The Swiss domestic bond market virtually died after the Swiss Federal Stamp Tax Act came into force back in 1973. Swiss issuance stamp tax had to be paid on the issuance of bonds by, among others, a Swiss-resident company or the Swissregistered branch of a foreign-resident company. A recently implemented Swiss Banking Act Reform Bill, which mainly deals with the capital adequacy requirements and organisation measures to ensure the winding-up of systematically important banks, has now abolish the issuance stamp tax on loan and cash debentures. This new tax regulation came into force on March 1, 2012 and should boost the Swiss bond market. An initiative of the Swiss Parliament now aims to abolish stamp tax on equity issuances of Swiss corporates as well.
Compared with other European countries and especially with the US, the total nominal amount of debt securities issued by Swiss corporations is relatively small. Swiss companies are mainly financed by means of asset based lending. Loans of an amount exceeding CHF 250 million are mostly syndicated within the Swiss domestic banking market. Usually, such syndicates are arranged by Credit Suisse, UBS, or the Zurich Cantonal Bank and the participating banks are other Swiss banks only. Foreign banks are mainly active in syndicates exceeding CHF 1 billion either by their Swiss branch or more likely on a cross-border basis by their foreign head office.
Under the previous Swiss tax regime, the issuance of bonds by, among others, Swiss-resident companies and Swiss registered branches of foreign-resident companies triggers issuance stamp tax consequences. Additionally, interest payments are subject to withholding tax at a rate of 35 percent and the secondary trading of bonds is subject to a 0.15 percent security transfer stamp tax if a transfer of title in the bonds is effected for consideration and a Swiss securities dealer is involved as a party, or an agent to a party, to such a transfer. Debt securities, therefore, represented a relatively unattractive way for Swiss companies to raise money.
The issuance stamp tax has been strongly criticised during, and in the aftermath of, the financial crises of 2008. It has been argued that companies should be able to raise money at a reasonable rate on the capital market given the risk of a credit crunch resulting from the liquidity distress of the banks.
Back in September 2010, the Swiss Federal Government proposed to abolish the issuance stamp tax as part of the so-called corporate tax reform III package. The intention of this package was, inter alia, to provide alternative financing to asset based lending to Swiss companies and to strengthen Switzerland as a domicile for holding companies of international corporate groups. The abrogation of the issuance stamp tax has now flown into the Banking Act Reform Bill which was published on 20 April 2011. The Banking Act Reform Bill regulates the too big to fail (TBTF) banks in order to mitigate insolvency risks. How the new rules on TBTF banks and the abolition of the issuance stamp tax are linked with each other will be shown below.
III. Former Swiss issuance stamp tax regulation
Under the previous provisions of the Swiss Federal Stamp Tax Act, the issuance of bonds by, among others, a Swiss-resident company and the Swissregistered branch of a foreign-resident company is subject to the Swiss issuance stamp tax levied on the principal amount. An issuer is deemed to be a Swiss resident company if it has its statutory or legal domicile in Switzerland or if it is registered as a business establishment (e.g., a branch) in the domestic commercial register.
The stamp tax legislation’s definition of bonds was broader than the one in securities legislation. It also exceeded the scope of what is considered as a debenture in trading and in the banking business. According to the rules applicable for Swiss stamp tax purposes loan debentures (Anleihensobligationen) and cash debentures (Kassenobligationen) need to be differentiated.
A. Loan debenture
A loan debenture is deemed to exist if there are more than 10 creditors (whereby Swiss banks (within the meaning of the Swiss Federal Banking Act) and foreign banks (within the meaning of the banking legislation in effect at their respective place of incorporation) are not taken into consideration), the loan amount is at least CHF 500,000 and there are identical loan conditions referring to one loan agreement only (including syndicated loans). The identical conditions test is met if the debt instruments are linked together through uniform terms of interest, term and repayment conditions or because of other circumstances under which they appear to form part of one whole debenture.
B. Cash debenture
Cash debenture means raising money from more than 20 creditors (whereby Swiss banks (within the meaning of the Swiss Federal Banking Act) and foreign banks (within the meaning of the banking legislation in effect at their respective place of incorporation) are not taken into consideration) against issuance of recognition of debts on a continuous basis at differing terms. As per the loan debenture, the aggregate principal has to be equal to or exceeding CHF 500,000. A cash debenture does not require that the debt instruments are issued at identical terms and conditions however.
In June 2010, the Swiss government partially revised the Swiss Federal Stamp Tax Ordinance whereas debts between group companies do not qualify either as loan debentures or as cash debentures and therefore do not count towards the thresholds mentioned above, provided that the Swiss company does not act as guarantor under a bond issuance or a syndicated loan towards a respective foreign group borrower. Such a revision became effective on August 1, 2010.
Issuances of loan and cash debentures as described above used to be subject to Swiss issuance stamp tax at the time of the issuance of the bond. The applicable tax rates were 0.12 percent (for loan debentures) and 0.06 percent respectively (for cash debentures) of the par value for each year of the maximum term of the loan.With respect to money market papers, i.e., bonds with a term of a maximum period of 12 months, stamp tax in the amount of 1/360 of 0.06 percent of the face value was due for each day until legal maturity. It is noteworthy that the issuance of equity capital is charged at an even higher rate of 1 percent on the value of the shares exceeding CHF1m. The issuance of shares instead of debt instruments to raise money is therefore no alternative from a cost point of view. As stated above, the Swiss parliament has taken up an initiative to abolish stamp tax on equity capital in the near future.
IV. Banking Act Reform Bill to abolish issuance stamp tax
In December 2010, the Swiss Federal Government has, in the context of the TBTF discussion regarding systematically important banks, proposed a Banking Act Reform Bill. This reform bill basically requires systemically important banks to hold more capital, meet more stringent liquidity requirements, improve their risk diversification and provide for organisational measurement which would allow a winding-up in case of an insolvency.
In terms of the risk-weighted assets, the Banking Act Reform Bill requests Swiss TBTF banks to hold an equity capital of up to 19 percent of the risk-weighted assets. Nine per cent of the risk-weighted assets may consist of contingent convertible bonds issued on the capital market. To cushion the costs of the TBTF banks resulting from these very stringent capital requirements, the new legislation has also abolished the issuance stamp tax for:
- the participation rights stemming from the conversion of continent convertible bonds; and
- the issuance of any loan and cash debentures in general.
The latter applies on all issuers (not TBTF banks only) in order to avoid any distortion of competition between TBTF banks and other financial and nonfinancial institutions in respect to fundraising. Hence, the Banking Act Reform Bill which has been set into force per March 1, 2012 has enabled all sorts of Swiss companies to finance themselves on the bond markets at much lower costs than is currently the case. We also welcome the abolition of the issuance stamp tax from another aspect. The more stringent capital requirements will increase the cost of the lending business on TBTF banks. In a syndicated loan transaction, the TBTF banks will most likely pass on these costs to the borrower, while enhancing the interest rate. The abolition of the issuance stamp tax is, therefore, to some extent only compensation as it supports the money rising on the bond market as a valid alternative to the common assets based lending.
V. Existing favourable regulation on bond issuance – private placement vs. public offering
As of today, the Swiss legal and regulatory environment for the issuance of bonds is already very favourable and no specific amendment of the current situation is required. Whenever notes are submitted for public subscription in Switzerland, the issuer must prepare a prospectus that is compliant with the Swiss Code of Obligations (CO). In the event of a private placement, no prospectus will be required. In any case, the prospectus or the offering documents will neither have to be registered, nor will need approval by any authority.
The following three requirements will have to be fulfilled in order to trigger a prospectus requirement.
The notes have to be:
- newly issued; and
- to be offered for subscription to investors; by
- a public offering.
Should the bonds have already been issued in the primary market (i.e., subscribed by a bank) and should now be placed on the secondary market, the first requirement is not fulfilled. According to the majority of the legal doctrine in Switzerland, any placement of bonds on the secondary market does not require a prospectus. A prospectus is only required in case the notes are offered to the public. Neither of the terms ‘public offering’ or ‘public subscription’ are defined in the CO. However, the CO states that any invitation for subscription is deemed public unless addressed to ‘a limited group of persons’ only. It has been argued that the offering must be made to a minimum number of investors in order to qualify as a public offering, in particular, to more than 20 investors. According to the more recent doctrine, such a specific number as safe harbour is arbitrary; the determination of public offering should rather be based on qualitative than quantitative criteria (e.g. on the basis of a pre-existing relationships). Unfortunately, there is no bright-line test for such threshold and a Swiss court would decide on a case-by-case analyses whether the conditions for a private placement are met.
In the event that a prospectus will be required, i.e., in view of a listing on the SIX Swiss Exchange (SIX) (the main Swiss stock exchange), it has to contain the following information:
- the content of the issuer’s entry in the respective commercial register;
- the amount and structure of the issuer’s share capital;
- the most recent audited statutory and consolidated financial statements of the issuer and, if the closing balance sheet is more than nine months old, interim financial statements;
- the issuer’s dividend history for the five years preceding the issuance;
- the issuer’s resolution regarding the issuance of the debt securities; and
- specific details on the terms of the debt securities (i.e., maturity, early redemption provisions, interest payment, security and representation of the noteholders).
In the event that a prospectus has not been prepared or does contain statements that are untrue, or in the event that the prospectus is not in compliance with the mentioned information requirements, the persons who have wilfully or negligently participated in the preparation of the prospectus are jointly and severally liable for the damage caused thereby. The investor bears the burden of proof that false or misleading statements or missing information caused the damage suffered and that the defendant responsible for such statements acted intentionally or negligently.
VII. Listing of the bonds on the SIX Swiss Exchange
Should the issuer already be recognised by the SIX, the regulations of the SIX allow for a time to market in respect of bond issuance of three days only. The applicant must submit the listing application to the SIX using its internet based listing tool which spells out the terms and conditions of the respective bond. Admission to provisional admission can occur at the earliest three exchange days after submission of the application. The issuer is afterwards required to submit a formal listing application together with the signed prospectus within two months following the provisional listing in order to ensure that the security can be definitively listed on the SIX. SIX requires in its regulation a catalogue of additional information which will have to be included into the listing prospectus but which does not derive from the international standard.
VIII. Trend and outlook
The recent abolition of the Swiss issuance stamp tax on bonds paired with the already existing favourable legal and regulatory environment on bond issuance and placements for both Swiss and foreign issuers may stimulate the Swiss bond market in the close future. The financial crises and the tighter regulation of the financial sector have recently forced the Swiss TBTF banks to implement covered bond programmes (backed by Swiss residential mortgages) and one of the two big banks has lately issued a CHF 6 billion contingent convertible bond qualifying as tier 1 buffer capital notes under the Basel framework. A couple of ABS transactions have been arranged by Swiss originators during the first term of 2012 which also profited from the abolition of the issuance stamp tax. The Swiss bond market will significantly benefit from the abolition of the issuance stamp tax and that the mentioned bond issuances of the banks only anticipate the positive trend on the Swiss bond market.