SWITZERLAND Law and Practice Contributed by: Francis Nordmann, Johannes Bürgi, Christian Eichenberger, André Kuhn and Sabrina Kunz, Walder Wyss Ltd
3.8 Lenders’ Liability Under Environmental Laws Generally, lenders that merely financed a property will not become liable under environmental laws but the borrower may become liable, which may have an indi - rect effect on the financing and potential enforcement scenarios. 3.9 Effects of a Borrower Becoming Insolvent If a borrower becomes insolvent, security granted by a Swiss borrower will not become void automati - cally. It should be noted, however, that Swiss law knows the concept of avoidance actions, providing for hardening periods of one to five years. Upstream and cross-stream securities may also be limited in value. Enforcement actions may become the subject of official proceedings run by the court or insolvency administrator. 3.10 Taxes on Loans For foreign investors, Swiss tax law imposes a source tax on interest payments on loans, which are secured with a mortgage lien/pledge on a Swiss property. The tax is 3% at the federal level. Cantonal and com - munal tax is also triggered, at rates of between 10% and 30%, depending on the location. This source tax may be reduced or even avoided if treaty protection can be achieved under a double tax treaty. Moreover, if a loan qualifies as a bond under withholding tax aspects, Swiss withholding tax of 35% is triggered on interest payments. Withholding tax can be reduced or even avoided if such is permitted by an applicable tax treaty. In Switzerland, regulatory responsibilities are shared among various authorities at the federal, cantonal and municipal levels. Pursuant to Article 75 of the Swiss Constitution, the Confederation shall lay down princi - ples on spatial planning, which are binding on the can - tons. Except for some specific regulations at federal level, zoning and building regulations are enacted by the cantons and implemented by the municipal build - ing authorities. Accordingly, there are 26 different can - tonal zoning and building regimes. The key federal 4. Planning and Zoning 4.1 Planning and Zoning Framework
taxation treaties, etc). Depending on the location of the property, transfer taxes might apply to the direct and indirect transfer of a Swiss property. Real estate capital gains are taxed either by special real estate capital gain taxes (RCGT) or by ordinary income taxes (this varies from canton to canton). Ordinary notarial and land registry fees will apply. Finally, it is always recommended to keep an eye on Swiss VAT aspects as well (with respect to transfers of Swiss real estate but also with respect to deemed servicing fees, etc). 3.5 Legal Requirements Before an Entity Can Give Valid Security Under Swiss corporate and tax laws, financial assis - tance and corporate benefit rules will apply to any upstream or cross-stream security, guarantee or joint liability. The rules are rather detailed and complex but, in a nutshell, the value of any such “impaired” secu - rity will be limited to freely distributable reserves (that could be paid out as a dividend) of the Swiss company in question, subject to general Swiss federal withhold - ing tax of 35%, if applicable. 3.6 Formalities When a Borrower Is in Default The Swiss enforcement process is a court-guided pro - cess, the timing of which will very much depend on the behaviour of the borrower in question. However, in larger transactions, private sale mechanisms are often agreed contractually to avoid a lengthy process and a public auction with associated higher costs. There are no longer any pandemic-related restrictions in place to foreclose or realise on collateral in real estate. As the real estate industry was not much affected by the pandemic or by market forces compared to other European countries, there is also no market for the sale of non-performing notes. 3.7 Subordinating Existing Debt to Newly Created Debt The subordination of existing debt to newly created debt is generally possible and frequently done, even though there are some residual uncertainties around the enforceability of such arrangements in the insol - vency of the borrower. However, the general view of legal scholars is that Swiss insolvency administrators will be bound by such contractual arrangements as well.
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