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Laven Partners On How Swiss Case Law Pressures Offshore Companies To Reinforce Operations

Tom Burroughes, Group Editor , London, 11 December 2013

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The issue of where a business operates on a day-to-day basis, which is an essential point in deciding tax issues, was highlighted in a recent ruling by a top Swiss court and the decision should force some firms to consider where they are based, argues Laven Partners, the consultancy.

The issue of where a business operates on a day-to-day basis, which is an essential point in deciding tax issues, was highlighted in a recent ruling by a top Swiss court and the decision should force some firms to consider where they are based, argues Laven Partners, the investment consulting company.  

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 that offshore corporate structures with a Swiss link face considerable uncertainties, Laven Partners said in a note.

“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,” it said.

“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,” Laven Partners continued.

“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,” it said.

Signing authority

Laven Partners pointed out that 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, such as by way of electronic banking systems or credit cards etc.

“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,” it said.

Laven Partner said the Swiss court’s ruling is helpful by giving more idea about what criteria are decisive in working out where a company’s “effective place of management” actually is.

“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,” it said. “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,” it added.

 

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