Financial sector stability: allowing the issue of CoCos in Switzerland
Berne, 24.08.2011 - Changes in withholding tax should allow Swiss companies to issue their bonds under competitive conditions in Switzerland. These changes would also apply to the newly created contingent convertible bonds (CoCos). Their issue in Switzerland ensures the application of Swiss law, thereby increasing the legal security of this instrument. At the same time, these changes should strengthen the security function in withholding tax. Today, the Federal Council approved a dispatch with corresponding measures for the attention of parliament. Initial measures in this vein were introduced within the scope of the bill on dealing with systemic risks of big banks ("too big to fail" or TBTF).
In the dispatch of 20 April 2011 on dealing with the systemic risks of big banks, the Federal Council submitted proposals to parliament on how financial sector stability could be strengthened. The package of measures is designed to prevent the state from having to use tax revenues in the future in order to bail out systemically important companies. So-called CoCos are one of the instruments proposed by the Federal Council to strengthen the capital base of banks. These are bonds that are converted into equity capital after a specific event occurs.
At the time, the Federal Council also proposed tax measures to promote the issue of bonds, and thus also CoCos, in Switzerland as well as to boost the Swiss capital market. In doing so, it decided on a staggered introduction of the tax measures. In a first step, on 20 April 2011, the abolition of issue tax on bonds and money market paper was proposed and issue tax exemption for participation rights stemming from the conversion of CoCos.
In the dispatch now available, amendments to withholding tax will be submitted in a second step. The goal of this is to enable bonds, including CoCos, to be issued under competitive conditions in Switzerland.
The tax environment applicable at present prevents the issue of bonds, and thus CoCos, under competitive conditions in Switzerland. The main reason for this is that the current withholding tax is levied by the issuer (so-called debtor principle) independently of the creditor's person on bond interest and thereby also affects tax-exempt institutional investors such as pension funds, for instance. This has led to the majority of Swiss companies issuing their bonds abroad and not in Switzerland. This entails additional costs for the companies and Switzerland loses tax receipts because added value is not created in Switzerland. In addition, the withholding tax fails partially in its security function because it is not levied on interest from foreign bonds, although this income is subject to income tax.
Against this backdrop, the Federal Council proposes switching from the debtor principle to the paying agent principle in the case of withholding tax on interest from bonds and money market paper.
In future, the Swiss paying agent (as a rule a bank) and not the issuer should levy the tax (so-called paying agent principle). The former knows its clients and is able to impose the tax depending on the creditor's person. In future, only interest payments to natural persons domiciled in Switzerland will be subject to the Swiss withholding tax but now this will also be the case for foreign bonds. Domestic and foreign investors who are not subject to income tax in Switzerland may be exempted from withholding tax. With the proposed amendments, withholding tax is aimed specifically at natural persons domiciled in Switzerland and thereby at securing Swiss income and wealth taxes. The paying agent principle is not a new concept. It already applies in the case of the taxation of savings income agreement with the EU and represents the technical basis for the bilateral final withholding taxes which are being sought with Germany and the UK.
The Federal Council is thereby pursuing three goals:
· Strengthening financial sector stability thanks to the possibility of being able to issue CoCos from Switzerland:
Legal certainty concerning CoCos is considerably increased when Swiss law is applicable, which is presupposed when they are issued in Switzerland. This is crucial in the case of looming insolvency so that CoCos can be converted into equity capital as smoothly as possible.
· Increasing the attractiveness of the country by stimulating the Swiss capital market:Due to the new tax framework, it will be possible for Swiss companies to issue domestic bonds and money market paper at internationally competitive conditions from Switzerland.
· Increasing tax equity by strengthening the security element of withholding tax:
According to current law, external financing using loans is carried out largely via foreign group companies (the debtor is not a Swiss national) so that the interest on these loans is not covered by the currently applicable withholding tax. This mechanism is to be abandoned, which will strengthen the security function of withholding tax and thereby the accurate levying of income tax and wealth tax.
The legislative amendments could come into force on 1 January 2013 at the earliest.
Address for enquiries
Franco Gennari,
Head of Securities and Financial Derivatives,
Collection Division,
Federal Tax Administration,
+41 31 323 08 58,
franco.gennari@estv.admin.ch
Johannes Münger,
Deputy Team Head, External Audit Division,
Federal Tax Administration,
+41 31 322 73 96,
johannes.muenger@estv.admin.ch
Publisher
The Federal Council
https://www.admin.ch/gov/en/start.html
Federal Department of Finance
https://www.efd.admin.ch/efd/en/home.html
