What is the importance of taxes in a securitisation transaction?
In a securitisation transaction, it is key that (i) any tax pitfalls are identified in an early stage so that the contemplated structure may still be amended; and that (ii) any potential tax consequences are analysed and known with certainty before the transaction is implemented. Only if such tax costs incurring from a planned securitisation transaction are known in advance, the decision can be taken whether the commercial benefits of the transaction outweigh the overall deal costs.
In Switzerland, it is common practice to discuss planned structures and transactions with the tax authorities in advance and to obtain legal certainty on the tax consequences by seeking the tax authorities’ written approval prior to entering into any transactions (so-called “tax ruling”).
Although there are no specific tax legislation and/or tax guidelines, it is standard practice that securitisation transactions are presented and signed off by the relevant tax authorities by way of such advance tax rulings.
What is the effect of an advance tax ruling?
An advance tax ruling granted by the tax authorities deploys effects in subsequent tax assessment procedures, if and to the extent required by the principle of dealing in good faith. This is the case if
the authority has delivered without reserve to a specific taxpayer an information in relation to a concrete, correctly and fully described set of facts;
the authority has the functional jurisdiction to deliver the information or the taxpayer has sufficient reasons to believe that the authority has functional jurisdiction;
the taxpayer is not in a position to realise at once that the information given is inaccurate;
the taxpayer, relying on the accuracy of the information, has undertaken action that cannot be undone without irreparable harm, and;
if the legal situation has remained unchanged since the delivery of the information.
If these conditions are met cumulatively and if the set of facts represented at the time of granting the information was not already realized, as a matter of principle the treatment described in the advance ruling of the tax authority is followed in the assessment procedure even if, subsequently, the information turns out to be inaccurate.
In the event of change of the assessment practice upon which the ruling has been based, the binding effect of the ruling terminates only prospectively. In these cases, the taxpayer (i.e. in case of securitisation transactions the Swiss borrower or the special securitisation vehicle, respectively) has the possibility to consult with the cantonal tax authority with a view of adapting the advance ruling to the new assessment practices.
Which taxes are typically triggered in Switzerland in connection with a securitisation transaction?
Depending on the contemplated structure of the transaction, Swiss corporate income tax, Swiss value added tax (VAT), Swiss federal stamp duties and Swiss federal withholding tax may be concerned. However, of particular importance are potential 35% Swiss withholding tax consequences.
As a general rule, arm’s length payments on receivables are not subject to withholding taxes in Switzerland. As an exception, the following interest payments might be subject to Swiss withholding tax:
interest on Swiss “bank deposits”;
interest on Swiss “bonds” (defined as a fixed term instrument if it cannot be ruled out that it is held at any time by more than 10 creditors which are not banks);
interest on any funds raised by a Swiss borrower with more than 20 non-banks; and
interest paid to non-Swiss lenders on any debt secured by mortgages in Swiss real estate.
Securitisation transactions in Switzerland (i.e. with a special securitisation entity in Switzerland) will regularly be seen, from a Swiss tax perspective, as an issuance of bonds and will thus trigger Swiss withholding tax of 35% on any interest payments to the investors irrespective of the underlying receivables.
While Swiss withholding tax is generally recoverable, the process of doing so can be burdensome for non-Swiss investors and even Swiss investors suffer a delay in recovering these amounts. For investors located in a jurisdiction that does not benefit from favourable double tax treaties, or that do not otherwise benefit from treaty protection, even in case a favourable double tax treaty were in place (such as tax-transparent funds), Swiss withholding tax might not be fully recoverable or not recoverable at all.
However, Swiss withholding tax can be avoided (on the level of the special securitisation entity) by careful structuring if a non-Swiss securitisation vehicle is used. In such a situation, it is key that the competent tax authorities accept and sign off on the structure, inter alia to make sure that the collective fundraising by a foreign special securitisation vehicle for the purpose of financing a Swiss company is not allocated directly to the Swiss company (i.e. is not treated as a domestic issuance of bonds subject to 35% withholding tax on interest payments).
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