Filed under: Switzerland
We recently posted an article about Switzerland being the ‘Pied Piper’ of the financial markets with their attempt to lull fund managers over to the shores of Lake Geneva. It looks like the Times has picked up on the potential for the Swiss to clean up in the high stakes game of ‘Tax Musical Chairs’.As we have said previously the mobile nature of funds and their managers makes a quick skip over the channel an easy issue to deal with and the latest 80% affective tax hike on capital gains in the UK has the Swiss licking their lips.
Switzerland has, over the years, lost out to other jurisdictions and has become less of a tax friendly center than many believe. The ‘forfeiture’ tax (where tax is calculated on the monthly rental value of your property and timesed by 5) is really only affective for the super wealthy, as someone under this tax structure is forbidden to work in Switzerland.
However, times they are a changin. On personal capital gains in Switzerland there is no tax at all, so you can happily invest in stocks, hedge funds and whatever you want, safe in the knowledge that your capital gains are all yours. The problem occurs when it is not a ‘private gain’. Basically ‘carried interest’ in funds are taxed as income and will hit you in the wallet but Mr Derobert of the Geneva Private Bankers Association is optimistic that an agreement to change this rule will be made and describes Switzerland as ‘Capital Gains Tax paradise’. In our opinion, if this happens then it would make sense for fund managers to set up home here.
The consequences of the latest tax hike for the Tax Reich in the UK has also affected the 90 day rule. Whereas before, the day of arrival and departure was not included for the 90 day rule, it now is, at least from next April. This is seen as a direct attack on groups such as the ‘Monaco Boys’ so called because of their routine of living in Monaco, paying no tax but working in the UK for most of the week. Under the previous rule a work week of Monday to Thursday would have only counted as two days for tax purposes, it now counts as 4.
I assume that someone in the UK Tax Reich thought that if they changed this rule everyone would come scampering home and make peace with the Tax Man and take it as a slap on the wrist from the Nanny State.. They obviously do not realise what they are up against.
I only go to London when I have to. Under the old regime I may have stayed three days at a time, spending money in hotels restaurants and bars while I work my stay, bringing revenue to the capital, as many other people do. They and I will now just get the earliest flight in and the latest flight out and get what I need to have done in a day, the rest I will do on the phone, if necessary.
John Carver, a tax partner at KPMG Switzerland, says that ‘There are thousands of people who commute from Zurich to London on Monday morning and return Friday evening. Banks may decide it is cheaper to keep those departments in Zurich than pay the tax for their executives”.
It will only take one straw to break the camel’s back of the daily nightmare that is London. The transport is atrocious the airports are a nightmare and the crime is ridiculous, maybe the tax hike is just enough to kill people’s love of the City. I left the City 4 years ago, for me the red tape, stealth taxes and general feeling that I wasn’t getting my money’s worth for the tax I paid, eventually lead me to packing my bags. I have to say, I do not regret it for a moment. I suspect that many will be following…
As one of the world’s biggest hedge fund buyers it is odd that only a handful of hedge fund managers are located in Switzerland. Of the estimated $600bn invested in funds of hedge funds $200bn comes from Switzerland making it second only to the USA.The Swiss authorities, according to a recent report from the Federal Banking Commission (EBK), is looking at making it more attractive for hedge fund managers to locate themselves in Switzerland.
“What is lacking still is an attractive tax environment for hedge fund managers to locate here,” said EBK director Daniel Zuberbuehler in reference to the report.
“If we wanted a level playing field, we would have to tax the managers at the same level as competing financial centres, not undercut them,” he said.
The EBK welcomed changes to make Switzerland more tax-friendly to hedge fund managers, saying it would be good for the Swiss fund sector overall, but it was a political decision.
Of the 9,500 hedge funds assumed to be in operation, only 40 or 50 hedge fund managers are based in Switzerland which seems at odds with the amount of money that is invested via Switzerland.
The EBK, however, may be missing a point and that is that regulations, as we understand them, presently only allow for the marketing of fund of hedge fund products from or within Switzerland.
The relevant legal framework as regards to hedge funds is the Collective Investment Scheme Act 2006 (CISA). The Act sets out a framework governing the setting up of Swiss mutual funds and the promotion of non-Swiss collective investment schemes in Switzerland. This piece of legislation shows other reasons than tax, as to why hedge fund managers may be staying away from Switzerland.
The Act only allows for the establishment of collective investment schemes having a contractual form (i.e. fonds com-mun de placement – FCP). With this is the requirement for a Swiss management company to be licensed by the EBK. The relevant legal and regulatory framework imposes strict rules to Swiss funds, in particular with regards to investment restrictions, such as leverage, risk spreading rules and limited leverage. It is obvious that these particular rules are at odds with the whole strategy of hedge fund investment.
Fund promoters have, therefore, looked into ways to distribute their offshore hedge funds in Switzerland. In generally no professional offer of a fund is allowed in or from Switzerland without the prior registration of the scheme with the EBK. In practice, registering a hedge fund in Switzerland is a non starter.
Registration is only available to a non-Swiss fund that has been set up in a jurisdiction which has an ‘equivalent’ level of supervision and investor protection as offered under the Act.
If you have set up your fund in BVI, Cayman etc then you are out of luck because these jurisdictions do not qualify. Also registering under the act would require the compliance with the investment restrictions, limited leverage, risk spreading etc, which a hedge fund would not be able to comply with.
If the Swiss Authorities are trying to attract hedge fund managers into the country then it is these laws that need to be dealt with. Hedge fund managers need to be able to have nimble structures that allow them to invest in pretty much anything they want, this is the reason that this particular type of investment is risky, and historically profitable for many. A manager does not want to set up shop in Switzerland and worry about the promotion of the fund, the risk spreading rule, leverage and all the other stuff that goes along with it.
Switzerland is a fantastic place to do business, there is no question about that. It feels to me like a country built specifically for people in our industry. It is hot in the summer, there is skiing in the winter, if you pay your taxes, the authorities will leave you alone, the people are fantastic, everything works, trains are on time, etc etc. There is a reason that half the Formula 1 grid lives here, past and present and its not just the taxes, or everyone would live in Monaco.
Having said all that, it is clear from the rules that are imposed on funds marketed or established in Switzerland, that until this particular piece of legislation is reviewed there will not be an influx of hedge fund managers anytime soon.
I have taken the information above from various sources. If anything is incorrect please free to contact me and put me right…
