Regulatory Changes: A Tax Opportunity

In Switzerland, the demise of the lightly regulated investment manager is now well documented. However, the burden of structural, procedural and administrative costs of the regulatory changes could be softened through making structuring changes tax efficient.

Historically, it has largely been sufficient for Swiss managers of foreign alternative investment funds, who have restricted their marketing activities in or from Switzerland, to register with one of the country’s self-regulatory organizations. Accordingly, they have been subject to anti-money laundering regulations and a code of conduct, but this has been light relative to other jurisdictions, particularly those within the EU. Switzerland’s response to the EU’s Alternative Investment Fund Managers Directive (“AIFMD”) is a revision of the Swiss Collective Investment Schemes Act (“CISA”) and associated ordinances.

The final draft of CISA was approved by parliament in September 2012 and will become law in early 2013. This is the first phase in a comprehensive review of the regulation of financial services and the creation of an overarching Financial Services Act (“FSA”). This is a work in progress, the first draft of which we will see in 2013. Broadly, CISA requires Swiss managers of foreign collective investment schemes to apply for Financial Market Supervisory Authority (“FINMA”) authorization.

The intention of the FSA – the next legislative phase – is to cast a wider net to regulate all asset managers in Switzerland. The intention of the Swiss government is to ensure its regulatory framework is considered broadly equivalent to the AIFMD, but uncertainty remains as to whether or not this will be achieved. For instance, CISA does not seek to address considerations
around sound remuneration policy. However, one thing is certain. Regulatory supervision is unavoidable and there are costs associated with enhanced corporate governance, segregating core
functions, and the implementation, documentation and monitoring of processes and systems of internal control. This, coupled with downward pressure from investors on the traditional 2 and 20 fee structure, means margins are being squeezed.

The regulatory changes are forcing asset managers to make key structural decisions. The opportunity, therefore, is to do this in a tax efficient manner.

Taking a simple corporate tax planning example within Switzerland, a manager seeking FINMA authorization may need to expand Swiss operations to ensure an appropriate segregation of duties between certain core roles. There might be scope for expanding operations
into a lower tax Canton, which in turn may justify greater fee retention there. A tax ruling with the Cantonal Tax Administration could be sought to provide fiscal certainty or a transfer pricing exercise could be undertaken to justify cross-Cantonal fee flows on the basis of activities
performed.

Using a cross-border example, if a manager decides that they need the certainty provided by being regulated in an EU Member State, an option might be to expand into the UK, with a real local presence being established. At a UK corporate level, certain transfer pricing exemptions
may be applicable and the tax concept of domicile provides that a UK resident individual, not domiciled in the UK, has the potential to avoid being taxed in the UK on unremitted non UK source income and gains. The potential for greater fee retention offshore from existing operations outside of the UK, coupled with the benefits of the “non-dom” regime in the UK, can offer tax efficient
opportunities.

Malta is another example that could offer a regulatory solution to managers looking to distribute their fund within the EU. Managers building substance in Malta may find an opportunity to structure corporate operations to benefit from an effective 5% tax rate on trading income. There is also the possibility for certain expatriates relocating to Malta to access the highly qualified persons regime, with a favorable 15% income tax rate.

In a time of margin pressure, finding tax efficient solutions for your business is essential and identifying a jurisdiction with both the right economic, regulatory and tax profiles is key. Whether managers are looking to expand organically or externally, they do have time to react tax
efficiently to the forthcoming changes to the regulatory landscape, but the clock is ticking.