Lower tax levels to act as incentives
Swiss Must Grab More Private
Equity Business

Dr. Urs P. Roth, Chief Executive Officer, Swiss Bankers Association, believes that Switzerland must take initiative in facilitating bigger volumes of private equity business in the country being a financial center with inbuilt incentives, including lower levels of corporate and income taxes. Dr. Roth's views were contained in an address he delivered at a media seminar held in Berne on 11 June, 2007, onthe theme of “Private equity a business of the future for Switzerland.
”Excerpts.

The future potential of sectors or individual lines of business is shaped by supervisory, institutional and tax frameworks. This is much more the case today in our global world and, in particular, one of the most global sectors than it was in the past. Just how wrong conditions can be is something that the financial sector has found out for itself on several occasions. I can still remember when Switzerland lost the gold trade to London practically overnight. And those who can remember that it was a Swiss regulatory invention namely the anachronistic stamp duty that led to Luxembourg's becoming the most important location for investment fund production will understand how I must be feeling. So we know only too well how quickly an initial edge can be allowed to slip away.
In my short speech, therefore, I would like to concentrate on a few factors relating to Switzerland as a location and show what has to be done if Switzerland is to play more of a role in the attractive private equity business than it does today. Private equity is a type of financing whereby equity and/or management resources can be made available to non-listed companies that find themselves at a crucial stage in their development. This capital is used for developing new products, tapping new markets or making acquisitions. So much for the definition of private equity. The speakers who follow me will provide you with more information and details on what happens in practice.
Switzerland is a business location that already offers several advantages. From the international perspective, one such advantage is a continued low level of corporate and income taxes.
Another factor which should attract more private equity management companies is the high quality of life and the appeal of Switzerland's financial centre with its highly-qualified workforce. Added to this is the flourishing wealth management business with a strong concentration of assets. As you can see, Switzerland has everything it takes to become a "cluster". It is a well-known fact that clusters form in locations where various financial service providers look for similar expertise and services, specialists are available and feeder sectors can be established.

Disadvantageous Legal System
From the regulatory viewpoint, however, Switzerland does have some substantial disadvantages. The new Collective Investment Act, for example, with its defined minimum number of five limited partners is still too high compared with other countries. A further problem is the legal uncertainty in respect of how supervisory authorities handle the legal framework. The actions of the supervisory authorities will play a major role in determining how competitive the newer investment forms established under the Collective Investment Act are compared with the tried-and-tested structures in other countries.

Institutional Factors
With regard to institutional factors, the negative elements are primarily approval procedures that take too long and a trend toward excessive formalism. Clearly, some remedial action is required. When we look at fiscal conditions, a major issue is the taxation of fund managers' carried interest. We have already made our opinion on this known several times and have also made a presentation to the Federal Tax Administration, but unfortunately without much success so far. It is such an important topic, however, that I would like to take this opportunity to explain our concerns to you.
Thanks to the newly-created legal form of limited partnerships for collective investments or Swiss Limited Partnerships, the new Collective Investment Act sets out a possible solution that can be used as a vehicle for both private equity and hedge funds. Limited partnership structures have been in use in the English-speaking world for some time now.
Unfortunately, Switzerland once again seems to have got stuck in a half-way house. Simply enacting regulatory amendments or introducing new legal structures does not go far enough. Assessing the competitiveness of a particular location involves looking at the overall package, including the tax implications for fund producers and management companies as well as funds themselves and their investors. What we want is to be on a level playing field at the international level.
Swiss Limited Partnerships are tax exempt, and this is a good thing. But the earnings of general partners and institutional investors will be subject to full taxation. It is still unclear how management's slice of capital gains - so-called “carried interest” respectively “performance fees” - will be taxed. These elements constitute the results secured by managers via the private assets they have used.
Unfortunately, the authorities are currently disputing this and would prefer to see full taxation with income tax and, on top of that, AHV old age and survivors' insurance. With a framework such as this presenting precious little in the way of tax advantages, it is unlikely that managers will base their headquarters or administrative centres in Switzerland, opting instead for countries such as the UK where they can benefit from more favourable tax benefits.

Investment in Limited Partnerships
A more common solution outside of Switzerland is for managers to invest directly in the limited partnership using a specific class of shares that would need to be newly created. In return, this class of shares would carry the right to a predefined share in any capital gains.
Unfortunately, this pragmatic solution flies in the face of the prevailing practice of quasi-securities dealers. Yet this problem, too, could be solved by clearly stating that management's share in any capital gains as limited partners should continue to be classifiable as such, thus ensuring that such gains fall outside the definition of employment income. The activities set out above are relatively rare in Switzerland and generate very little in the way of tax revenue. If more private equity firms and their management teams were to base themselves in Switzerland, tax income would increase automatically. It is not a case of letting managers get away with paying no taxes, but simply ensuring that they are taxed in line with international norms. By way of example, the figure is 15 percent in the US and 12 percent in the UK.
Let me make this clear: when it comes to competing in the global marketplace, we need to remove our ideological blinkers. We need matter-of-fact marketing of our advantages. If no adjustments are made, the Swiss financial sector will be the loser in this scenario and will miss out on attractive business opportunities. It will only be able to look on as other financial centres gain in importance.