SWITZERLAND Law and Practice Contributed by: Shelby R du Pasquier, Patrick Hünerwadel, Valérie Menoud and Marcel Tranchet, Lenz & Staehelin
standard gross-up clauses will not typically be valid and enforceable in Switzerland. In practice, there is an attempt to achieve the same commercial result by including a provision in facility agreements that provides for a recalculation of the applicable rate of interest (if and to the extent that Swiss withholding tax should become applicable and the tax gross-up is not valid). Such clauses remain untested in Swiss courts. 4.2 Other Taxes, Duties, Charges or Tax Considerations Aside from the Swiss non-bank rules discussed in 4.1 Withholding Tax , tax issues may arise depending on the specific security package of a secured transac- tion. • First, Swiss tax at source can apply on financings by non-Swiss lenders where the security package includes Swiss real estate assets. Applicable dou- ble taxation treaties, if any, may provide for exemp- tion from such tax. • Second, the Swiss non-bank rules need to be con- sidered and addressed where a Swiss entity acts as guarantor or security provider. • Finally, the granting of a guarantee or security by a Swiss direct or indirect subsidiary for the obliga- tions of a parent company (so-called upstream security) or a sister company (so-called cross- stream security) may trigger Swiss withholding tax on payments under the guarantee or on the enforcement of such security interests (see 5.3 Downstream, Upstream and Cross-Stream Guar- antees ). 4.3 Foreign Lenders or Non-Money Centre Bank Lenders Aside from the Swiss non-bank rules discussed in 4.1 Withholding Tax , Switzerland may levy a withholding tax, if: • interest is paid on loans granted by foreign lend- ers to borrowers in Switzerland, which are secured by collateral on Swiss real estate (see 4.2 Other Taxes, Duties, Charges or Tax Considerations ); • an up/cross-stream security or guarantee is not granted at arm’s length terms, the difference between the consideration granted and the con- sideration actually paid by the Swiss affiliate to
the security provider (if any), which may constitute a hidden dividend distribution on which Swiss withholding tax is payable (see 4.2 Other Taxes, Duties, Charges or Tax Considerations ); • a bank in Switzerland owes interest to a non-bank lender; or • bonds are issued by foreign issuers but guaranteed by their Swiss parent company – these bonds may be requalified as domestic issuances under certain conditions, thus triggering Swiss withholding tax on interest payment. By being compliant with the Swiss 10/20 non-bank rules, the interest payments paid by a Swiss obligor will not be subject to Swiss withholding tax on that basis. For this purpose, specific language is gener- ally incorporated in the relevant loan documentation to make sure that the Swiss obligor is compliant with the rules. Withholding tax on an up/cross-stream security or guarantee is also generally recoverable if the recipi- ent or beneficiary is a Swiss-resident entity (subject to certain conditions). In the case of a non-Swiss resident, however, the withholding tax paid may only be recovered in part or entirely under the terms of a double tax treaty. The type of security interest, as well as the applicable formalities and perfection requirements, will generally depend upon the particular security asset. Typically, in corporate lending transactions, a security package will consist of a combination of a pledge over shares, a security assignment of (certain) rights and receiva- bles, a pledge over bank accounts and guarantees issued by certain group entities. As a matter of Swiss law, the creation of a security interest requires parties to enter into a security docu- ment identifying the collateral (see also 5.2 Floating Charges and/or Similar Security Interests ) and deter- mining the secured claims in a sufficient manner. 5. Guarantees and Security 5.1 Assets and Forms of Security Security Packages
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