Minimum substance and the “multi-national SME”
What constitutes ‘minimum substance’ for a company in a rather formalistic and civil law country like Switzerland? Fortunately, not as much as one might expect.
Until the recent financial crisis and crack-down on offshore centres, cross-border families and offshore companies could still find what they were looking for from Swiss banks, who were happy to open accounts for offshore and onshore companies, regardless of substance, without much fuss. This has all changed unrecognizably. From around 2010, it was beginning to look like FINMA’s new“cross-border risk management” requirements for banks and intermediaries, together with the recurrent offshore leaks and tax scandals, would close down the possibility of foreign company accounts in Switzerland, with the exception large industrial or trading groups.
Even Swiss letter-box companies – of which there are many thousands all over Switzerland and especially in low tax cantons such as Zug, Schwyz, Luzern – can no longer get accounts open without very onerous conditions attached.
Fortunately this has not been as bad as we feared. As banks restructured and the crisis receded, in 2012 and 2013 things started improving.
The big banks have now come up with new rules about what constitutes substance for an international group (however offshore it might wish to remain in theory), which can be summarized as:
local staff including a Swiss-resident manager / director
Swiss office space
minimum of commercial / treasury / FX transaction volume
proof of tax compliance (in Switzerland – which can include outsourcing of up to 80% of business income and costs)
A Swiss company with demonstrable substance qualifies for full onshore status and can apply for the whole range of international banking services offered to any domestic company.
Given this basic local substance (which facilitates the newly enhanced anti-money laundering procedures and controls)a client’s group banking needs can be metin the same way as any small multi-national, and international transactions should not be subjected to unduly onerous compliance requirements.The banks have at last understood the process of “onshorisation”, and now are beginning to understand better the needs of legitimate, cross-border “Small & Medium-sized (Multinational) Enterprise” which could reduce the sector’s excessive dependence on wholly opaque offshore companies.
In addition, having gained entry to the domestic banking department of Credit Suisse or UBS with a small Swiss company, friendly bank managers seems once again prepared (like in the good old days) to go out of their way to expand the relationship, subject to a few volume & pricing issues - and to allow additional offshore corporate accounts to be opened to bring in more fees.
The minimal annual banking volume expected for such accounts – from corporate FX, treasury, transfers, etc. - would seem to be around EUR 3’000’000 (approx. USD 5’000’000), generating annual fees from transactions of around CHF 15-20’000. Trust companies with enough volume of business to offer can get these minimum thresholds reduced for individual companies.