into effect as of 1 March 2012
Fundamental changes with regard to Swiss withholding tax in relation to interest payments on bonds and debentures.
As a result of the amendments to the Swiss stamp duty act implemented on 1 March 2012, the issuance of stamp duty on debt instruments has been abolished, including on bonds, debentures, money market papers and loans that would be considered as bonds according to the FTA's practice. Furthermore, the issuance of participation rights issued upon conversion of a CoCo bond is no longer subject to Swiss issuance stamp duty.
Even though amendments to the Swiss stamp duty act are part of the TBTF bill, the abolishment of issuance stamp duty on debt instruments is applicable to all issuers of bonds and notes (and is not limited to TBTF-banks). This measure aims to increase the attractiveness of the Swiss financial market for any domestic debtor considering the issuance of a bond in Switzerland, and to lower the fiscal hurdles for inter-company financing through treasury centers in Switzerland. Furthermore, a possible distortion of competition between TBTF-banks and other institutions in respect of financing activities should be avoided, providing any Swiss company with the advantage to finance itself on the domestic bond market at lower costs.
In contrast, the abolishment of the issuance stamp duty on participation rights issued upon conversion of CoCo bonds is clearly only a measure for Swiss banks. Any other issuance of participation rights still remains subject to Swiss issuance stamp duty of 1%.
On 24 August 2011, the Federal Council proposed fundamental changes to Swiss withholding tax in relation to interest payments on bonds and debentures. The newly proposed regulations are designed to change the current system for interest paid on bonds and debentures by switching from the so-called debtor principle, to the 'paying agent' principle. Furthermore, Swiss corporate and non-Swiss resident investors would, according to the proposed changes in general, be excluded from the scope of Swiss withholding tax. On the other hand it is intended to broaden the scope of Swiss withholding tax with regard to Swiss individual resident investors, by imposing Swiss withholding tax on bonds and debentures issued by foreign issuers.
In its spring and summer sessions 2012 the Swiss parliament debated the proposed changes to Swiss withholding tax. The parliament decided to reject the draft legislation and return it to the Federal Council for further refinement. However, to enhance the issuance of CoCos the Swiss parliament decided to introduce a separate legislation with regard to withholding tax on interest payments on CoCos only. The separate legislation foresees a general exemption of interest on CoCos from Swiss withholding tax for issues within four years of implementation of the change of law. The separate legislation exempting interest payments on CoCos from Swiss withholding tax will enter into force on 1 January 2013. Exempting interest on Swiss CoCo bond issues from Swiss withholding tax is a big step for the Swiss parliament and a step in the right direction. The new legislations enables Swiss issuers of CoCo bonds to offer these bonds at competitive conditions and will even put them in an advantage over other Swiss bond issuers as long as interest on other Swiss bonds and debentures are still subject to Swiss withholding tax.
However, the fundamental legislation changes regarding the Swiss withholding tax system, proposed by the Federal Council, have been further postponed and will not enter into force on 1 January 2013 as originally planned. The Federal Council is to elaborate on the issues presented by the Swiss parliament before coming up with a new draft legislation on a comprehensive reform of the Swiss withholding tax system.
Amongst others, the parliament has asked the Federal Council to clarify and align the reform with other taxes at source, such as the EU savings tax, FATCA and the new retention tax regimes to be implemented under the treaties with the UK, Germany and Austria. The parliament also criticised that a partial remodelling of the Swiss withholding tax system confined to bonds and debentures, without considering distribution on equities, bank deposits and investment funds, would complicate the Swiss tax system further and would lead to inconsistencies. In our opinion a fundamental change of the Swiss withholding tax system is long due but should take into account all aspects and all income on financial instruments currently subject to the tax. The proposed exemption of non-Swiss residents from Swiss withholding tax on bonds and debentures is a step in the right direction, as with regard to non-Swiss residents securing tax-compliance is not a core-function of Swiss withholding tax.
It is expected to take some time until a comprehensive remodelling of the Swiss withholding tax can finally be expected. However, a comprehensive change of law is undoubtedly preferable to a hasty and inconsistent solution.
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