Despite its relatively small size, Switzerland is home to several large and well-established international companies, spanning a diverse range of industries. These include major banks such as Credit Suisse and UBS, large insurance and reinsurance corporations such as Zurich Insurance and Swiss Re, and food and beverage, healthcare and biotech companies such as Nestlé, Novartis and Roche. It also includes mechanical and electrical engineering companies specialising in high-technology, knowledge-based production such as the Swatch Group and ABB. In addition, tourism plays an important role for Switzerland’s economy. While Switzerland has large global companies, most businesses are small or medium-sized, and many of them specialise in niche machinery and high technology. Switzerland is one of the world’s most competitive economies, thanks to its large and well-established corporate base, exceptional infrastructure and highly skilled employees. Its economic and political stability, comparatively flexible labour market, transparent legal system, efficient capital markets and low corporate tax rates also play a part.
The negative effects of the sharp rise in the value of the Swiss franc resulting from the Swiss National Bank's lifting of the minimum exchange rate in mid-January 2015 started to diminish in 2016 and the Swiss economy showed signs of a slow recovery with GDP growth of 1.3% in 2016. Because of the weak performance in the first half of the year, the Federal Government's Expert Group on Economic Forecasts anticipates only moderate GDP growth of 0.9% in 2017. It expects that growth will quicken in 2018, resulting in GDP growth of 2.0%.
Market developments in 2016/2017
Mergers & acquisitions
The Swiss private M&A market remained at a high level in 2017 in terms of the number of transactions. Transaction values, however, were lower overall. A notable number of M&A transactions involved private equity partners. Public takeover activity continued to be very strong in 2017, with the most noteworthy transactions being the USD30 billion acquisition of Actelion by Johnson & Johnson (completed in June 2017), the USD43 billion acquisition of Syngenta by ChemChina announced in 2016, and the proposed acquisition of gategroup Holding by HNA Aviation. In addition, the ongoing takeover battle for Sika, following the Burkard family announcing their intention to sell its 16% stake (with 52% voting rights) to Saint-Gobain, continues to be a major attention point.
During the first three quarters of 2017, the Swiss IPO market was strong, with an aggregate issue volume of more than CHF4.5 billion. In the third quarter, SIX Swiss Exchange accounted for the second largest IPO volume in Europe. The largest Swiss IPO in the first three quarters of 2017 was energy management company Landis+Gyr (CHF2.3 billion), followed by pharmacy chain Galenica (CHF1.9 billion). Other transactions included the IPO of online pharmacy Zur Rose and the spin-off of biopharmaceutical company Idorsia from Actelion after Johnson & Johnson’s takeover. The Swiss market has also been active in terms of rights offerings. The largest transaction was Credit Suisse's CHF4 billion transaction. Other rights offerings included life science company Lonza's CHF2.3 billion issuance. The Swiss public securitisations market continued to develop in 2017 with the CHF297 million inaugural SIX Swiss Exchange listed auto lease transaction by Emil Frey Group company Multilease in April, followed by a second transaction in November.
Pre-eminent key political and legal topics discussed in the Swiss economy in 2016/2017
Corporate tax reform
Switzerland has been undergoing major corporate tax reforms. The so-called third corporate tax reform package proposed by the Swiss Federal Council intended to abolish certain tax advantages for holding, domiciliary and mixed companies pursuant to an agreement with the European Union as well as implementing tax advantages deemed in line with EU rules.
The third corporate tax reform package hit a political roadblock when voters rejected it in a referendum with an unexpectedly high proportion of 59.1% of the popular vote in February 2017. While the Federal Council announced its intention to propose a new reform package as soon as possible, the referendum added a lot of uncertainty in part because it is unclear whether a new package will be in place within the timeframe agreed with the EU.
Withholding tax reform
Another troubled Swiss tax reform project relates to withholding tax. Currently, a Swiss issuer of bonds must deduct a withholding tax of 35% from interest (and certain other) payments made to investors inside and outside of Switzerland (debtor-based regime).
Because it may be difficult for investors outside Switzerland to reclaim Swiss withholding tax, the current system makes it impracticable for Swiss issuers to directly access investors outside Switzerland. This had a material adverse effect on Swiss capital markets for decades. To address this issue, the Swiss Federal Council published in December 2014 draft legislation to, among other things, replace the current debtor-based regime with a paying agent-based regime for Swiss withholding tax, where a withholding would be required only for Swiss investors. The Federal Council withdrew the draft legislation in June 2015 and mandated the Swiss Federal Finance Department to appoint a group of experts to prepare a proposal for reform of the Swiss withholding tax system. Because of a popular initiative to enshrine banking secrecy in the Swiss constitution, the project of the group of experts has been put on hold in 2015 pending the results of the popular vote. To facilitate compliance by banks with the tougher capital requirements under Basel III prior to the reform of the Swiss withholding tax system, the Swiss Federal Council exempted contingent capital instruments and bail-in bonds from the withholding tax until 2021.
It is expected that its sponsors will withdraw the banking secrecy initiative in early 2018. Once withdrawn, the Swiss Federal Council and the group of experts would recommence the withholding tax reform project. Once recommenced, the implementation of the reform is expected to take about two years.
Cross-border banking and banking secrecy
Swiss cross-border banking, banking secrecy and data protection laws have come under increased pressure from individual neighbouring countries, the EU, the USA and international institutions in recent years. The Swiss Federal Council, in autumn 2012, adopted an overview of financial market policy that is still being implemented. In particular, Switzerland has accepted OECD standards on administrative assistance in tax matters and, as a consequence, has renegotiated its double taxation treaties with numerous countries. On 1 January 2017, the Swiss federal act on the international automatic exchange of information in tax matters entered into force, and Swiss banks have since been collecting information that will be exchanged starting from 2018.
Cross-border investigations involving Swiss banks
With respect to the US client legacies of Swiss banks, a key area of concern in previous years has been the US Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (published on 29 August 2013) that enabled Swiss banks to resolve certain US-client-related legacies with the US Department of Justice in a defined framework. In light of the ongoing co-operation duties of the participating Swiss banks, the still-unresolved investigations against some of the banks against which the US DOJ had authorised formal investigations prior to the announcement of the US Program ("Category 1 Banks") – as well as potential further investigations against individual bank employees – the US client legacies of Swiss banks will remain an attention point at least until 2019, when the four-year co-operation period under the non-prosecution agreements end.
In addition, a number of ongoing large-scale international regulatory, criminal and civil investigations – such as those related to the Malaysian Sovereign Wealth Fund 1MDB and FIFA – will continue to occupy a number of Swiss banks and their employees throughout 2018.
New financial market legal architecture
In 2017, the Swiss financial markets' legal architecture continued its significant transformation. The aim of this legislative initiative is to increase investor protection and to harmonise Swiss regulations with existing and upcoming EU regulations.
As a first cornerstone of the new Swiss financial market architecture, the new Financial Market Infrastructure Act (FMIA), together with its executing ordinance, came into force on 1 January 2016. In December 2016 and September 2017, respectively, the two chambers of Swiss parliament discussed the proposed new Financial Services Act and Financial Institutions Act. It is expected that the reconciliation between the two chambers of parliament will be finalised by summer 2018 and that the new rules will enter into force in 2019.
The proposed Financial Institutions Act would implement new rules regarding the supervision of financial services providers, including asset managers and trustees that are currently not subject to supervision.
The proposed Financial Services Act includes new rules regarding the provision of financial services and the distribution of financial instruments (except for insurance and insurance products, which are excluded). One of the aims of the new rules is regulatory harmonisation with relevant EU rules (e.g. MiFID II/MiFIR, Prospectus Regulation, PRIIPs Regulation). The proposed Financial Services Act also includes a new prospectus regime that would introduce a number of novelties for issuers of securities in the Swiss market, such as the requirement for a prospectus for secondary public offerings, and an ex-ante prospectus approval requirement, subject to certain exemptions.
Additional key developments under Swiss law published or entering into force in 2017/2018
On 15 September 2017, the Federal Council published a draft bill to amend the Swiss Data Protection Act, aligning the Swiss data protection rules to the revised EU rules, in particular the General Data Protection Regulation (GDPR). The final text of the revised Swiss Data Protection Act as well as the date of enactment of the new law are not yet available.
Tax law (VAT/BEPS)
On 1 January, a revised Value Added Tax Act enters into force. Under the revised law, a company's global turnover will now be decisive for mandatory tax liability (instead of turnover in Switzerland). Companies whose global turnover is at least CHF100,000 will be liable to VAT from the first franc of turnover in Switzerland. Previously, foreign companies could provide their services in Switzerland without VAT up to a turnover level of CHF100,000. New mail-order regulations will enter into force on 1 January 2019, with a delay of one year. As from 2019, mail-order companies will be liable to tax if their annual turnover from small consignments that are import-tax-free is at least CHF100,000. Such mail-order companies will themselves bill customers for VAT. In return, the customers will no longer have to pay the taxes and fees levied by Customs upon importation.
In addition, as from 1 January 2018, the general VAT tax rate is reduced to 7.7% (from 8%).
On 7 June 2017, Switzerland signed the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. As of 1 December 2017, the Swiss Federal Act on the International Automatic Exchange of Country-by-Country Reports of Multinationals (CbC Act) entered into force, forming the legal basis for the exchange of country-by-country reports as one of the global minimum standards of the base erosion and profit shifting (BEPS) project.
Insurance and reinsurance companies
On 1 July 2015 a partial revision of the Swiss Insurance Supervision Ordinance (ISO) entered into force, focusing on solvency (e.g. the discontinuation of Solvency I), qualitative risk management, and disclosure and reporting. In addition, the ISO revision introduces more flexible rules on the treatment of hybrid instruments for regulatory capital purposes. Based on the partial revision, a first set of new and revised circulars entered into force on 1 January 2016. The second and final set of new and revised circulars were published by FINMA on 15 December 2016 and entered into force on 1 January 2017. This second package comprises a new circular on business plans for insurers, a revised circular on corporate governance, a revised circular on the Swiss Solvency Test (SST) and a revised circular on the responsibilities of actuaries.