Playing by the rules

Funds domiciled in Switzerland, which would be captured under the pending AIFM directive’s third-country rules, face a hazy future as the country struggles to understand what EU regulators will demand of foreign fund managers.

It is accepted by now that the European Parliament’s draft version of the AIFM will require non-EU countries, such as Switzerland, to implement a regulatory regime of equivalent calibre to the EU, but what constitutes “equivalency” is still up in the air.

Switzerland, unsure of where it stands in the directive’s requirements for third countries, but aware a number of its fund structures on offer will likely be caught in the directive’s net, has nonetheless taken action which will decrease the risk of being shut out from Europe’s markets.

Switzerland: Trying to find its
place in Europe's new regulatory
environment.

More specifically, the country has successfully avoided the Organisation for Economic Co-operation and Development’s crippling “tax haven” label by agreeing to greater transparency measures and more effective information exchange agreements in cases where “a  specific and justified request has been made” for information regarding a potential tax offence. 

Switzerland could perhaps be taking its cue from recent Parliamentary discussions which have indicated the need for cooperation agreements to be in place, such as tax information exchange agreements.

However, the final language of the directive may call for much more. Whether Switzerland will have to meet other “equivalency” criteria, such as depositary guidelines, reporting requirements and remuneration stipulations for example, will be seen in the weeks to come.

Switzerland is currently unable to meet reporting requirements under the Council draft of the directive which calls for managers to report on a fund’s liquidity arrangements, risk profile, categories of assets invested, any use of short selling and results from stress tests, according to the Swiss Private Equity & Corporate Finance Association’s annual yearbook report.

The report stated Switzerland is in need of further regulatory reform, as the information reporting requirements – under the current Council draft – are vast and for Switzerland would “mean a level of regulation required locally as a channel for this information to meet the requirements of Europe.”

Whether or not Switzerland is able to meet the directive’s requirements before it becomes fully effective sometime within the next couple of years is uncertain, but one thing for sure, however, is that Swiss domiciled funds will face an increased level of regulation relative to years past if they want to play by EU rules. 

SWISS BLISS

As the AIFM directive threatens to dampen the appeal of Switzerland as a fund domicile, the Swiss government is taking action to remain a competitive source of investment.

Most notable is the government’s creation of collective investment schemes (CISA) introduced in 2007. The vehicles are intended to help reposition Switzerland as an international hub for investment funds, taking back some of the market share lost to Luxembourg and other tax havens since the mid-1980s.

However, the vehicle’s appeal has remained limited due to the uncertainty concerning the government’s treatment of tax on carried interest as well as capital gains realized by Swiss resident fund managers.

“The industry still awaits a clarifying circular from the Swiss Federal Tax Administration (SFTA),” says Stephan Erni, an associate at Swiss law firm Lenz & Staehelin, in an interview with PEI.

Erni adds that while the SFTA has not yet issued a circular, there are certain indications Swiss tax authorities will effectively treat a manager’s capital gains on the vehicle as tax free. However, doing so, Erni adds, is quite difficult at the moment because politicians are hesitant to give the out-of-favour financial sector any good news so soon after the financial crisis, putting the vehicle’s potential attractiveness for Swiss domiciled funds on pause.