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Swiss case law pressures offshore companies to reinforce operations

Tuesday, December 10, 2013
Opalesque Industry Update - From Laven Financial Services: On 16 May 2013, the Swiss Federal Supreme Court decided that the effective place of management of a finance company established in Guernsey was actually in the Canton of Zug. As a consequence, the finance company was found to be liable for direct taxes in Switzerland since its incorporation in 2002.

The decision confirms substantial uncertainties for offshore corporate structures with a Swiss link. Asset managers and other financial companies (such as funds or holding companies) dealing with Swiss companies should take note of the findings of the case. Though the case has not reinvented the way Swiss authorities perceive offshore companies, it further substantiates previous cases (such as that of a BVI parent company on 4 December 2003). It also emphasises what has generally been known before, without having been fully tested in the Swiss courts.

Operating Business Management

One of the key points to take away from the case was that of effective place of management which refers to day-to-day operating business management. The case found that an offshore company must have adequate operating business management which is separate from high-level management and purely administrative activities. Therefore, though board meetings may be conducted offshore by a majority of non-Swiss residents on the board, this would no longer be sufficient to ensure the effective place of management is outside Switzerland. The same would apply even with the addition of corporate secretarial work being carried out offshore.

As was the case with the 2003 BVI company, the 16 May decision found that Swiss residents should not have signing authority on the bank accounts of offshore companies and they should also not have indirect access, e.g. by way of electronic banking systems or credit cards etc.


The case also focused on the specific circumstances of the finance company’s local infrastructure. The federal judges made use of a set of criteria to conclude on the lack of substance which included insufficient human infrastructure characterised by only two part-time employees with low wages. The court also found that there was insufficient technical infrastructure characterised by low office rent, office sharing with other offshore companies and low telephone costs.

The case could have large implications for Swiss linked international companies. It calls for an immediate assessment and reinforcement of local functions for qualified and senior employees. In the case of a financial services company, this may include a reinforcement of functions related to risk, asset management supervision and compliance. It may also include more staff, more full-time employees and real private offices.

What next for offshore companies?

The decision is helpful as it gives more indications on the criteria that are decisive for a company to be deemed as having its effective place of management in its country of incorporation. It does suggest, however, that some companies will need to review how they operate. Companies should also, according to the decision, review their corporate documentation to strengthen their offshore substance and ensure that what takes place abroad is a legitimate commercial operation.

In our White Paper Series on How to Run Offshore Management Companies and Funds with Substance and Corporate Governance we have addressed the main elements of how an offshore company should be managed from an operational and fiscal point of view. With the tightening grip of tax authorities around the world – one only needs to look at this year’s initiatives from the G8 and G20 Summits, tax cooperation agreements, the OECD Action Plan – all financial services businesses should proactively assess their structures. The days where a company could have a majority of offshore directors without the need to care too much about actual operational substance supported by fully engaged corporate governance are gone.


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