CFE Forum 2010 Information Across Borders 15 April 2010, Brussels Situation in Switzerland

1. CFE Forum 2010Information Across Borders15 April 2010, BrusselsSituation in Switzerland Prof. Pascal HinnyPartner, Lenz & Staehelin, Zurich Professor of tax law, University of Fribourg pascal.hinny@lenzstaehelin.com +41 58 450 8000

2. Contents • Exchange of Information • Tax treatment of Swiss holding-, domiciliary- and mixed companies • Current economic and tax climate in Switzerland after the financial crisis

3. Main Swiss (international) tax issues • Exchange of information under tax treaties • Tax treatment of Swiss holding-, domiciliary- and mixed companies • Acquisition of stolen bank data in France and Germany • U.S. – UBS saga • Relationship with Italy • Special tax treatment for bonus payments, hedge-funds, globally acting banks, currency transactions • Financial Problems of neighbour countries • Destabilized Euro/British-£/U.S.-Dollar

4. Extended exchange of informationNew tax treaties • So far only exchange of information for the proper application of the tax treaty • Extended information in case of tax fraud (as opposed to mere tax evasion) • March 13, 2009 Switzerland withdraw its reservation to OECD 26 • Since then negotiation of 23 new / amended tax treaties • Exchange of information according to OECD 26 (on request / no fishing expeditions / foreseeably relevant / no retroactive effect / subsidiarity / reciprocity and legal protection) • Other significant enhancements: reduction of WHT / arbitration clauses / elimination of discriminatory practices • Switzerland now compliant with international standards on exchange of information

5. Exchange of information (2)Swiss expectations due to adherence to OECD principles • Application of discriminatory practices of OECD-/EU-MS justified by limited exchange of information so far • Application of EC-treaty freedom non-discrimination principles under EC-Swiss treaties by EC-MS and ECJ • Other discriminatory practices applied towards Switzerland abandoned • Switzerland expects that transparency is increased regarding • Beneficial ownership in trusts and opaque corporations (see FATF on money laundering), e.g. in UK and U.S. • Adherence of Far Eastern Countries to the same principles (e.g. Singapore) • Switzerland is looking forward to OECD peer review for equal application of transparency principles

6. Exchange of information (3)Neighbour countries tactics • Switzerland concerned of tactics of neighbours’ countries • use of illegally acquired data unclear and based on untested legal grounds • non-transparent procedure of acquisition of stolen data vs. request for full transparency regarding personal situation of its citizens • humiliation and intimidation of tax evaders • governments encourage breach of neighbour countries’ laws • rude approach of neighbours’ countries diplomacy • Switzerland not prepared to exchange information re stolen data

7. Holding-, mixed- and domiciliary companies (1)European Commission argument • February 2007: European Commission resolved that Swiss tax treatment of holding-, domiciliary- and mixed company treatment infringes Free Trade Agreement (1972) between Switzerland and EC • European Commission applies Art. 107 TFEU (former Art. 87 TEC) and Code of Conduct principles on non-MS situation

8. Holding-, mixed- and domiciliary companies (2)Consultations with European Commission • Switzerland rejects the technical position taken by the EC • OECD “approved” tax treatment in 2004 HTP-Report • Switzerland discusses the following amendment of the current holding-, domiciliary- and mixed company treatment: • Pure letter-box companies: Abolition of special tax treatment • Holding companies: Prohibition of business activities • Holding / mixed company: Increase of tax basis • So far, no agreement and no change in Swiss tax treatment • In parallel: Preparation for major corporate tax reform

9. Holding-, mixed- and domiciliary companies (3)Adopted changes of corporate tax law as from 2011 • Tax free repatriation of shareholder‘s capital contributions (important in case of inbound transactions) • Tax free replacement of business assets, i.e. no realization of untaxed reserves on assets in case of replacement. Applicable also to 10% share-holdings • Participation exemptions: Threshold for qualifying participations reduced to 10 % / FMV CHF 1m (10% for capital gains) from previously 20%/CHF 2m (20% capital gains)

10. Holding-, mixed- and domiciliary companies (4)Proposed changes of corporate tax law • Abolition of Issuance Stamp Tax on debt and equity contribution • Resolving of problems re intra group financing (cash-pooling) • Enhancement of participation exemption (full exemption) • Cantons are free to abolish annual tax on corporations’ equity • Unlimited loss carry-forward • Loss transfer within group of companies (including foreign losses)

11. Switzerland: Current Economic ClimateIn general • Only few public money employed to bail out suffering industries • Less tax revenue from various industry sectors expected. However, no or few public budget deficits in 2009 • Unemployment at 4.2% (March 2010) • Switzerland is concerned about • financial problems of neighbor countries / destabilized Euro/£/US-$ • increasing pressure (and distrust) on corporate and individual tax payers in these countries • increasing migration of affluent and mobile tax payers • hostility among friendly countries to defend economic interests • increasing tax compliance cost (transfer pricing, information exchange etc)

12. Switzerland: Current Economic ClimateCharacteristics of Swiss system • Pluralistic, highly democratic and coalition based political system with relatively weak governmental power results in conservative policy making • Pros: Stability, foreseeability • Cons: Quick and firm reaction often not possible • Reliable and efficient service industry / infrastructure • Still relatively reasonable public spending attitude • Liberal legal framework, including liberal labour law • Safe / nice environments / everything is neatly together • Not a member of, but strong ties with EU • But: Relatively high living cost due to continuously high demand • Leading position in various global competitiveness reports

13. Switzerland: Current Economic ClimateCharacteristics of Swiss (tax) system (1): General • Federal State System with powerful cantons. 2/3 of direct tax levied at cantonal level. Strong competition among Cantons, also on tax rates • Ordinary corporate overall effective tax rate: 12 –23%; special tax treatments for holding- and mixed companies • Individual tax rates: 19 – 42%; up to 80% exemption on dividend income • Stable / reliable tax system • Efficient ruling process, i.e. advance information on tax treatment • Large treaty network featuring 99 tax treaties based on OECD standards

14. Switzerland: Current Economic ClimateCharacteristics of Swiss (tax) system (2) • Tax rates • Tax rates approved by Swiss people in public votes after serious public discussions • Each community defines it own multiplier in a public vote annually • Moderate rates and relatively flat progression of tax rates • Big differences among cantons and communities; but equalization procedures • Results in • Good acceptance of tax burden • Efficient delivery of public goods

15. Summary • Switzerland compliant with int. exchange of information standards • Expectations / recommendations • discriminatory practices applied to Switzerland abandoned • transparency criteria applied equally (trusts, opaque corporate regimes, Far Eastern Countries, “cheap” treaties etc.) • implementation and consolidation of the results now (theoretically) achieved, before further hectic activity is undertaken • return of productive and friendly working relationship • compliance measures to increase transparency must be proportionate • tax payers (financing governmental spending) treated with trust, dignity and acknowledgment