Weathering the storm

Given its low tax rates and financial talent, it’s no wonder that Switzerland is the fulcrum for international banking, hedge fund investment and commodity trading. As Chinese investors become increasingly sophisticated, Switzerland is keen on attracting a fresh crop of clients from the mainland.

We sat down with three partners at Swiss law firm VISCHER – Markus Guggenbühl, head of the banking and finance practice, Felix W. Egli, a lawyer specializing in corporate M&A, and Nadia Tarolli, co-head of the tax practice – to talk about the emerging dynamic between China and Switzerland, the impact of the European debt crisis and pressure for transparency at Swiss banks.

How did the trend of Chinese investors using Swiss banks develop?

Markus: With the opening of China toward the West and Europe, we have seen increasing interest from Chinese investors, particularly for support services for foreign investment. Using the Swiss banking system for large-scale precious metal deposits is popular, and we have also seen an increase in financing transactions. Chinese investors are interested in Swiss banks in Europe, but banks are also offering services in or near China.

Felix: The two largest Swiss banks, Credit Suisse and UBS, are rather established in China. Credit Suisse started a representative office in Beijing in 1985, while UBS launched its office in Shanghai in 1989. In the opposite direction, the Bank of China now has a branch in Switzerland.

What are the tax and regulatory benefits of structuring an investment through Switzerland?

Nadia: Switzerland has a broad treaty network. It has a tax treaty with China, in addition to about 85 other tax treaties with other countries. Therefore, investing directly in Switzerland has quite favorable tax possibilities, although it really depends on where the company or investment is located.

Felix: During a recent visit to China, I realized from my talks with Chinese attorneys and potential investors that people in China often confuse Switzerland with Sweden. I’ve time and again heard that Switzerland is not very attractive for direct investment because we’re a high-tax country with a very burdensome social security system. This is absolutely wrong. Switzerland, within the European context, is a low-tax country with a very reasonable social security system.

The US has launched high-profile investigations into Swiss banks for helping Americans evade taxes. How is Switzerland faring through that?

Felix: What is important to understand is that Switzerland for a long time maintained a distinction between tax fraud and tax evasion. Tax fraud is concealing assets and income with fraudulent tools, such as forged documents. Tax evasion is not reporting the entirety of an income or asset to the tax authorities; you do not forge anything. Upon proper request by prosecutors, Swiss banks have been obliged to disclose information on customers engaged in tax fraud but not tax evasion. This distinction still applies to Swiss taxpayers, but it has vanished entirely for clients from the US and most European countries because of their heavy pressure. But the distinction still applies with respect to other countries. One day we may give it up entirely, but Switzerland has not reached that point yet. With respect to automatic exchange of information, we believe that Switzerland will not give in to requests of the EU. However, what attracts money to Swiss banks is the political stability and financial health in Switzerland. This has nothing to do with tax evasion, but with the skill of Swiss banks to manage wealth.

How have current exchange rates impacted investment in Switzerland?

Felix: The biggest problem was the exchange rate of the euro to the Swiss franc. The debt crisis caused investors to seek a safe harbor in the Norwegian krone and Swiss franc. A lot of money flowed into Switzerland, to the point that the euro-Swiss franc exchange rate dropped to almost 1:1, which had never occurred before. It was alarming for the Swiss export industry, so the national bank established a target exchange rate of 1 euro to 1.20 Swiss francs. Since then, the Swiss-euro exchange rate has been stable, and the Swiss-US dollar exchange rate has dropped about 10%. Although it’s more reasonable, Swiss economists agree that the Swiss franc is still overvalued. It has been a challenge for our export industry, but they have managed thanks to their leadership in quality and technology.

Has the European debt crisis encouraged Swiss banks to go to Asia in search of new business?

Felix: The debt crisis has actually helped bring in money from Europe. If banks have to fear the debt crisis, then it is because they are invested in the bonds of weak European nations. But according to reports, the Greek, Italian and Spanish loan holdings of Swiss banks were relatively small; they were very careful in this respect. On the other hand, reports have also said UBS incurred heavy losses from US mortgage-backed securities in the American financial crisis. UBS had to turn to Asia for help. They soon found it in Singapore, which invested heavily in UBS equity, helping it survive that difficult period.