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DOING BUSINESS IN SWITZERLAND CONTENTS
1 1.1 1.2 1.3 1.4 2 2.1 2.2 2.3 2.4 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4. 4.1 4.2 4.3 5 5.1 5.2 5.3 6 6.1 6.2 6.3 7 7.1 7.2 7.3 A Brief Survey Geography Population and Languages Political System The Economy Swiss Company Law Governing Law and Forms of Business Enterprises Corporation Books of Account Annual Business Report Taxation of Resident Corporations Liability to Swiss Tax Determination of Taxable Income Tax Privileged Corporations Treaty Benefits for Swiss Resident Corporations Computation of Corporate Taxes Assessment of Corporate Taxes Withholding Taxes of Dividend Distributions of Swiss Corporations Filing of Tax Returns, Assessments of Tax, Tax Litigation Corporate Reorganizations Taxation of Non-Resident Corporations Liability to Swiss Tax Determination of Taxable Income and Capital of Swiss Permanent Establishments Remittance of Profits Withholding Tax Income Subject to Withholding Tax Exemptions from Withholding Tax Withholding and Reimbursement of Tax Indirect Taxes Value Added Tax Stamp Duties Real Estate Taxes Personal Taxation Income Taxes on Residents Income Taxes on Non-residents Other Individual Taxes

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7.4 8 8.1 8.2 8.3 9 9.1 9.2 10 10.1 10.2 10.3 10.4 10.5 10.6

Tax Returns, Assessment and Payment of Tax Labour Conditions an Social Security Working Conditions Social Security Social Security Treaties Government Incentives Export Risk Guarantee Program Investment Incentives Government Controls Import and Export Controls Restrictions on Investment Acquisition of Swiss Real Property Anti-Trust Legislation Price Controls Exchange Controls

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1

A BRIEF SURVEY

1.1

GEOGRAPHY Switzerland is situated in the heart of the Alps at the center of western Europe and borders on five countries (Germany, France, Italy, Austria and Liechtenstein.) Its surface comprises 41,284 square kilometers, of which 75% is productive soil (forests, arable land, vineyards, etc.) Its highest point is Point Dufour (4,634 meters) in the massif of the Mont-Rose and its lowest point, Lago Maggiore (193 meters). There are many important lakes and rivers and both the Rhine and the Rhône have their source in Switzerland. Switzerland has extremely dense road and railway networks with multiple connections to all bordering countries. As a result, major centres within the country and in adjacent ones are easily accessible. The Rhine is of great importance to the Swiss economy, linking the country with major ports in western Europe.

1.2

POPULATION AND LANGUAGES The population of Switzerland in 2002 was approximately 7.200.000 and it is growing slowly. The principal cities and the number of inhabitants in 2000 are: Zurich Basle Geneva Berne Lausanne Winterthur St. Gall Luceme Bienne 340.000 170.000 175.000 125.000 115.000 90,000 70.000 60,000 50.000

Of the total population, 23 % are under 20 years of age, 62 % are between 20 and 65, and 15 % are older than 65; 21% are foreigners. The national languages and the percentages of the population speaking each are German (64%), French (19%), Italian (8%), and Romansch (1 %). Eight percent speak other languages. The use of English is widespread, particularly in business circles. In 2001 the working population numbered almost 3,700,000, of which 69% were in the service sector. Foreigners accounted for 27% of the work force.

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1.3

POLITICAL SYSTEM The roots of the Swiss Confederation go back as far as 1291 but its territory was fixed by the Congress of Vienna in 1815, and has not changed since. In 1848, Switzerland became a federal republic. The Confederation comprises 26 cantons. Power is shared unequally between the Confederation and its component parts, as is the total national tax revenue: only 25% of global tax revenues are raised by the central state, and the remaining 75% are raised by the cantons and communes. Switzerland is a country with strong local government. At the federal level, executive power is exercised by the Federal Council, which comprises seven members. Legislative power lies in the hands of the Federal Assembly, which is made up of two houses with equal powers: the Council of States (representing the cantons) with 46 members and the National Council (representing the people) which has 200 members. The National Council is elected every four years by direct ballot, whereas elections for the Council of States are organised by each individual canton with varying electoral modes and terms of office. The constitution grants the people a right to participate in decision making through referendums, either proposed by the government or initiated by a specified number of voters. Referendums are held at both the federal and cantonal levels. All cantons have their own legislatures and governments, and they retain sovereignty in all matters except those specifically transferred by the constitution to the Confederation. Switzerland is committed to neutrality and international co-operation. It hosts many prestigious international organisations, such as the United Nations, the International Labour Office, the World Health Organisation, the International Union of Telecommunications, World Meteorological Organisation, World Intellectual Property Organisation, the International Committee of the Red Cross, the World Trade Organisation, CERN, IATA the International Olympic Committee, FIFA, UEFA and many others. lt is the safe haven where many international peace talks are conducted.

1.4

THE ECONOMY Switzerland is a highly industrialised country, based upon a free enterprise economy in which government control is limited. State-owned industry is principally confined to public utilities and defence. With the exception of agriculture, government has rarely shown itself willing to intervene in the functioning of the market economy. Switzerland is a country of great economic and political stability; it has a well-trained and adaptable labour force, whose relations with management have been characterised by decades of labour peace. This has contributed to raising living standards to among the highest in the world.

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Switzerland lacks significant natural resources, with the exception of hydroelectric power. The most important industries are the production of machinery and precision instruments, metals, chemicals, pharmaceuticals, textile and consumer goods. Forty percent of the gross national product is accounted for by exports of goods and services. Because of its dependence on foreign trade, Switzerland has pursued a liberal trade policy with low tariffs and the avoidance of import restrictions. Swiss products in general are renowned for their high quality and precision. Simultaneously with industrial growth, the service sector has become highly developed. Tourism, commerce, banking and insurance have become a significant element in the Swiss economy and have a h igh degree of international interdependence. In particular, banking and insurance have grown thus strengthening, the position of Zurich as a leading world financial centre. As a country committed to open markets and freely convertible currencies, Switzerland has traditionally been the preferred location for the headquarters of many important international business organisations. Switzerland was a founding member of the European Free Trade Association, (EFTA), which now includes only Switzerland, Iceland, Liechtenstein, and Norway. However, Switzerland and the other EFTA countries are associated with the European Union (EU) in many areas. There are no customs duties or other similar charges levied on cross-frontier transactions in industrial goods originating in EU or EFTA countries, but goods originating from countries other than the EU or EFTA are subject to customs duties if they are exported from Switzerland into EU countries, or vice versa. Goods may acquire Swiss origin if sufficient processing is carried out locally. Switzerland is an active member of the WTO and has also concluded many bilateral trade agreements with third world countries. Switzerland does not belong to the European Monetary System. lt is a member of the International Monetary Fund (IMF).

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2.1

SWISS COMPANY LAW
GOVERNING LAW AND FORMS OF BUSINESS ENTERPRISES Swiss company law is embodied in the Swiss Code of Obligations (Schweizerisches Obligationenrecht, Code des obligations.) The current law was introduced in 1992, and an unofficial English translation has been published by the Swiss-American Chamber of Commerce. The code details all the various forms of business enterprises in Switzerland. A fundamental distinction is to be made between those enterprises that are run by individuals or groups of individuals, and those set up in the form of a corporate entity with a separate legal personality. The most common forms of enterprise are as follows:

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Proprietorship and partnerships: • • • • Sole proprietorship Ordinary partnership General partnership Limited partnership

Legal Entities: • • • Corporation Limited-Iiability company Co-operative

Seventy-five percent of all business enterprises in Switzerland take the form of sole proprietorships and corporations. The remainder of this chapter deals only with the corporation.

2.2

CORPORATION, AKTIENGESELLSCHAFT, SOCIETE ANONYME The corporation is characterised by the existence of a minimum capital divided into shares which are usually freely transferable, and by the fact that it confers a limited liability on its shareholders. Shares may be paid up either in cash or in kind.

2.21

FORMATION PROCEDURES Founders At least three founders, be they individuals or legal entities, are necessary to form a corporation. lf subsequently the number of shareholders falls below the minimum of three, a judge of the commercial court may, at the request of a shareholder or creditor, declare the dissolution of the corporation unless it takes corrective action within a reasonable period of time. Nationality and Residence Requirements Founders and shareholders are not subject to any nationality or residence requirements. However, directors must be shareholders and a majority of directors must be Swiss citizens residing in Switzerland. Another restriction relates to the acquisition by non-resident aliens of shares in a Swiss corporation whose assets consist mainly of Swiss real estate; these transactions are subject to prior authorisation, as explained in section 11.3 below. Prior authorisation is also required for non-residents to form and operate a Swiss bank, or to acquire an existing Swiss bank.

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Articles of Incorporation Articles of incorporation must have the following minimum content: • • • • • • • the corporate name and address; the purpose of the corporation; the amount of share capital and the amounts paid in; the number, par value, and type of shares; the procedures for calling a general meeting of shareholders, and the voting rights of the shareholders, the naming of the bodies responsible for managing and auditing, the corporation; and the form in which the corporation must publish its notices.

Optional clauses need be included only if the founders intend to adopt additional provisions, such as the directors' participation in net profits, the issue of preferred shares, the Delegation of directors' authority, an increase in the authorised capital, or the issue of conditional capital (see section 2.22 below.) Founders' Statement The founders must provide a written statement giving particulars of the nature, condition, and appropriateness of v aluation of contributions in kind or any proposed acquisitions of assets. A founders' statement is also required when the capital of a corporation is to be contributed by conversion of shareholder loans and advances. The auditors are required to review the founders' statement and confirm in writing that it is complete and truthful. Raising of Funds After the shares of capital stock are subscribed, a minimum of 20 % of the par value but not less than CHF 50,000 must be placed in escrow with a bank. The funds may only be released to management after the corporation has been registered in the commercial register. Incorporation Meeting The corporation is formed at the incorporation meeting, which is held in the presence of all the shareholders and a public notary. The shareholders declare that the capital stock is fully subscribed and that the minimum payments have been made. Thereafter, they adopt the articles of incorporation and appoint the bodies corporate (board of directors, auditors, etc.) finally, a notarised deed is drawn up recording the resolutions of the meeting.

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Registration After incorporation, the corporation must be registered with the commercial register. This registration is published in the Swiss Official Business Gazette (Schweizerisches Handelsamtsblatt, Feuille Officielle du Commerce.) lt discloses details such as the purpose of the corporation, but not necessarily the names of its founders. Only at the time of registration does the corporation become a distinct legal entity. Shares may not be issued prior to registration. Corporate Name In principle, the corporation is free to choose any name. However, the name must be distinguished from those of all other corporations already existing in Switzerland. In addition, it may not be misleading or otherwise untruthful. The use of national or territorial designations is not permitted unless specifically authorised by the federal and cantonal commercial registers. If a personal name is used, a designation showing, the corporate nature must be added: for example: Gebrüder Meier AG. Formation Expense At formation a one-time federal stamp duty of 1% is assessed on the price at which shareholders buy the shares, including any premium above par value. In addition, there are registration and notary fees and, generally, fees due to agents who act as founders to the new entity. Total expenses can amount to approximately SFrs. 6,000 but may be considerably higher where the share capital exceeds the minimum of SFrs. 100,000 or where extraordinary procedures are required such as the valuation of shareholders' contributions in kind.

2.22

SHARE CAPITAL, AKTIENKAPITAL, CAPITAL-ACTIONS Minimum Capital A corporation is required to have a minimum capital of SFrs. 100,000, divided into shares with a par value of not less than one cent. The issue price for each share may not be lower than the par value. One fifth of the par value of the capital, but not less than SFrs. 50,000, must be paid up prior to the incorporation meeting. The balance is payable on call. All shares must be subscribed at the time of formation. Existing companies, except those that were entered in the commercial register before January 1, 1985, must have complied with these regulations and have increased their capital to the minimum level by June 30, 1997. Contributions in Cash or in Kind Capital contributions may be in cash or in kind. lf in kind, the corporation must have access to such assets immediately after it is registered. The articles must describe the property, its value, the shareholder from whom it is received, and the number of shares issued in return. The acceptance by the corporation of contributions in kind requires the approval of at least two thirds of the shares represented at the incorporation meeting.

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Authorized Capital A general meeting of shareholders may authorize the board to increase the share capital at any time within two years of the authorization. lt is within the competence of the board to decide if, when, and to what extent, the capital is increased. Conditional Capital A general meeting may amend the articles to provide for a conditional capital increase. The purpose of issuing conditional capital is either to secure options and conversion rights in connection with warrant issues or convertible bonds, or to create employee shares. The increase in capital takes place as and when the respective rights are exercised. Capital Reduction, see section 2.26 below. Different Types of Shares Swiss company law distinguishes between the following categories of share: • Bearer shares, Inhaberaktien, Actions au porteur Bearer shares may not be issued until the full issue price has been paid up. They are transferable by delivery and the corporation may not restrict their transfer. Bearer shares are very popular in Switzerland because many holders prefer the anonymity they provide. • Registered shares, Namenaktien, Actions nominatives Registered shares are subscribed as called by the corporation and do not need to be fully paid on issue. They are transferable by endorsement or assignment, generally without restriction. The corporation must keep a share ledger listing the owners' names and places of residence. The entry must be certified on the share certificate by the board. The buyer of incorrectly transferred registered shares cannot exercise personnel membership rights. The articles may provide for subsequent conversion of registered shares into bearer shares and vice versa. • Restricted transferability of registered shares, vinkulierte Namenaktien, Actions nominatives liées To prevent unfriendly take-overs, the articles may provide for restrictions on the free transferability of shares. By law those restrictions are, however, limited. • Preferred shares, Vorzugsaktien, Actions privilégiées A general meeting of shareholders is entitled to issue preferred shares or to convert existing common shares into preferred shares. The holders of preferred shares enjoy preferences decided by the shareholders, such as cumulative dividends, priority in the proceeds of liquidation, and a preferential right to subscribe to new shares. This preferential treatment must be provided for by the articles or be adopted by the votes of at least two thirds of all shares represented at the general meeting.

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•

Voting shares, Stimmrechtaktien, Actions de droit de vote In general, each share is entitled to one vote. However, because shares of differing value may be issued, each vote may not re represent the same amount of capital contribution. Voting shares may, therefore, provide the decision making power within a corporation to shareholders who represent a financial minority. The issue of voting shares is permitted in the ratio of 1:10 to ordinary shares.

•

Profit sharing certificates, Genussscheine, Bons de jouissance A general meeting of shareholders may issue profit sharing certificates in favour of persons who have an interest in the corporation through previous capital contributions, shareholdings, creditor claims, employment, or similar relationships. Profit sharing certificates may grant rights to a share in profits, a share in the liquidation proceeds, or rights to subscribe to new shares. They do not procure any membership rights. By law, profit sharing certificates may not have a par value nor be issued in exchange for contributions characterised as assets.

•

Certificates of participation, Partizipationsscheine, Bons de participation The certificate of participation is a non-voting share, the holder of which has essentially the same status as a shareholder, except the right to vote. The participation capital may not exceed twice the share capital.

2.23

SHAREHOLDERS, AKTIONAERE, ACTIONNAIRES The General Meeting of Shareholders The General meeting of shareholders is the supreme authority of the corporation and is composed of all shareholders. There are two types of meeting: • • Ordinary General meeting, which is held annually within six months after the close of the business year; and Extraordinary General meeting which is called whenever required.

A General meeting of shareholders has the right to adopt and amend the articles, to appoint directors and auditors, to approve the financial statements and the directors' report, to ratify certain decisions of the board and, in general, to make all important decisions that are not delegated to any other body. The shareholders must also approve the board's proposal for the distribution of annual profits. A general meeting is called by the board or, if the board fails in this duty, by the auditors. One or more shareholders representing, a total of at least 10% of the share capital may, at any time, request the calling, of an extraordinary general meeting. The request must be made in writing, indicating the purpose of the meeting.

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In general, a simple majority of votes represented at the General meeting is sufficient to pass a resolution and to elect officers. However, certain decisions, such as a change of corporate purpose, extension of the scope of business, a distribution of shares with privileged voting, rights, etc., require the approval of two thirds of the votes represented and an absolute majority of the par value of the shares represented. Shareholder Rights The code distinguishes between two kinds of shareholders rights: financial rights and personal membership rights. Financial Rights Shareholders may not be deprived of their acquired financial rights without their consent. Financial rights include the right to vote, to receive dividends and a share of the liquidation proceeds, and to receive adequate information on the financial condition of the corporation. • Dividends Each shareholder has the right to a proportionate share of the profits distributed. Dividends may be paid only out of net profits or out of reserves specially created for this purpose. There is no interest payable on the ordinary share capital and a corporation may not declare interim dividends out of current year profits. Dividends may be declared only by a general meeting of shareholders and after transfers to the legal reserve, see section 2.45 below. A share of the net profits (tantième) may be paid to members of the board of directors if a) the articles specifically provide for such payments, b) the transfers to the legal reserve have been made, c) a dividend of at least 5% has been paid to the shareholders. • Subscription rights, Bezugsrechte, Droits de souscription Unless otherwise stated in the articles or in the resolution for the increase in share capital, each shareholder has the right to subscribe to new shares in the same proportion that the original holding bears to the total shares issued. • Proceeds of Liquidation, Anteil am Liquidationsergebnis, Dividende liquidation Each shareholder is entitled to a proportionate share of the proceeds of liquidation unless the articles of incorporation provide otherwise. The proceeds are calculated in proportion to the amounts paid in on the share capital. Personal Membership Rights Shareholders may not be deprived of most of their personal membership rights, even with consent. Personal membership rights include the following: • Attendance at general meetings Shareholders exercise t eir rights at general meetings of shareholders. Every shareholder h may attend meetings in person or be represented by a proxy. The holder of bearer shares, or

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any proxy of the holder, may attend if the share is presented, but a holder of registered shares may only be represented by a proxy if a written proxy form is produced. • • Voting rights, see paragraph on voting shares in section 2.22 above Information to shareholders Shareholders are entitled to review the financial statements, which must be available for inspection at the registered address of the corporation not later than 20 days prior to the annual general meeting. Any shareholder may request to be sent a copy before the meeting. 2.24 BOARD OF DIRECTORS, VERWALTUNGSRAT, CONSEIL D'ADMINISTRATION Election The corporation is managed by the board composed of one or more individual directors who must be shareholders. A majority of board members must be Swiss citizens residing in Switzerland. lf the board consists of a single member, he or she must be a Swiss citizen residing in Switzerland. The directors are elected at a general meeting of shareholders for a period fixed by the articles, which by law may not exceed six years. The directors may, however, be reelected indefinitely. The articles may require that, during their term of office, the directors deposit a specified number of shares at the corporation's registered address. This is to protect the corporation against any damages caused by the directors in the exercise of their duties. The board may delegate part of its authority to either an executive committee or to individual directors, officers, or agents. At least one director must have unrestricted authority to represent the corporation. The board designates the individuals authorised to represent the corporation visà-vis third parties and determines the signatory powers. The corporation is unrestricted in the selection of its executive personnel, such as managers and officers, although managers and employees of foreign nationality require a permit to take up residence and employment in Switzerland (see section 8.4 below.) Duties The board is responsible for the organisation of general meetings. lt gives the necessary instructions to management for the proper conduct of the corporation’s business, and supervises those authorised to act on behalf of the corporation. It is the primary responsibility of the board, although generally delegated to management, to keep the accounting records and to prepare the annual financial statements. In addition, the board is required to submit a written annual report on the corporation's financial position and the results of its activities to each ordinary general meeting of shareholders.

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2.25

AUDITORS, REVISIONSSTELLE, ORGANE DE REVISION Election The general meeting of shareholders elects one or more independent auditors who may be individuals or legal entities but who are required to be professionally qualified. At least one auditor must have a domicile, registered office, or registered branch in Switzerland. The auditors may not serve as directors nor be otherwise employed by the corporation, nor may they assume managerial functions for the corporation. Auditors may be a ppointed for a maximum period of three years, but reelection is permitted. Special Professional Qualifications Auditors must have special professional qualifications if the audited entity: • • • has outstanding bond issues; has shares listed on a Swiss stock exchange; or exceeds two of the following parameters in two consecutive years: Balance sheet total Revenues Average number of employees Duties The auditors must report on whether the accounting records and the financial statements, as well as any proposal concerning the appropriation of available profit, comply with the law and the articles of incorporation. lf the auditors, in the course of their examination, find violations either of law or of the articles, they report this in writing, to the board of directors and, in serious cases, to the general meeting of shareholders. In the event of obvious over-indebtedness, the auditors must notify a judge of the commercial court if the board fails to do so. Auditors are liable to the shareholders and creditors for damage caused by intentional or negligent failure to perform their duties. They are required to attend each general meeting of shareholders. CHF CHF CHF 20.000.000 40.000.000 200

2.26

REORGANIZATION Capital Reduction A reduction in capital requires a resolution of the general meeting of shareholders to amend the articles. A reduction is not permitted unless a special audit report shows that all claims of creditors are fully covered after the reduction. The audit report must be prepared by a qualified auditor. Prior to implementation of the reduction, the board is required to publish the decision three times in the Swiss Official Business Gazette. Also, creditors must be informed.

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An exception to the above requirements is made for reductions in the event of a capital deficiency, but under no circumstance may the share capital be reduced below CHF. 100.000. In the case of a financial restructuring of the corporation, the par value of the existing shares may, however, be reduced to less than SFrs. 10 each. In spite of a reduction in the par value a share may still carry the same voting rights as before the reduction. Dissolution A corporation may be dissolved voluntarily for any reason provided by the articles, or by decision of a general meeting of shareholders. An involuntary dissolution may be imposed upon the corporation by bankruptcy or by a court decision. A court may dissolve a corporation, such as in cases where serious violations of legal or statutory provisions have occurred. Also, shareholders representing at least 10% of share capital may request dissolution by the court if they have good cause, such as if minority rights have been vi olated. Liquidation At dissolution, whether voluntary or involuntary, a corporation is liquidated, unless the dissolution takes place in connection with a merger or take-over. The liquidation procedures and duties are as follows: • Registration of dissolution and liquidation Except in the case of a bankruptcy, the board must register the dissolution of the corporation with the commercial register. During the period of liquidation, the corporation remains a legal entity and retains its name with the addition in liquidation. • Appointment of liquidators Unless the corporation appoints special liquidators, the liquidation procedures are carried out by the board. The names of the liquidators are registered, and at least one must be domiciled in Switzerland and be given authority to represent the corporation. •

Duties of liquidators The term liquidation means that the corporation's normal business activities are discontinued, and it is restricted to such operations as are necessary to settle all outstanding matters. The liquidators must prepare a balance sheet upon assuming their duties. lf the balance sheet shows an excess of liabilities over assets, the liquidators must file an application for bankruptcy, unless arrangements can be made for an amicable settlement (aussergerichtlicher Nachlassvertrag, concordat extrajudiciaire) with the creditors.

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In all other cases, the liquidators must attempt to wind up the business (terminate contracts, collect receivables, pay outstanding debts, etc.) with a view to reaching a final settlement with creditors and shareholders. Creditors reflected in the books of the corporation or known in any other way must be informed of the dissolution of the corporation in writing and requested to file their claims; unknown creditors and creditors whose domiciles are not known are notified by publication in the Swiss Official Business G azette. To protect unknown or disputed creditors who have failed to lodge their claims, an appropriate amount of money must be deposited in escrow. A distribution of net assets is postponed until such liabilities have been settled. After settlement of all liabilities, the remaining net assets of the liquidated corporation may be distributed among the shareholders in proportion to their holdings and in accordance with the rights attached to their shares. Upon completion of the liquidation procedures, the liquidators apply to the commercial court for deregistration, and designate a safe place where the books of the corporation are kept for a period of ten years. Deregistration is contingent upon express approval by the Federal and Cantonal tax administrations, to ensure that all taxes on income, capital and distribution are paid in full. Merger A resolution dealing with the merger of companies may be passed only by a general meeting of the shareholders at which at least two thirds of the shares are represented. Creditors of merging companies are given special protection. Merger procedures may be summarised as follows: • • • • • The board of directors of the acquiring corporation must issue a call for registration of claims by the creditors of the corporation to be dissolved. The net assets of the corporation to be dissolved must be administered separately by the acquiring corporation until creditors are satisfied or secured. The dissolution of the absorbed corporation must be registered in the commercial register as soon as creditors have been satisfied or secured. Subsequent to this registration, shares of the acquiring corporation may be delivered to the shareholders of the absorbed corporation, in accordance with the merger agreement. The members of the board of the acquiring corporation are personally liable, jointly and severally, to the creditors of the absorbed corporation. The net assets of the absorbed corporation may not be used to another purpose before the satisfaction of that corporation's creditors.

Conversion into a Limited Liability Company and vice versa A corporation may be converted into a limited liability company provided that the capital of the limited liability company is not less than the corporation’s share capital, that shareholders are informed of the possibility of becoming participants in the newly created company, and that their amount to at least two thirds of the share capital of the transformed company. Any retiring shareholder is entitled to a proportionate share of the net assets valued at fair market price. The creditors of a transformed company are protected in the same way as creditors of a merged corporation (see above).

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A limited liability company may not be transformed into a corporation. lt must be liquidated and a new corporation formed. 2.3 BOOKS OF ACCOUNT General principles governing the keeping of books and the preparation of financial statements are laid down in articles 957 to 964 of the code. These are applicable to all Swiss business operations required by law to maintain books of record. The provisions require the preparation of financial statements within a reasonable time following the end of the financial year. They must be complete, true and clear, drawn up in accordance with accounting principles generally accepted in Switzerland, and expressed in Swiss currency. The code does not specify where the books and supporting documents should be kept. They may therefore be kept outside Switzerland, although they must be readily available to the tax authorities for inspection. Local directors frequently insist that they be kept in Switzerland.

2.4

ANNUAL BUSINESS REPORT The board prepares an annual business report which is composed of: • • • the annual financial statements; the annual report; and the consolidated financial statements, if such statements are required by law.

2.41

FINANCIAL STATEMENTS The annual financial statements comprise the following three documents: • • • profit and loss statement (or income statement); balance sheet; and annex.

Profit and Loss Statement The profit and loss statement must distinguish between operating, non-operating, and extraordinary income and expenses. Income must be shown separately for: • • • revenues from deliveries and services; financial income, and profits from the disposition of capital assets.

Expenses must show, as a minimum, cost of goods sold, personnel expenses, financial e xpenses, and depreciation and amortisation.

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Balance Sheet The balance sheet must show current assets, capital assets, liabilities and equity. Current assets are divided into liquid assets, claims resulting from deliveries and services, other claims and inventories. Capital assets are divided into financial assets, tangible assets and intangible assets. Liabilities are divided into those resulting from deliveries and services, other short-term liabilities, long-term liabilities and provisions. Equity is divided into share capital, legal and other reserves and profit (or loss) brought forward. Capital not paid in, the total amount of investments, the claims and liabilities against affiliates or against shareholders, accruals and deferrals, and losses carried forward are all disclosed separately. Annex The annex includes: • • • • • • • • • • • the total amount of guarantees, liabilities under indemnities, and pledges in favour of third parties; the total amount of assets pledged or assigned to secure the corporation's own liabilities; assets to which a third party has retained title; the total amount of liabilities from leasing contracts not included in the balance sheet; the fire insurance value of assets; liabilities to personnel welfare institutions; the amounts, interest rates and maturities of bonds issued by the corporation, each investment that has a material effect on the corporation's financial position; the total of transfers from hidden reserves, to the extent that such total exceeds the total of current transfers to hidden reserves, thereby improving the result for the period; information on the reason for and the amount of any revaluation; information on the acquisition, disposition, and number of the corporation’s shares held by the corporation itself, including those held by another corporation in which the first corporation holds a majority investment, and the terms and conditions of such share transactions; the amount of any authorised or conditional capital increases; and sundry other information required by law.

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2.42

ANNUAL REPORT

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The annual report describes the development of the business, as well as the economic and the financial situation of the corporation. lt also includes the auditors' report.

2.43

CONSOLIDATED FINANCIAL STATEMENTS lf a corporation controls one or more other corporations, creating a group under common control, it is required to submit consolidated financial statements to the shareholders. The corporation is not required to submit consolidated statements if, together with its subsidiaries, it does not exceed two of the following parameters during two consecutive business years: Balance sheet total Revenues Average annual number of employees However, consolidated statements do need to be prepared if: • • • • the corporation has outstanding bond issues; the corporation's shares are listed on a stock exchange; shareholders representing at least 10% of the share capital so request; or consolidation would have a material effect on the balance sheet or profit and loss account. CHF CHF CHF 10.000.000 20.000.000 200

2.44

VALUTATION PRINCIPLES The rules in Switzerland for valuing assets and liabilities are conservative. In addition, the code gives discretionary powers to the board to value assets at amounts lower than the maximum carrying values prescribed by law, or to create hidden reserves. The maximum asset values permissible are set out in articles 664 through 670 of the code. They are as follows: Costs of Incorporation, Capital Increase, and Organization Costs of incorporation and capital increases, and other costs resulting from the establishment, expansion, or reorganisation of the business may be carried in. the balance sheet, but must be shown separately and amortised within five years.

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Capital Assets Capital assets are valued at not more than their acquisition or manufacturing cost, less the appropriate depreciation. Investments Holdings of shares and other financial investments are also part of capital assets. Investments are permanent investments in the capital of other corporations; if the investment provides overall control, the other corporation is a subsidiary of the first, whereas if the investment provides control of at least 20% of the votes, the other is an affiliate. Inventory Raw materials, semi-finished and finished products, and purchased inventory are valued at not more than the manufacturing or purchase cost respectively. If the cost is higher than market value on the date of the balance sheet, then market value is used. Securities Quoted securities are valued at not more than their average stock exchange price during the month preceding the date of the balance sheet. Unquoted securities are valued at not more than the acquisition cost less provision for any diminution in value. Depreciation and Provisions Depreciation and provisions are made to the extent required by Swiss generally accepted accounting principles. Full provision must also be made for all known liabilities. In addition, provisions are established to cover any loss in value of assets, contingent liabilities, and potential losses from pending business transactions. Hidden reserves exceeding the above are permitted to the extent judged by the board to be in the interest of the continuing prosperity of the corporation, or to enable the regular distribution of dividends, taking into account the interests of the shareholders. For example, the board may take additional depreciation, make additional provisions, and refrain from dissolving provisions that are no longer required. The auditors must be notified in detail of the creation and the dissolution of hidden reserves. Revaluations If half of the total of share capital and legal reserves is lost, real estate property or investments whose fair market value has risen above cost may, for the purpose of eliminating the deficit, be re-valued up to the maximum of such deficit. The revaluation amount shall be shown separately as a revaluation reserve.

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The revaluation is only permitted if the auditors confirm in writing to the general meeting of shareholders that the legal requirements have been respected. Other As explained in section 3.21, deductions from gross income are only allowed for tax purposes if they are recorded in the corporation's legal accounts. Details of other valuation rules permitted for tax purposes, and therefore allowed in the legal accounts, are given in section 3.23.

2.45

RESERVES Companies are required to allocate 5% of the annual net profit to the legal reserve until it has reached 20% of the share capital paid up. Also, the following amounts must be allocated to the legal reserve at all times: • any excess of the issue price over the par value of new shares, less the issue costs, to the extent the surplus is not used for depreciation or welfare purposes the excess of the amount paid up on cancelled shares over the issue price of replacement shares; and ten percent of profit distributions in excess of a dividend of five percent.

•

To the extent that it does not exceed half of the share capital, the legal reserve may generally only be used to offset an accumulated deficit. In exceptional circumstances, such as a reorganisation, the legal reserve may also be used to absorb expenses incurred to preserve the existence of the enterprise, and to reduce or mitigate unemployment. Legal reserves in excess of 50% of share capital may be freely distributed by decision of the annual general meeting of shareholders.

2.46

FILING REQUIREMENTS There are no filing requirements in Switzerland for annual financial statements except in the case of banks, finance companies and insurance companies.

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3

TAXATION OF RESIDENT CORPORATIONS In Switzerland, corporations are taxed on both their income and their capital. The Confederation, each canton and commune and, sometimes, churches have taxing jurisdiction. Certain types of corporation, including holding, domiciliary, and service companies, receive special tax treatment, as explained in section 3.3 below. Usually, foreign controlled corporations operating in Switzerland are taxed in the same way as Swiss domestic corporations. Non-resident corporations with a branch in Switzerland are subject to tax on branch income and branch capital the same as resident corporations, subject however to special allocation rules described in chapter 4 below. 3.1 LIABILITY TO SWISS TAX Except for certain exempt organisations, all resident corporations, public or private, come within the scope of the corporate tax system. A corporation is considered resident if both its place of management and its business activities are in Switzerland. The place of management is the place where the corporation is domiciled as shown in the articles. The place of business is the place from where its business activities are directed. Corporations with branches in several cantons must apportion their taxable Swiss income among the cantons concerned. The apportionment rules depend on the corporation's activity; for example, banks apply apportionment rules that are quite different from those applicable to public utilities or drugstores.

3.2

DETERMINATINATION OF TAXABLE INCOME

3.21

FINANCIAL STATEMENT INCOME Swiss business enterprises are assessed on their net profit and net equity as shown by the statutory financial statements prepared in accordance with Swiss-generally-accepted accounting principles. Swiss business enterprises are not required to prepare special tax accounts, nor are they allowed to submit any financial statements other than those prepared by management and approved by the general meeting of the shareholders. Thus, the importance of statutory financial statements may not be underestimated: they constitute basic taxpayer evidence and form the starting point for the determination of taxable income. The various adjustments made to statutory income to arrive at taxable income are discussed below.

3.22

GROSS INCOME Worldwide Income A resident corporation is subject to income tax on its world-wide income from all sources, except as explained in sections 3.24 and 3.3 below.

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Capital Gains Capital gains are included in the ordinary income of a corporation and are fully taxable. There are no separate rates applicable to capital gains. Exchange Gains Realised exchange gains are included in ordinary income; unrealised gains, however, are d eferred until realised in accordance with current Swiss accounting practice. Transactions with Related Parties Related party transactions must be recorded at arm's-length prices. Any deficiency of income or excess of expense incurred vis-à-vis related parties represents a hidden profit distribution and will be included in taxable income. Examples of such hidden profit distributions are excessive compensation paid to a director-shareholder, interest-free or cheap loans made to shareholders, lease agreements with shareholders under terms regarded as unreasonable, loans from shareholders at unreasonably high rates of interest, and purchases or sales of merchandise involving unusual pricing arrangements. In addition to being disallowed for income tax purposes, hidden profit distributions are subject to withholding taxes (see chapter 5 below.) Withholding taxes are paid by the corporation but ultimately borne by the recipient of the income. Where the withholding tax charge is not transferred to the recipient, the benefit received must be grossed up for the purposes of calculating the addback to taxable income of the deemed distribution. With withholding tax at 35%, the gross up is 153.85%, 35% of 153.85% being

3.23

DEDUCTIONS FROM GROSS INCOME General Business Expense Business expenses must be wholly and exclusively incurred for the purpose of the business in order to qualify as a deduction from taxable income. Commission payments, finders' fees, and the like are deductible to the extent that the name and address of the recipient is disclosed and the character of these payments as necessary expenses is properly documented. Interest Expense Interest is a deductible business expense. However, interest expense incurred with affiliates will be scrutinised as to its deductible character and may be subject to limitations. The rate of interest used should reflect fair market terms and conditions. The Swiss tax authorities regularly publish guidelines as to the interest rates considered appropriate on Swissfranc loans and borrowings. Interest payments at rates exceeding fair market rates or recommended official rates are disallowed for income tax purposes and are also treated as distributions for withholding tax purposes.

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The deduction of interest expense is further limited if the Swiss corporation is exclusively or substantially financed by loans from affiliates. Interest expense is deductible only to the extent that total indebtedness does not exceed six times equity. Any interest paid on indebtedness exceeding this amount is treated as a distribution. Management and Service Fees Paid to a Foreign Parent The tests for deductibility of management and service fees are as follows: • • • the payer must establish that management functions are assumed by the foreign parent company or head-office for the benefit of the Swiss co-operation; the expenses must be necessary, reasonable, and at arm's-length prices; and the basis for allocation should be consistent and fair and should reflect sound business practice. Also, the expenses must be properly substantiated.

Tax Expense For Swiss income tax purposes, any tax expense incurred by a corporation is a tax deductible expense, as follows: Pre-tax income Corporate income tax (federal, cantonal, communal) at statutory rate of 40% on 714 Net after-tax income, being the taxable income CHF CHF CHF 1000,00 286,00 714,00

Because of the deductibility of the tax expense, the effective tax rate (expressed as a percentage of pre-tax income) is consistently lower than the statutory rate. In the example shown, the statutory rate is 40% and the effective rate is 28.6%. Exchange Losses Both realised and unrealised exchange losses are tax-deductible. In cross-currency transactions (for example, where the proceeds of borrowings in one foreign currency are used directly to extend loans in another) only the not unrealised exchange loss is deductible. Depreciation Depreciation is deductible if it is calculated using allowable rates. The methods of depreciation currently used are the straight-line and the declining-balance methods. Maximum allowable depreciation rates are given in tax authority circulars, although some cantons may allow accelerated depreciation. The following are examples of the rates currently allowed when using the declining-balance method:

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Office buildings (excluding land) Office furniture and equipment Intangible assets Automobiles Computer hardware Computer software

4% 50 % 50 % 50 % 50 % 100 %

If the straight-Iine depreciation method is used, the above rates are reduced by half. Assets having only a short life and those of small unit value are charged to income as operating expenses. Inventory Inventories must be carried at the lower of cost or market. Cost may be determined using the FIFO, LIFO, or average method, and market value is calculated after taking into account provisions for special risks, such as obsolescence, slow moving stocks, etc. From this resultant value, an additional provision of one third may be taken. Obviously, this additional provision presents all the characteristics of a hidden reserve, as discussed in section 2.44 above. Provision for Bad and Doubtful Debts A provision for bad. and doubtful debts is allowed within limits. Generally, Swiss tax laws allow general provisions of up to 5% against domestic debtors and of up to 10% against foreign debtors. Provisions in excess of these percentages require substantiation. Loss Carry-Forwards Swiss federal income tax laws allow losses to be carried forward for up to a maximum of seven years. Most cantons allow the deduction of prior year losses, but the carry-forward period is frequently restricted to between one and seven years.

3.24

EXCLUSIONS FROM TAXABLE INCOME A reduction of, or exemption from, income tax is generally available for the following: • • • • • holding company income, derived from major investments in other Swiss or foreign corporations; foreign permanent establishment income and foreign branch profits; income and gains from foreign real property; contributions from shareholders to equity and share premium accounts, and profits distributed by a foreign partnership, provided that the business of the partnership is carried out abroad.

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Holding Company Income Income derived from Swiss domestic or foreign subsidiaries is subject to Swiss taxes if and when received by the Swiss parent in the form of dividend or liquidation proceeds. However, such income qualifies for relief which is usually given in any of the following forms: • • • a 95% exclusion from the tax base, taxation at a reduced tax rate, or a proportional reduction of tax due.

Capital gains realised on the disposition of an interest in a domestic or foreign subsidiary or affiliate are also included in taxable income. Foreign Permanent Establishments, Foreign Branches, and Foreign Real Property Profits Income attributable to foreign permanent establishments, foreign branches, and foreign real property is generally exempt from Swiss corporate income tax. A determining issue is the appropriateness of the method used to allocate net income between the Swiss head-office and the foreign branches. Contributions from Shareholders Contributions from shareholders in the form of subventions and payments or waivers are exempt from income tax in the hands of the recipient frequently, however, they are characterised as capital contributions and, as a result, subject to stamp duty.

3.3

TAX-PRIVILEGED CORPORATIONS Special rules, involving either exemption from or significant reduction of cantonal and/or federal taxes, apply to certain types of corporation as follows. Holding Companies These are entities which hold substantial investments in the capital of other corporations, and their income comprises, essentially, dividend income. Provided that income other than dividend income (such as trading, interest and commission income) does not exceed a certain percentage of total income (generally between 20% and 49%) the corporation will retain its status as a holding company and therefore be exempt from tax on income. Industrial or commercial Holding Companies These are normal commercial and industrial corporations which also hold equity investments in other corporations and which may qualify for relief from income taxes on their investment income. To qualify for such relief, the investment must represent at least 20 % of the investor's capital or have a carrying value of not less than CHF 2,000,000.

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Administrative Companies These are entities engaged in any type of trading or financing operation abroad, and the registered office in Switzerland is normally no more than an address for official communications. The transactions of the corporation must originate in or be supervised from places other than the registered office, and by some body or person other than the board, any individual director, or any other party connected with the corporation's shareholder(s). Domiciliary companies may not have local staff and, normally, have transactions only with parties outside Switzerland. Swiss Base Companies Some cantons give favourable treatment to entities whose activities extend beyond the limitations of the domiciliary companies described above. The tax privileges generally take the form of exempting profits from trading, outside Switzerland or taxing these profits at substantially r educed rates. The request for the determination of the tax status is usually made to the cantonal tax administration prior to formation of the corporation, each case being dealt with on its merits. The agreement thus reached is valid for as long as there is no change in the operational structures or circumstances on which the determination is based. Service and International Headquarters Companies In the case of Swiss resident corporations providing group co-ordination or management services, including research and promotional activities, Swiss tax laws require that a share of profit accruing to the group be assessed at the level of the Swiss corporation. Because it is impracticable in many cases to determine the extent of the contribution of the Swiss resident corporation to the total profits of the group, the profit assessable in Switzerland is generally deemed to be equal, at a minimum to 5% of total expenses (including the tax expense) incurred in the provision of the services. One sixth of the total local payroll cost is an alternative calculation method sometimes used. For withholding tax purposes, a service company is required to recover all expenses incurred in connection with services performed for the group and to generate a net, distributable profit equal to 10% of all expenses, as follows: Total recoveries from group companies, with a mark-up of 14.6 % Expenses incurred in the provision of services to group companies Pre-tax income Corporate income taxes, at, for example, 40 % of 104 Net profit available for distribution (the taxable profit) CHF CHF CHF CHF CHF 1.146,00 1.000,00 146,00 42,00 104,00

The net Profit of 104 meets the minimum profit requirement in that it represents 10 % of total expenses including tax expense (1,000 + 42.= 1,042).

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Tax Rates Applicable to Tax Privileged Entities The charge to cantonal taxes varies from canton to canton and thus it is not possible to provide a complete overview. In general, income of holding and administrative companies is exempt from cantonal taxes. Federal income taxes are only reduced in the case of holding company income. Cantonal capital taxes in general are levied at lower rates in the case of holding, and domiciliary companies. 3.4 TREATY BENEFITS FOR SWISS RESIDENT CORPORATIONS Eligibility Switzerland has concluded over 50 tax treaties with foreign countries and Swiss corporations are eligible for treaty benefits if: • • they have their corporate residence in Switzerland; and they are the ultimate beneficial owners of the property, reducing the income in the foreign country.

Benefits Benefits available under the various treaties include: • • • • for certain items of income, exemption from Swiss tax, with taxation in the country of source; the reduction or elimination of foreign withholding tax; the ability of Swiss corporations to claim a credit for foreign withholding taxes against Swiss income taxes payable (foreign tax credit); and the protection against most forms of double taxation.

Anti-Abuse Provisions The Misuse Decree of 1962 was introduced to prevent nonqualifying persons (corporate or private) from deriving an unintended benefit from Swiss tax treaties by using Swiss resident corporations either as a conduit or as a means of unreasonably accumulating treaty-benefited income. These anti-abuse provisions may be summarised as follows: Capital structure The Swiss corporation must have a reasonable capital structure, with the ratio of interest-bearing debt to equity not exceeding 6 : 1. Interest rate limitation The rate of interest paid on borrowings from affiliates must not exceed the fair market rate. If there is no market, the rates prescribed by tax authority publications apply.

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Expense limitation Tax-deductible expenses, such as interest, royalties, and management fees paid to nonresidents may not exceed 50 % of gross income benefiting from treaties. This limitation applies also to depreciation taken on tangible and intangible property acquired from non-residents. Redistribution requirement The corporation is required to redistribute, in the form of a dividend, at least 25 % of cross income benefiting from treaties. Non-compliance with the above provisions prevents the Swiss corporation from claiming, treaty benefit. Undue benefits obtained must be returned to the foreign tax authority via the Swiss authority in charge of supervising the correct implementation of Swiss income tax treaties.

3.5

COMPUTATION OF CORPORATE TAXES Income Tax Swiss federal income tax rates is 8,5 % of the net profit. Cantonal tax rates are progressive, and the progression is a function of yield or profitability, with fixed minimum and maximum rates. For example, in Geneva, cantonal and communal income taxes are charged at rates ranging, from 14.05 % to 32.75 % of pretax income. Because income taxes are tax-deductible, the effective tax rate, expressed as a percentage of pre-tax income, is considerably lower than the statutory rate. Credits Against Income Tax Payable A credit against income tax is generally granted for the following taxes paid: Swiss Withholding Tax Where a Swiss taxpayer receives Swiss source investment income on which the payer deducted Swiss withholding tax, such withholding tax is either creditable against tax (both federal and cantonal) or refundable. Foreign Withholding Tax For Swiss resident corporations, foreign withholding taxes generally represent a final charge in the foreign country unless tax treat relief is available. For the nonrecoverable amount of foreign withholding tax, most treaties provide for a credit against Swiss income tax subject to certain limitations (pauschale Steueranrechnung, imputation forfaitaire.) There is no credit available for the underlying corporate income tax paid by the distributing entity.

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Swiss branches of foreign entities do not qualify for treaty relief as described above, even though they are treated in the same way as resident taxpayers in respect of taxes on income and capital attributable to their Swiss operations. Capital Taxes Capital taxes are levied by the cantons on capital and reserves, usually as of the end of the tax year. The aggregate flat tax rate is in the range of approximately 0.47 up to 0.6 %. The tax also applies to the contributed capital of branches. In situations where branches do not have a formal contributed capital, the assessment basis for capital taxes is represented by a fixed percentage of the balance sheet totals, generally between 7 % and 8%.

3.6

ASSESMENT OF CORPORATE TAXES Federal Tax Tax is calculated on the basis of income earned during the business year and is assessed in the following business year. Cantonal Taxes Each of the cantons has its own tax legislation and it is not possible to give details of each. However, most are similar to the federal system.

3.7

WITHHOLDING TAXES ON DIVIDEND DISTRIBUTIONS OF SWISS CORPORATIONS Distributions of Swiss resident corporations are subject to withholding tax at the rate of 35 %, see chapter 5 below. Such withholding taxes may be recovered in full by Swiss recipients. Recipients who reside abroad may obtain relief under any relevant tax treaty.

3.8

FILING OF TAX RETURNS, ASSESMENTS OF TAX, TAX LITIGATION Filing of Tax Returns Tax return forms, which are sent out to all registered corporations at the beginning, of each assessment period, are to be filed within the prescribed period (generally between March and June). Extensions may normally be obtained without difficulty upon written request. Penalties for late filing take the form of automatic assessments which may be appealed only in certain limited situations. Assessment of Tax The tax return is reviewed for reasonableness upon receipt by the assessing agent. lt is decided at that time whether further inquiry is required. When the tax return has been investigated to the satisfaction of the agent, a final assessment is issued, or a tax audit is initiated.

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Payment of Tax Generally, taxes are payable on the b asis of a provisional or final assessment, although payments on account may be required by cantonal regulations. Tax Litigation In situations where a taxpayer believes that the assessment received is not made in accordance with applicable laws, an appeal (Einsprache, reclamation) may be filed. The time limit for appeal is usually thirty days. The filing of a written notice of appeal is a prerequisite for an appeal to be heard. The assessing authorities must reconsider all taxable elements, which may also result in other items being reconsidered which may be advantageous or disadvantageous to the taxpayer. A further right of appeal (Rekurs, recours) exists to a cantonal administrative court, or, in certain cases, to the Swiss Federal Court, whose decision is final. In certain cantons the decision of the first appeal regarding, cantonal taxes may be challenged.

3.9

CORPORATE REORGANIZATIONS (MERGERS, ACQUISITIONS, SPINOFFS, ETC.) Swiss income tax laws contain only a few sketchy provisions covering corporate reorganisations. The administrative practice followed by the various tax authorities is therefore of critical importance. Reorganisation treatment involving deferral gain on transfers of assets, exemption from withholding tax, and reduction or exemption from stamp duty, is generally available if the following requirements are met: • • • • non recognition of the gain; i.e. transfer of assets and liabilities on the basis of existing book values; assumption by the absorbing entity of tax liabilities incurred by the absorbed entity; continuity of business operations; and continuity of ownership.

Obviously, there are many gimmicks and pitfalls in the area of corporate reorganisations. In recent times, acquisition techniques and financing methods used in corporate reorganisations have attained a high degree of sophistication. The tax problems associated with complex mergers and acquisitions are therefore extremely complicated. The presence of both Swiss domestic and foreign parties frequently introduces a further factor of complexity. In significant transactions careful tax planners would typically seek and obtain an advance ruling from the competent tax authorities.

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4
4.1

TAXATION OF NON-RESIDENT CORPORATIONS
LIABILITY TO SWISS TAX Liability to Swiss tax arises when a non-resident entity: • • • • receives investment income from Swiss sources; maintains a permanent establishment in Switzerland; is a partner in a Swiss partnership; or owns real estate in Switzerland.

4.11

INVESTMENT INCOME FROM SWISS SOURCES; see chapter 5 below

4.12

PERMANENT ESTABLISHMENT INCOME The following are considered permanent establishments: • • place of management; branch, office or factory; and

• long-term building, construction, or installation project. A permanent establishment may also be created if an agent in Switzerland habitually exercises, authority to contract in the name of and on behalf of a foreign principal. A foreign entity is not deemed to maintain a permanent establishment in Switzerland and is therefore not liable to Swiss taxes if it operates: • • a representative office, or a warehouse where goods are stored for convenience of delivery.

Also foreign corporations may retain the independent services of Swiss banks, lawyers, notaries, fiduciaries, accountants and bookkeepers without attracting a liability to Swiss taxes on income, capital and profit distributions. Even a very broad range of contractual relationships of a nonresident corporation with Swiss based service providers is not sufficient to constitute a taxable presence in Switzerland.

4.13

SWISS PARTNERSHIP INCOME Swiss partnerships are fiscally transparent. The foreign partners are liable, to Swiss income tax on their share of partnership profits and on their equity invested in the partnership. lf the foreign

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partner is an individual, he or she will be liable to individual income tax; a foreign corporation will be liable to corporate income tax.

4.14

SWISS REAL ESTATE INCOME A foreign corporation owning, Swiss real estate is liable to Swiss taxes as follows: • • • • real property transfer tax (Handänderungssteuer, droits de mutuation) on the acquisition and disposition of Swiss real estate; income tax on net income derived from, and capital gains realised on the disposition of, Swiss real estate; a proportion of interest expense is tax deductible; capital tax on the net asset value of the Swiss real estate; and where applicable, special property taxes imposed by the canton or commune in which the real estate is located.

4.2

DETERMINATION OF TAXABLE INCOME AND CAPTIAL OF SWISS PERMANENT ESTABLISHMENTS The foreign entity is liable to Swiss corporate income tax on income and capital attributable to the permanent establishment. In general, taxable income of a permanent establishment is determined on the basis of its separate financial statements. A percentage of foreign head-office administrative expenses may be deducted in arriving at the profits of the permanent establishment.

4.3

REMITTANCE OF PROFITS Swiss-based permanent establishments may remit their net after-tax profits abroad free of Swiss withholding tax.

5
5.1

WITHHOLDING TAX
INCOME SUBJECT TO WITHHOLDING TAX Federal withholding tax (Verrechnungssteuer, impôt anticipé) is levied at source on income from movable capital, lottery gains and insurance benefits. Movable capital includes the following: • • • • deposits with Swiss banks; bonds and other similar negotiable debt instruments issued by a Swiss resident borrower; shares and profit participation certificates issued by Swiss resident corporations; and units issued by Swiss resident investment funds.

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Interest Interest withholding tax is imposed on certain specific interest categories only the most important being interest on deposits with Swiss banks. For withholding, tax purposes, the term Swiss banks is very broadly interpreted, and may include resident finance corporations and any other corporate or individual person accepting, customer deposits on a regular basis and paying, interest in the same way as a professional deposit taker. Generally speaking, deposit takers are considered as banks for withholding, tax purposes if they attract more than 12 interest-bearing customer deposits and expect to attain the number of 20 deposits within a period of three years. Interest withholding tax is also imposed on interest derived from bonds and similar negotiable debt instruments issued by Swiss resident borrowers. Withholding tax on interest secured on Swiss real estate is levied independently of normal withholding tax and, in certain instances, both withholding taxes could be levied cumulatively. Profit Distributions Profit distributions involve any benefit of a financial nature received by a shareholder (other than the repayment of capital) and include: • • • • ordinary dividends liquidation proceeds stock dividends constructive dividends

Royalties, management fees, service fees, and technical assistance fees are not subject toSwiss withholding tax. However, if the payments are to an affiliate (whether or not a shareholder) and are deemed excessive, they are treated as a hidden distribution of profits subject to withholding, tax.

5.2

EXEMPTIONS FROM WITHHOLDING TAX The following income is exempt from withholding tax: Foreign Source Income Withholding tax is levied exclusively on Swiss source income. The source is determined by the residence of the debtor or by the place where the investment is made. Loan Interest This includes a whole range of business and non-business loan transactions where the borrower is not a bank.

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Interest on Interbank Loans Between Swiss or Foreign Banks This category includes a whole range of Interbank transactions; a circular issued by the tax authorities provides a list of exempt transactions. Interest on Fiduciary Deposits If a bank acts as fiduciary agent (trustee) and deposits the funds with a foreign bank or invests them in Eurobonds, the interest derived therefrom and transferred to the customer is exempt. Branch Profits Remittances of profits by a Swiss branch to its foreign head-office. Corporate Restructuring Retained earnings of a corporation which are transferred to the reserves of another entity of the same kind upon merger, transformation, or reorganisation, see section 3.9 above. Small Amounts of Income Interest on savings accounts and deposits, if the interest is less than CHF. 50 per annum. Distribution of Capital Gains Realized by Investment Funds This exemption is subject to the condition that such gains are paid through a separate coupon. Interest on Savings Held by Recognized Pension Funds Interest on deposits in insurance funds, welfare funds, and similar institutions which provide for old-age, survivor, and disability benefits.

5.3

WITHHOLDING AND REIMBURSEMENT OF TAX The payer of the income is required to withhold 35% irrespective of whether the recipient is entitled to a full or partial refund. Payment of tax must be made on or before 30 days after maturity of the interest or dividend coupon. Relief may be obtained, depending, on the residency of the taxpayer and the provisions of any relevant treaty, as follows:

5.31

RELIEF FOR SWISS RESIDENT TAXPAYERS For recipients who are Swiss residents, the withholding tax is a means to enforce compliance with Swiss tax reporting requirements.

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Withholding tax is reimbursed by way of cash refunds to corporate taxpayers or credit against income tax payable by individual taxpayers, subject to the following conditions: • • the beneficiary must be a Swiss resident taxpayer; and the asset and the income derived therefrom must be reported by the beneficiary.

5.32

RELIEF FOR NON-RESIDENTS For most non-resident recipients, Swiss withholding tax represents a final tax on investment income from Swiss sources. A tax treaty may, however, reduce the rate of tax or exempt the nonresident entirely. Relief is available upon application for a refund. With the two following exceptions, treaty reduction or exemption is never granted by a reduction of the withholding tax. These exceptions concern: • • dividend distributions to a U.S. parent company, where the 30 % treaty rate may be applied; and income from investment funds, provided that at least 80 % of such income is derived from foreign investments and that a bankers' affidavit certifying the non-residency of the unit-holder is presented to the tax authorities. In all other cases, Swiss federal withholding tax must be paid in cash, even if the recipient is subsequently entitled to claim a refund.

•

6
6.1

INDIRECT TAXES
VALUE ADDED TAX; MEHRWERTSTEUER; TAXE SUR LA VALEUR AJOUTEE Value added tax (VAT) was introduced on January 1, 1995, replacing, the existing sales tax. VAT is imposed on deliveries of goods and services, and the assessment system is broadly similar to those in force in the European Union. The rates applied are as follows: standard rate Reduced rate (food, medicine, water, etc.) special rate (for hotel accommodation, introduced October in October 1996) 7.6 % 2,4 % 3,75 %

6.2

STAMP DUTIES With effect from April 1, 1993, stamp duties have been levied on the following transactions:

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• issues or increases of the capital stock of legal entities, bonus certificates, bond issues, and money market paper. Capital transfers to a branch are exempt. • transactions in Swiss and foreign securities effected by Swiss-based brokers or other registered securities dealers, including banks.

6.3

REAL ESTATE TAXES Certain cantons and communes levy an annual real estate tax based on the gross value of real estate, without deduction of mortgage or other debts that may be attached thereto. The taxable value is normally lower than current market value and rates of tax range from 0.05 % to 0.40 %.

7

PERSONAL TAXATION
Swiss personal income tax legislation is enacted at both the federal and cantonal levels. The federal regulations are described in more detail because of their nationwide application, whereas the cantonal laws are described only to the extent that they are significantly different from federal law.

7.1

INCOME TAXES ON RESIDENTS

7.11

TAX LIABILITY An individual becomes fully liable to Swiss income tax if domiciled in Switzerland if resident and earning, an income in Switzerland, or if living in Switzerland without earned income for a period exceeding, three months.

7.12

DETERMINATION OF TAXABLE INCOME An individual fully liable to Swiss tax is taxed on worldwide income. The taxable income includes the following: Earned Income Any compensation received, whether in cash or kind, is included in taxable income. Income from Swiss employment is confirmed in a salary statement (Lohnausweis, certificat de salaire) provided by the employer. Foreign source earned income should also be reported in the Swiss return, unless a tax treaty provides specifically for imposition of tax by the country of source. In such a situation, the exempt income is nevertheless taken into consideration for purposes of determining the progressive tax rate applied to non-exempt income.

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Income from Self Employment Income from self employment includes fee and trading income as well as profits from agriculture. For certain categories of self-employed income, financial statements must be attached to the return. A partnership is not a taxable entity in Switzerland and each partner is taxed on the share of partnership profits. Investment Income Dividends and interest from domestic and foreign sources are included in taxable income. Swiss source investment income, such as bank and bond interest, dividends and investment fund distributions are generally subject to a 35 % withholding tax, which is offset in full against Swiss tax on income and net worth due by a Swiss r esident. For the r ecipient of investment income to qualify for such a credit, a list of securities (Wertschriftenverzeichnis, état des titres) must be submitted, on which must be indicated both the taxable value of the securities and the amount of income received. When dividends and interest are received from a country with which Switzerland has concluded a tax treaty, the income should be reported gross. A special credit (pauschale Steueranrechnung, imputation forfaitaire) against Swiss income tax payable is available in certain situations for that part of any withholding tax which is not recoverable under tax treaty provisions. Dividends and interest derived from non-treaty countries are reported net; that is, after deduction of foreign withholding tax. There is no credit for underlying, foreign income taxes paid or accrued. Rental Income Swiss source rental income is taxable in Switzerland as ordinary income. Many foreign nationals living in Switzerland own real estate in their home country and, during their period of Swiss residence, this real estate may be rented and may produce foreign source rental income. This income is not taxable in Switzerland. lt is, however, taken into account for the determination of the tax rate applicable to non-exempt income. A resident taxpayer owning and living in a house or apartment in Switzerland will generally be taxed on the hypothetical rental value of the property. Capital Gains on Disposition of Movable Property For federal tax purposes, gains realised upon disposal of movable property are exempt from tax. With one exception (Grisons, which taxes gains on personal capital assets) the cantons follow the federal tax system. However, if a taxpayer is engaged in a trade or business, and is therefore required to keep accounting records, any gain on disposal of business assets forms part of taxable income. Gains Disposition of Real Property Such gains are generally subject to a separate real property gains tax in the various cantons. lf the immovable property sold represents business property, the gain is included in business profits subject to federal and cantonal income taxes.

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Pensions and Annuities Pensions, annuities and other income of this type are fully taxable at the federal level. Certain types of annuity income, such as annuities paid by recognised pension funds, are subject to reduced tax rates or are assessed separately.

7.13

DEDUCTIONS Social Security Social security and unemployment contributions paid by the employee are fully deductible. Life insurance premiums and pension fund contributions are generally deductible up to a limit. Special deductions are usually granted for children and disabled dependants. Medical expense deductions are allowed in certain cantons, within limits expressed either in francs or as a percentage of total taxable income. Business Expenses The reimbursement of properly substantiated and documented business expenses is not income to the employee; conversely, an employee in receipt of expense reimbursements is not allowed to take a deduction for the expense. Unreimbursed business expenses are deductible from the employee's income to the extent such expenses are incurred for a clear business purpose and properly documented. It should be noted, however, that Swiss employers have a legal duty reimburse all business expenses incurred by their employees in the accomplishment of their professional duties; it is therefore rare for genuine business expenses not to be reimbursed. Interest Expense Interest expense is deductible. However, if interest expense is incurred to finance tax-exempt property (for example, mortgage interest on foreign property) only the portion allocable to financing taxable property is allowable as a deduction.

Record Keeping An important factor for obtaining a deduction from taxable income is record keeping. For any deduction other than those related to the family situation (the personal exemption, and the child and dependent allowances) the taxpayer is required to document the expense, indicating both the amount and the name and address of the recipient.

7.14

LUMP SUM TAXATION; PAUSCHALSTEUER; IMPOT A FORFAIT Resident aliens may elect for special taxation if they do not have any income-producing activity in Switzerland. This is a lump-sum tax based on deemed taxable income which, in turn, is a function of the living expenses the taxpayer incurs.

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The tax due is the higher of: • • • the tax calculated on certain specific items of actual income, such as income from Swiss real property, Swiss source investment income, pensions, and annuities, or the tax due on five times the rental expense of the taxpayer, or a negotiated amount on a deemed taxable income.

The lump-sum taxation must be requested by the taxpayer and a special tax return is filed when electing for this special taxation. The system enables the taxpayer to retain eligibility for treaty benefits (such as the reduction or elimination of foreign withholding, tax) if treaty benefited income is properly declared and therefore subject to Swiss income tax at the full rate. However, a lump-sum taxpayer may also opt out of the treaty, with the result that treaty country source income is ignored for Swiss tax purposes, while remaining subject to the full foreign withholding, tax.

7.2

INCOME TAXES ON NON-RESIDENTS A non-resident individual is subject to limited taxation if in receipt of earned income from Swiss sources, owning a house or any other immovable property situated in Switzerland, having the right to use immovable property in Switzerland, maintaining a permanent establishment in Switzerland, holding a partnership or commercial interest in a Swiss enterprise, or in receipt of directors' fees or similar remuneration from a Swiss resident corporation. A non-resident is taxed on the following: Income Derived from Swiss Real Estate Income derived either from Swiss real estate or from loans secured by a mortgage on Swiss real estate is subject to ordinary taxes. Investment Income from Swiss Sources A 35 % withholding tax (Verrechnungssteuer, impôt anticipé) is imposed on Swiss source dividends (including, distributions of investment funds,) interest on Swiss bonds, and bank deposits with Swiss resident banks. The tax may be fully or partially recoverable depending on the terms of any relevant tax treaty. Directors' Fees from Swiss Companies Non-resident individuals receiving directors' fees from a Swiss resident corporation are subject to ordinary taxes on such income or to a source tax at a special rate. The Swiss corporation is required to file, together with the tax return, a special information return indicating all the directors' fees paid during the year, with the names and addresses of the recipients. Income from Swiss Partnerships

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Non-resident partners of a Swiss partnership are subject to ordinary taxes on their share of the partnership's profits and equity. For the determination of the tax rate, worldwide income and wealth are taken into account.

7.3

OTHER INDIVIDUAL TAXES

7.31

NET WORTH TAXES All cantons levy a net worth tax on residents. foreign real estate and foreign permanent establishments are exempt from tax but taken into consideration for the determination of tax rates, which range from 0.1 % to 1 % per annum of taxable net worth. The net worth tax is assessed with the income tax and is payable at the same time.

7.32

GIFT AND INHERITANCE TAXES Gift taxes are imposed by the cantons and communes on the following gifts: • • gifts made by Swiss resident donors; and gifts of Swiss real property made by resident and non-resident donors. Inheritance taxes are imposed by the cantons and communes in the following situations: estates of deceased persons having had their last domicile in Switzerland; and estates of foreign deceased persons involving the transfer of Swiss real property or unincorporated business enterprises in Switzerland.

• •

The rates of gift and inheritance taxes are approximately the same. They depend upon the relationship existing, respectively, between the deceased and the heirs, or between the donor and the donee. Interspousal gifts and inheritances collected by the surviving spouse are frequently exempt or taxed at very low rates (up to 6 %.) Gifts to, and inheritances received from, unrelated persons attract rates ranging from 20 % to 40 %.

7.33

CHURCH TAX In most cantons a church tax is imposed on individuals belonging, to one of the three recognised churches, being the Protestant, the Roman Catholic and the Christ Catholic churches. Church taxes may amount to between 8 % and 15 % of total income tax. For federal tax purposes, no church tax is levied. Church tax is voluntary in Geneva.

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7.4

TAX RETURNS, ASSESSMENT AND PAYMENT OF TAX Most individual taxpayers are required to file a return and to report their net income and net worth. Tax is assessed on the basis of the return filed and is collected subsequently. Certain specific categories of taxpayer are subject to a salary withholding tax which represents either: • • a final tax, with dispensation of subsequent filing of a return, and no formal assessment, or an estimated tax, with the requirement to file a tax return at year-end, subject to final assessment as in the case of ordinary taxpayers.

For details on the Swiss wage withholding tax system, see section 7.42 below. 7.41 FILLING OF RETURN BY ORDINARY TAXPAYERS Type of Returns to be Filed Ordinary Swiss resident taxpayers must file two returns: • • Swiss federal tax return reporting net income, and Cantonal and communal tax return reporting both net income and net worth.

Because federal taxes are assessed and collected by the cantonal tax administrations, many cantons have developed combined tax return forms which provide the necessary space, or separate columns, to report income and deductions for both federal and cantonal purposes. Filing Date As a general rule, individual income tax returns must be filed annually on or before February 28 (or March 3 1) and report: • • income of the preceding calendar year, and net worth at January 1 of the year the tax return is filed.

Filing Date for Newly Arriving Taxpayers Individual taxpayers who become liable to Swiss taxes during the tax year, for example because they move to Switzerland after the normal filing dates, are required to file a provisional r eturn shortly after arrival and to report the following items: • • net income the taxpayer expects to make during the period from the date o arrival until the end of the current calendar year; and net worth at the time the taxpayer becomes a Swiss resident.

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The net income is annualised and tax is computed for one year. It is then pro-rated to determine the amount of tax due for the period the taxpayer is liable to tax. Extensions of Time for Filing Extensions of time for filing returns are granted upon special request. The granting of extensions is normally contingent upon payment of an estimated tax. Assessment of Tax Swiss resident taxpayers are required neither to compute the tax due nor to make payment of tax when the return is filed. Tax is assessed by the revenue accent on the basis of the return filed and, as the case may be, additional information provided by the taxpayer in the context of the assessment procedure. At the end of such procedure, the taxpayer would typically receive: • • an assessment of tax and, if the assessment has become final, a request for payment of the tax.

Tax Rates The federal tax rates applicable to individuals are progressive; the maximum rate is 11.5 %. Cantonal income tax rates are a composite of base tax and surtax. In addition to the base tax, the cantons and communes generally levy a surtax expressed as a percentage of the base tax; that is, the cantonal base tax is multiplied by a cantonal factor and a communal factor, both of which are determined annually. Cantonal tax rates are also progressive. The maximum rates applicable to incomes over CHF 400,000 are approximately: · · 30 % in high-tax cantons (such as Basle, Berne, Geneva and Zurich), and 18 % in low-tax cantons (such as Schwyz and Zug).

Payment of Tax Federal taxes, which are assessed on a two-year period, are due in two instalments payable on or before March 31 of the year following the tax year. Cantonal taxes are generally payable by instalments with a final amount due within 30 days after receipt of the assessment.

7.42

TAX WITHHOLDING ON WAGES AND SALARIES Many cantons require withholding taxes with respect to: • resident aliens during their early years of employment in Switzerland (B permit holders);

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• • •

cross-border workers in certain cantons; non-resident individuals receiving, directors fees from Swiss corporations and non-resident athletes and entertainers performing in Switzerland.

In certain cantons, such as Zurich and Vaud, tax is withheld irrespective of the level of income; however, individuals with a high salary must also file an ordinary tax return at year-end. In this situation, tax withheld is regarded as a prepayment. Tax withheld includes all ordinary taxes: Swiss federal, cantonal and communal. Because the tax withheld is calculated on gross rather than net income, the rates are slightly lower than those applicable to ordinary taxpayers. Tax is withheld monthly by the employer. In certain cantons, tax withholding, is required only if earning income is below certain amounts; for higher earning levels, the tax is assessed and collected through the normal filing, procedure.

7.43

PENALTIES, INTEREST AND AUTOMATIC TAXATION If a taxpayer fails to file a tax return on time, there is automatic taxation Veranlagung nach Ermessen, taxation d'office.) In such a case, the authorities assess the taxpayer on the basis of what they consider to be a reasonable estimate. Such an assessment is usually substantially higher than the actual basis and is, therefore, expensive for the taxpayer. A penalty for non-filing of the return is also imposed. The tax is due within a short deadline and there is usually no possibility of refund, claim, or appeal. lf a taxpayer fails to pay taxes due on time, interest for late payment is imposed.

8

LABOUR CONDITIONS AND SOCIAL SECURITY

8.1

WORKING CONDITIONS Wages and Salaries Wages and salaries are normally based on company or industry-wide agreements certain of which fix minimum salary levels, which are absent from federal legislation. There are no compulsory profit sharing schemes.

Consultation with Employees Private enterprises with at least 50 employees are required to set up a body representing the employees, if the employees vote by secret ballot to have such a body. The size of the body is dependent on the size and structure of the enterprise, and is frequently a matter for agreement between the employer and employees. The employer is required to inform the body extensively and in a timely manner for the conduct of the employees' duties and, at least annually, on the effect of business trends on the employees

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and on employment generally. In addition, the law grants employees a right to be consulted on questions regarding workplace health and safety, the transfer of all or part of these to a third party, and mass dismissal. In enterprises without a representative body, employees have indivi dual rights to information and consultation.

Hours Worked On average, the Swiss, both blue and white collar, work significantly more than 40 hours per week. Overtime may be compensated in cash or equivalent free time. Overtime premiums are normally immediate for blue collar workers, and usually start after 60 hours overtime per calendar year for white collar workers. Annual overtime may not exceed 260 hours in industry for technicians and white-collar workers, and 220 hours for other workers. Up to 60 or 90 hours in annual overtime may be worked without authorisation. Cantonal authority approval must be sought for any overtime in excess of these limits. Temporary, night and Sunday work is voluntary and must be remunerated with a minimum premium of 25 % or 50 %. No premiums need be paid, however, for permanent night and Sunday work.

Vacation Federal law prescribes at least four weeks of annual vacation, and at least five weeks for employees up to the age of 20.

Termination of Employment Contract Unless the employment contract is for a fixed term or provides for longer notice periods (of equal length for both employer and employee) termination is possible upon giving the following notice: • • • one month for employees with less than one year of service; two months for employees with two to nine years of service; and three months for periods of service of ten years or more.

At the request of the employee, the reasons for dismissal must be given in writing. Employees with more than twenty years of service and who are over 50 years of age at the time of dismissal have a right to an indemnity of from two to eight months' salary.

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8.2

SOCIAL SECURITY Social security benefits in Switzerland are governed partly by federal and/or cantonal law and partly by collective employment agreements. Participation in the federal social security program is compulsory for all persons, whether employed or self-employed. With regards to retirement benefits, it is customary in Switzerland to speak of a three tier system; the first tier refers to the federal old age insurance, the second to the occupational retirement and disability pension schemes, and the third to the employee's own savings efforts (life insurance or bank savings.) Federal legislation covers both the first and second tiers.

8.21

OLD AGE AND DISABILITY, ALTERS- UND HINTERLASSENENVERSICHERUNG; INVALIDEN-VERSICHERUNG (AHV; IV) ASSURANCE VIEILLESSE ET SURVIVANTS, ASSURANCE INVALIDITE (AVS; AI) Resident individuals and non-residents having a gainful activity in Switzerland are required to contribute to the old age and disability insurance scheme. Employers also have the same obligation. The contribution is 10.1 % of total compensation, 5.05 % being borne by the employee. Employers are required to withhold the insurance contributions monthly and remit them to the social security authorities at the end of each quarter. The exact amount of benefits is calculated on the basis of the amount and the number of years of the individual's contributions, with maximum retirement benefits being the following as of January 1.2004 (in CHF): Single person Married couples CHF CHF 25.320 37.980

Old age pensions are payable at the age of 65 for men and, for women, age 62 until 2000, 63 from 2001 to 2004, and 64 from 2005. Married couples receive a combined pension when both have reached the relevant qualifying age. 8.22 OCCUPATIONAL RETIREMENT AND DISABILITY INSURANCE, BERUFSVORSORGE, PREVOYNACE PROFESSIONNELLE Since 1985, occupational retirement and d isability insurance has been compulsory for all employees who have annual earnings in excess of a threshold currently set at CHF 25.320 and who are subject to the federal old age and disability insurance (see above). The maximum compulsory pensionable annual earnings currently CHF 50.640, which represents that part of annual earnings between CHF 25.320 and CHF 75.960, although many corporations have voluntary schemes with higher pensionable earnings and benefits. The retirement pension generated by the compulsory insurance depends on the amount of accumulated retirement credits and interest at retirement age. Conversion rates are fixed by the Federal Council.

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8.23

UNEMPLOYMENT INSURANCE Individuals having an employment in Switzerland are subject to mandatory unemployment insurance. The contribution, as from January 1, 1995, is 3 % of the first CHF. 8,100 of monthly earnings and 1 % of the next CHF 12,150. The employer each bear 50 % of the monthly contribution. Under the unemployment insurance scheme, single employees receive 70 % and married employees 80 % of the qualifying, final pay (maximum CHF 97,200). To qualify for these benefits, the employee must have contributed to the scheme for a minimum period of six months within the two years prior to becoming unemployed.

8.24

ACCIDENT INSURANCE All Swiss business enterprises must contract occupational accident insurance for both temporary and permanent employees. Occupational illness must also be covered. Such coverage is obtained through private insurers and the cost is borne by the employer. The premiums on insurance for accidents not related to work may be borne by the employer or the employee, or may be shared.

8.25

HEALTH INSURANCE A minimum level of health insurance is required by federal law for all Swiss residents other than temporary employees and the employees of certain international organisations such as the United Nations. Insurance above the minimum level may also be available, depending on the state of health of the individual.

8.26

CHILD ALLOWANCES Swiss business enterprises are required to contribute to a scheme for child allowances. Each canton operates its own system, with different conditions of funding and benefits. On average, the cost of contributing to the schemes ranges from 1.2 % to 2.25 % of total payroll. The allowances range from CHF. 100 to CHF 300 per child.

8.3

SOCIAL SECURITY TREATIES In the absence of social security treaties, migrant workers are exposed to the risk of either double coverage (in their home country and in the country where the personal services are performed, and hence double cost) or inadequate coverage because neither of the social security schemes provide the benefits otherwise available to ordinarily resident employees. Social security treaties are designed to avoid both double and inadequate coverage, and Switzerland has concluded approximately 20 agreements, mainly with its traditional trading Partners.

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Under these agreements, a migrant worker temporarily assigned from one country to a nother may retain the coverage of the home country system, and both employer and employee continue to contribute to that system, and the employee receives full benefits from that system. A migrant worker permanently assigned from one country to another loses the right to receive benefits from the home country system and become eligible for benefits from that of the country of employment. Under the clearing, mechanism established by international agreement, the home country system then transfers some of the accumulated premiums to the other country, thereby enabling, the latter to provide benefits as though full contributions had been made to that system.

9

GOVERNMENT INCENTIVES
Switzerland's economy is based largely on private initiative, free trade, a freely convertible currency, competition and, hence, efficiency, low taxes, and a low level of government intervention. It is therefore not surprising that government incentives are relatively modest when compared to programs available in neighbouring countries.

9.1

EXPORT RISK GUARANTEE PROGRAMM, EXPORTRISIKOVERSICHERUNG, GARANTIE DE RISQUE A L'EXPORTATION Switzerland operates a federal export risk guarantee program. All exports of Swiss-made goods, except weapons and ammunition, are eligible for guarantee, as are services connected with engineering and construction work abroad and exports of know-how and processes. The guarantee is granted only to firms domiciled in Switzerland and for supplies primarily of Swiss origin, but the Swiss content rule is very flexible. Fifty percent may be manufactured in countries with which Switzerland has reciprocal agreements, such as Germany, France, Italy, Sweden, and Belgium. In general, cover runs for up to five years from the date of delivery, but the scheme occasionally issues guarantees covering longer periods for the sale of capital goods to developing countries. Only political risks are covered. These include cancellation of an existing, payment or import license in the buyer's country, the transfer risk (that is, non-availability of hard currency in the buyer's country ), and default by the buyer due to government measures or for political reasons. The guarantee covers goods and services against loss resulting from confiscation by authorities or political events such as war, revolution, etc., if no private insurance company will cover the risk. Losses due to currency fluctuations are not covered. Maximum coverage of political risks is 95 % and applies principally to large deals involving, developing countries. There are no governmental arrangements for financing export sales. This is handled through commercial banks and private institutions.

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9.2

INVESTMENT INCENTIVES Switzerland attracts industrial investment from abroad with both federal and local government programs to create jobs for people living, in economically troubled regions. Both Swiss and foreign firms are eligible for the benefits available through these programs. Federal assistance to economically troubled regions is generally given only if new jobs will result. Assistance takes the form of federal government guarantees for bank facilities and interest rate subsidies of one third; that is, for example, 3 % of a 9 % interest rate. Investment incentives vary from region to region but are most generous in areas such as St. Gall, Solothurn, Neuchâtel and Berne, which have troubled industrial sectors. More prosperous areas with a wide range of industries, such as Geneva, Basle and Zurich, offer fewer concessions. Cantonal authorities are most interested in attracting international corporations that need a skilled work force to produce high technology goods, especially in the electronic field, and which locate their regional headquarters in urban centres. New ventures may be exempt from municipal and cantonal taxes for up to 10 years. Corporations not receiving the maximum relief may expect tax reductions of from 30 % to 50 % over varying periods of up to 10 years. Municipalities interested in attracting investment often have land available for sale or rent at below market rates for projects that aid industrial development. Local authorities are also willing to help retrain workers. For instance, watchmakers have been aided to enter the electronics industry. In Berne, subsidies may amount to as much as 20 % of wages paid.

10
10.1

GOVERNMENT CONTROLS
IMPORT AND EXPORT CONTROLS Quota restrictions on imports into Switzerland apply mainly to agricultural products. A complete ban is imposed on butter imports. Import permits are also required for defence materials, cereals, live animals, meat, certain fruits and vegetables, wine in barrels, narcotics, pure alcohol, and some other products. Certain items that fall under stockpiling regulations, including coffee and petroleum products, are subject to special permits. Certain textiles, such as wool, cotton and linen products, require import permits, except if originating in EFTA and EU countries. Switzerland grants most-favoured-nation rates to all countries except its EFTA and EU trading partners, whose industrial (and certain other) goods enter Switzerland tariff-free, provided they satisfy the rules of origin. It retains, however, the right to levy duties for revenue purposes on such goods as automobiles, trucks and petroleum products. Importers must pay the regular turnover tax (see chapter 6.) Fuels, alcohol, vine, cars, tobacco and certain other products are also subject to excise tax, payable on importation. Switzerland has no specific anti-dumping, law. Labelling requirements are generally liberal, although the law does forbid trademark forgeries.

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There are 28 free ports or free zones. Goods may be warehoused for an unlimited time without being subject to Swiss duty. Packing and sorting is allowed without customs supervision. Processing or changing the nature of the goods, requires special authorisation; however, if the goods are re-exported, there is considerable freedom. To facilitate import operations, 13 federal warehouses also exist, which may be used for all types of merchandise. Their use is subject to special regulations. In principle, all imported goods intended for re-export may enter on a duty-free basis. Duty drawbacks exist only for tobacco goods, alcoholic beverages and products containing imported sugar.

10.2

RESTRICTIONS ON INVESTMENT A company interested in investing, in Switzerland needs few approvals, nor is there any special office controlling or monitoring such investments. However, the establishment of a bank requires the approval of the Federal Banking Commission. Also, with effect from February 1, 1997, securities dealers are required to obtain a license. Foreign corporations may invest in the same industries as those open to private Swiss corporations except for utilities and certain other public services controlled by the government. Investment in mines is governed by cantonal laws, which require 51 % Swiss ownership. Similarly, although foreigners may hold a majority in petroleum exploration operations, they are limited to less than 49 % ownership of operation engaged in exploitation. Apart from these few exceptions, there is no restrictions on the percentage of equity which may be held by foreign investors. Both foreign and: local firms that plan to build factories or install machinery must obtain approval from the local building authorities. In simple cases, approval takes from 45 to 60 days, depending on the nature of the project. All cantons have zoning regulations for industry and housing.

10.3

ACQUISITION OF SWISS REAL PROPERTY At the present time, the purchase of real property by non-residents is subject to prior authorisation, as is the purchase of shares in real property corporations or partnerships. Real estate transactions made without such prior authorisation are null and void. Prior authorisation is obtained easily for the acquisition by non-residents of business premises if the premises are wholly or mainly used as a manufacturing facility, as offices, for retailing, or for some other commercial purpose. Applicants must provide information on previous and future business activities. Buyers, by virtue of their business, profession, or residence, must be able to participate in the management of the company.

10.4

ANTI-TRUST LEGISLATION

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Switzerland's attitude towards cartels, dominant positions, and restraint of trade is far more liberal than that of most other western countries, although chances made by the 1996 anti-trust law became effective in July 1996, except for some provisions that entered into force on January 1, 1997. The law addresses three types of restriction on competition: cartels, anti-competitive behaviour, and mergers leading, to inappropriate market domination. Cartels, referred to as agreements relating to competition, are presumed to be illegal if they: • • • set prices, directly or indirectly; restrict the quantity of goods or services produced, or allocate exclusive distribution territories.

Anti-competitive behaviour of enterprises that dominate the market includes activities such as discriminatory pricing, the artificial limitation of production, and the blacklisting of customers or suppliers. In addition, the law seeks to prevent mergers, acquisitions, or other associations that result in an inappropriate level of market domination. Competition matters are addressed by a competition commission comprised of from 11 to 15 lawyers, economists, business representatives and consumers, who are all a ppointed by the Federal Council and who make recommendations to the federal authorities. Parties claiming to be injured by the anti-competitive behaviour of others may seek r dress e through administrative or judicial procedures. Claims are addressed by the competition commission, whose decisions may be appealed to an appeals commission. Also, suit may be filed in federal court.

10.5

PRICE CONTROLS Switzerland has an ombudsman whose principal task is to review what indivi dual consumers may perceive as unreasonable price increases for basic goods and services offered by both public and private business enterprises. The ombudsman, with a staff of approximately 15 economists, would usually attempt to arbitrate the conflict and issue a recommendation as to a pattern of price increases considered socially and economically acceptable to both parties.

10.6

EXCHANGE CONTROLS There are currently no exchange controls in force, expect for certain capital export regulations applicable to the financial sector. The banking law defines the types of capital export transactions that are subject to the prior approval of the Swiss national bank, and the bank has issued a circular setting out clearly the transactions that are subject to approval.