EU Benchmarks Regulation and Market Impact as of 1 January 2018

The new EU Benchmarks Regulation (BMR) was published in June 2016 and most rules will apply as of 1 January 2018. The BMR introduces new compliance requirements for benchmark administrators, contributors, and users, with regard to interest rate, foreign exchange, security, commodity, and other benchmarks used in financial transactions. The BMR was enacted in response to public pressure resulting from the aftermath of the LIBOR scandals and follows the recommendations of the IOSCO and ESMA EBA Principles.

Executive summary

Functioning benchmarks are key to ensuring the smooth functioning of financial markets. However, they lead to conflicts of interest and other integrity issues on the part of contributors of input data and administrators. The scope of the BMR covers all published benchmarks which are used in the European Union with regard to associating financial instruments, financial contracts and/or fund managers. The BMR defines obligations and conduct requirements for both administrators and contributors to ensure market integrity. The Regulation has an extraterritorial dimension in cases where third country administrators request market access. Market access can be granted on the basis of equivalence, recognition, and endorsement by an EU supervised entity. All the legal requirements of the BMR will phase-in on 1 January 2018 and take effect on 1 January 2020 – except for the EURIBOR, which is subject to the BMR today.

What is a benchmark?

A benchmark is defined as “a reference index, to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees” (Article 3(1)(3) BMR).  Such an index is a figure, fulfilling one of the following criteria:

  1. Published or made publicly available;
  2. Determined at a regular interval by either:
    • partially or entirely applying a formula or any other method of calculation, or another means to assess it by; and
    • on the basis of the value of one or more underlying assets or prices, including estimates of prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys.

Derivatives as defined in Section C, Annex I, Directive 2014/65/EU do not qualify as an index where there is only a single reference value. Such is the case where a single price or value is used as a reference for a financial instrument, e.g. the reference price for a future or option, without any calculation, input data or discretion. Equally, reference or settlement prices produced by central counterparties are not considered to be benchmarks.

Who will be affected?

While the IOSCO Principles are the basis of the BMR, the Principles included the concept of “comply or explain”; this exemption with respect to proportionality and the nature of the benchmark is only included to a limited extent in the BMR. In order to comply with the new Regulation, administrators of a benchmark will either have to apply for registration or for authorisation, depending on the type of benchmark they provide. The provision of critical and significant benchmarks, as well as commodity and interest rate benchmarks, requires an application, while in all other cases registration with the designated authority will suffice.

  • Administrators: An administrator can be either a natural person or a legal entity with control over the provision of a benchmark, in particular by administering the arrangements determining the benchmark, by collecting and analysing the input data, as well as by determining the rate of the benchmark, and by publishing it. While specific functions of the administrator can be outsourced to a third party, the sole act of publishing or referring to an existing benchmark is insufficient for an individual or an entity to be considered as the benchmark administrator. Control of provision of the benchmark is a necessary regulatory requirement for the provider to become subject to the BMR.
  • (Supervised) Contributors: The two types of contributors are differentiated in that any natural person or legal entity can contribute input data as a “contributor”, but only a “supervised contributor” can contribute input data to an administrator located in the EU as a supervised entity and the contributor has to comply with more stringent requirements, in accordance with Article 16 BMR. The quality and reliability of any benchmark is based on the integrity and accuracy of the input data, which is provided by the contributor. To prevent manipulation at data contribution level, contributors are subject to stringent rules under the BMR. The administrator has to ensure contributors adhere to the code of conduct and that input data is of the required integrity and can be validated, even if the contributor is located in a third country. Any omission by a contributor providing input data to a critical benchmark can undermine the credibility and representativeness of such a benchmark, with severe impact on the underlying market and economic reality. As such, national authorities are given the power to demand mandatory contributions from supervised contributors to critical benchmarks.
  • User of a benchmark: A supervised entity may use a benchmark or a combination of benchmarks in the EU if the benchmark is provided by an administrator located in the Union and included in the register or is a benchmark which is included in the register. Where the object of a prospectus is transferable securities or other investment products that reference a benchmark, the issuer, offeror, or person asking for admission to trade on a regulated market shall ensure that the prospectus also includes clear and prominent information stating whether the benchmark is provided by an administrator included in the register.

Which benchmarks will be affected?

The BMR subdivides the benchmarks into various subcategories, based on the type of market they reproduce. The Regulation contains specific additional requirements for both commodity and interest rate benchmarks. The following provides an overview of the various subcategories of benchmarks:

Type of Benchmark Description
Regulated Data Benchmark Data input for the benchmark is provided directly from regulated venues. Certain provisions of the BMR do not apply to regulated data benchmarks, and they cannot be classified as critical.
Interest Rate Benchmark An IR Benchmark is determined on the basis of the rate at which banks may lend or borrow from other banks or agents in the money markets. They are subject to the requirements set out in Annex I BMR. Provisions of the BMR relating to significant and non-significant benchmarks do not apply.
Commodities Benchmark The basis for the benchmark is a commodity as defined by MiFID II. Commodity Benchmarks are subject to the requirements of Annex II BMR, unless the benchmark also qualifies a regulated data benchmark, or is based on submissions from mainly supervised entities. Provisions of the BMR relating to significant and non-significant benchmarks do not apply.
Critical Benchmark To qualify as a critical benchmark, the value of the underlying contracts needs to be at least EUR 500 bn, or it has to have been recognised as critical in a member state. Critical benchmarks are subject to more stringent and specific requirements than other types of benchmarks.

A framework has been developed by ESMA to determine Interbank Offered Rates benchmarks (IBORs) and the Euro Over Night Index Average (EONIA) as critical benchmarks. To date, only EURIBOR has been qualified as such by the EC.

Significant Benchmark Requires the value of underlying contracts to be at least EUR 50 bn, or there to be none or very few market-led substitutes, leading to significant impact on financial stability, if the benchmark ceases to be produced.
Non-Significant Benchmark All other benchmarks where the benchmark is neither a commodity nor an interest rate benchmark and the value of underlying contracts of the benchmark is less than EUR 50 bn.

How will a Switzerland-based benchmark provider be affected?

Non-EU administrators are subject to BMR rules where they intend to obtain EU market access; non-compliance will likely lead to these non-EU benchmarks being denied EU market access. There are three ways for third country administrators to become compliant: equivalence, recognition, and endorsement. Firstly, an equivalence decision with regard to foreign jurisdictions can be made by the European Commission if the requirements of Article 30(1) BMR are met and this results in benchmarks from relevant third country jurisdictions being eligible for use by supervised entities in the EU. Secondly, where an administrator located in a third country provides proof of compliance with the IOSCO Principles and said compliance is equivalent to the BMR, the administrator should be recognised as an administrator within the EU. An administrator located in a third country, such as Switzerland, must have a legal representative in the reference member state, if the entity intends to obtain recognition. The legal representative must oversee the provision of benchmarks as performed by the administrator and is accountable to the competent EU member state authority. Finally, market access as a third country administrator can be gained through an endorsement by an administrator of a supervised entity located in the EU. Endorsement will permit market access where the third country administrator adheres to the IOSCO Principles and such adherence results in equivalent compliance with the BMR.

Obligations for administrators and contributors

The BMR directly imposes a variety of obligations on persons involved in the provision, contribution, and use of benchmarks throughout the EU to prevent conflicts of interest and manipulation of benchmarks as well as to ensure maximum harmonisation in cross-border applications. If tasks are outsourced to an external service provider the provider also has to adhere to the BMR. In particular, the administrator is required to provide a code of conduct specifying the requirements and responsibilities regarding input data and to supervise adherence to the code, even if the contributor is located in a third country.

The obligations include the following provisions for administrators:

  • Robust governance arrangements, including a clearly organisational structure with well-defined, transparent and consistent roles and responsibilities for all involved, preventing conflicts of interest (Article 4 BMR).
  • Develop and maintain robust procedures to ensure oversight of all aspects of the provision of a benchmark and communication with the relevant competent authorities (Article 5 BMR).
  • Ongoing control of benchmarks to ensure they are provided, published and/or made available in accordance with the Regulation, and maintained through an accountability framework, record-keeping, auditing, and review and complaints handling process (Article 6 to Article 9 BMR). These frameworks must include any third party to which a task has been outsourced (Article 10 BMR).
  • The administrator is also responsible for overseeing the quality of input data and reporting any infringements without delay to the competent authority (Article 11 to Article 15 BMR).

The obligations include the following provisions for contributors:

  • The contributor must adhere to the code of conduct provided by the administrator and the specific requirements prescribed with respect to the contribution of input data (Article 15 BMR).
  • Supervised contributors must also ensure input data is not affected by any existing or potential conflicts of interest and that all discretion is exercised in an independent and honest way (Article 16 BMR).

Typical products in scope

Entry into force

The BMR will enter into force on 1 January 2018. There is a transition period for certain new and existing benchmarks until 1 January 2020. In accordance with the transitional provisions of Article 51(3) BMR, ESMA considers existing benchmarks as including benchmarks “existing on or before 1 January 2018”, including those provided for the first time on or before 1 January 2018. Thus, an EU index provider may provide a benchmark created between 30 June 2016 and 1 January 2018, including updates and modifications, to supervised entities in the EU until 1 January 2020, even if authorisation or registration has not yet been granted, unless authorisation or registration has been refused.

The BMR has applied to the EURIBOR since 12 August 2016, following qualification as a critical benchmark.

Impact

The BMR is a highly complex regulation with implications for all market participants. It requires considerable time to plan, structure, and implement the requirements set forth in accordance with the IOSCO Principles and EU regulations. The requirements have a direct impact on the usage of benchmarks, provision of input data, and cross-border market access.

Please contact our experts on this topic for a free consultation:

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

Alexandra Balmer
Consultant
Legal FS Regulatory & Compliance Services
Tel: +41 58 792 1424
alexandra.balmer@ch.pwc.com

The New EU Prospectus Regulation and its impact on Swiss-based issuers and their KIDs under PRIIPs

The new EU Prospectus Regulation (“PR”) was adopted by the European Council on 16 May 2017 and will enter into force on 20 July 2017. The PR is the latest regulation issued by the European Capital Markets Union (“CMU”) and should become reality by 2019. The PR is based on and further clarifies the existing EU Prospectus Directive. It contains provisions that are directly applicable in all EU member states without discretion, but that also apply in particular to Swiss-based issuers and their agents offering securities in the EU or admitting transferable securities to trading on regulated markets located in the EU such as EUREX. One of the main goals of the PR is to reduce the length of prospectuses by providing clear and detailed guidelines of how to create a prospectus. This newsletter gives a short overview of the key content of the PR and explains in particular how it will be applicable to Swiss-based issuers and their agents.

1. Executive Summary

The PR particularly affects Swiss-based issuers and their agents publicly offering transferable securities in the EU and admitting transferable securities to EU regulated markets such as EUREX.

Most financial instruments, such as shares, bonds, warrants and structured products come under its scope, except for units in collective investment schemes which are not close-ended. There are detailed new requirements related to the content, scope, length, formalities and other requirements of a prospectus.

The summary of a prospectus can be used instead of a KID created under PRIIPs. Issuers should therefore investigate operational and legal synergies between the PR and the KID. Consequently, the PR should be addressed now despite the fact that most provisions will not enter into force until 21 July 2019.

2. When a prospectus is required

A prospectus must be published when transferable securities are offered to the public in the EU or admitted to trading on regulated markets located in the EU by means of a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe to the securities in question.

The prospectus obligation applies to both equity and non-equity securities entitling the holder either to acquire transferable securities or to receive a cash amount through a cash settlement determined by reference to other instruments, notably transferable securities, currencies, interest rates or yields, commodities or other indices or measures. It covers in particular warrants, covered warrants, certificates, structured products, and securities convertible at the option of the investor, but not units in collective investment schemes other than the closed-end types.

No public offer of transferable securities is deemed an offer to qualified investors in the sense of MiFID II (safe harbour). Any resale to the public of transferable securities first placed with qualified investors or admitted to trading on a regulated market will however require the publication of a prospectus. Offers to fewer than 150 natural or legal persons per EU Member State are not deemed to be public, nor are offers of securities with denominations per unit amounting to at least EUR 100,000 or offers of securities addressed to investors who acquire securities for a total consideration of at least EUR 100,000 per investor. There are also multiple exemptions applicable to securities traded on a regulated market.

Resales of transferable securities in the scope of the PR are generally treated as separate offers and are subject to a prospectus, unless an exemption applies. No additional prospectus is required as long as a valid prospectus is available. A prospectus is valid for 12 months from the date of approval of the offer or the admission to trading and the date on which the issuer or the person responsible for drawing up the prospectus consents to its use in written form.

It is possible to voluntarily draw up a prospectus in accordance with the provisions of the PR even if the offer would be outside the scope of application of the PR. Such prospectuses are subject to all the rights and obligations of a prospectus created according to the PR.

3. The issuer of a prospectus

The issuer who issues or proposes to issue securities, the offeror who offers securities to the public, or a mandated third party such as a bank, is responsible for ensuring that the prospectus provides sufficient information to enable investors to make informed investment decisions.

The liability for the information given in the prospectus, and any supplement thereto, lies at the very least with the issuer, or its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market, or the guarantor. The persons responsible for the prospectus must be clearly identified in the prospectus. Civil liability remains with the individual EU member states.

4. When do Swiss-based issuers have to issue a prospectus?

Any non-EU domiciled issuer, such as a Swiss issuer, bank or intermediary, can offer transferable securities in the EU or seek admission to trading of securities on a regulated market established in the EU, such as EUREX, if a prospectus is drawn up and approved by the competent authorities according to the PR. It is to be expected that the corresponding Swiss prospectus requirements will be equivalent to the prospectus requirements under the PR. The Swiss requirements are currently undergoing a revision in the context of the debate on the Swiss Financial Services Act (FinSA) in the Swiss parliament. As a result, competent authorities may in future even approve prospectuses issued under Swiss law if certain additional requirements are met.

5. The Key Types of Prospectuses

6. The prospectus approval process

Any prospectus and all its constituent parts must be approved by the competent authority prior to publication. Any of the constituent parts can be approved separately. The competent authority is generally the EU member state where the issuer has its registered office or, in the case of a third-country issuer such as a Swiss bank, the member state where the securities are intended to be offered to the public for the first time or where the first application for admission to trading on a regulated market is made.

The prospectus has to be made available to the public by the issuer, offeror or person asking for admission to trading on a regulated market in advance of, and at the latest at the beginning of the offer to the public or the admission to trading of the securities concerned. The prospectus is regarded as public if it is published in electronic format or on certain web pages.

The approving authority will then notify the competent authorities of the EU member states in which the securities will be distributed.

7. The rules for advertisements

Any advertisement regarding either an offer of securities to the public or an admission to trading on a regulated market must be clearly recognisable as such. All information disclosed in the context of an advertisement must be consistent with the information contained in the prospectus.

8. When are updates required?

Every significant new factor, material mistake or material inaccuracy relating to information included in the prospectus which may affect the assessment of securities and which arises between the time of the approval of the prospectus and the closing of the offer period or when trading on the regulated market begins, must be mentioned in a supplement to the prospectus and must be approved by the competent authority. In such cases, investors who have already agreed to purchase or subscribe to the securities have two days in which to withdraw their acceptance.

9. When will the PR enter into force?

The PR will enter into force on 20 July 2017. There will be a transitional period until 21 July 2019 for most requirements under the PR. Certain provisions will already apply as of 21 July 2018 and 20 July 2017 respectively, such as the exemption from publishing a prospectus for shares which represent less than 20% of the number of shares of the same class admitted to trading on the same regulated market over a period of 12 months.

Please contact us for your free consultation:

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

Michael Taschner
Senior Manager
Legal FS Regulatory & Compliance Services
+41 58 792 23 25
michael.taschner@ch.pwc.com

Anne Batliner
Manager
Legal FS Regulatory & Compliance Service
+41 58 792 2955
anne.batliner@ch.pwc.com

Newsflash: The Swiss Federal Council has published some key amendments to the current version of the Swiss Financial Market Ordinance (FinfraV/FMIO)

The new regulations on initial and variation margins for OTC-derivatives, the platform trading obligation, the delayed recording and reporting obligation for securities dealers and foreign market participants, and the prolonged exemption for pension funds and investment funds for retirement.

The Swiss Federal Council has published some key amendments to the current version of the Swiss Financial Market Ordinance (FinfraV/FMIO) affecting a wide variety of market participants such as counterparties of OTC-derivatives, securities dealers, pension funds, and investment funds for retirement.

The new regulations on initial and variation margins for OTC-derivatives under the Swiss Financial Market Infrastructure Act FinfraV/FMIO will enter into force on the 1st of August 2017. The variation margin requirements under FinfraV/FMIO will enter into force on the 1st of September 2017 and will affect all counterparties to OTC-derivatives not being small non-financial counterparties (NFC-). The key new requirements under the new initial and variation margins regulations will be as follows:

  • The new regulations are much stronger aligned to the final initial and variation margin regulations under EMIR, the corresponding European regulation. The new Swiss regulations do however not impose an obligation to review the legal opinions applicable to OTC-contracts on an annual basis. This is a welcomed alleviation for the Swiss market participants.
  • It is now generally possible to re-use initial margins granted in the form of cash if they are held in custody with a third party custodian bank or a central bank.
  • It is now possible to change the method for the calculation of the initial margin in each derivative category also after a mutual agreement on such calculation has been achieved.
  • There will no mandatory haircut of 8% anymore if the variation margin paid in cash is not provided in the mutually agreed currency.
  • The obligation to exchange initial and variation margins for options on equity, indexes or similar equity derivatives will apply only beginning as of the 4th of January 2020.
  • Units in UCITS funds can now also be used for initial and variation margin purposes.
  • No initial margin must be provided anymore for the foreign exchange component of Cross Currency Swaps.
  • OTC-derivatives related to covered bonds are under certain conditions totally or at least partially exempted from the initial and variation margin obligation.

The platform trading obligation, that requires that certain specifically designated derivatives must be traded on a trading venue, has formally set in force. There is however currently no derivatives category that has been designated as subject to the trading obligation on a platform.

Another important alleviation for securities traders and foreign market participants at Swiss trading venues is the delayed entry into force of the recording and reporting obligations. These obligations will now only enter into force on the 1st of October 2018 for Swiss securities dealer. The transactions and orders that have occurred in between the 1st of January 2018 and the 30th of September 2018 will however have to be recorded and reported no later than until the 31st of December 2018 (“backloading”). The recording and reporting obligations will enter into force for foreign branches of Swiss securities dealers and foreign participants of Swiss trading venues as of the 1st of January 2019.

The exemption for pension funds and investment foundations for retirement from the clearing obligation has been extended until the 16th of August 2018.

Please do not hesitate to contact us for a free consultation on any of these new provisions.

Contact

Martin Liebi
Head Capital Markets
martin.liebi@ch.pwc.com
0041 76 341 65 43

New Swiss FinTech rules

Switzerland adopts revised banking regulations in order to facilitate the business activities of “FinTech” companies

On February 1, 2017 the Federal Council initiated a public consultation suggesting modifications to Swiss banking regulations. The purpose of the proposed revision was to create appropriate regulations for FinTech companies operating outside the traditional financial sector, taking into account the specific risk potential of their respective business models. The proposed revision included amendments to both the Banking Act (“BA”) and the Banking Ordinance (“BO”). The public consultation lasted until May 2017.

On July 5, 2017 the Federal Council finally adopted the new Swiss regulatory framework with regard to the BO. The new regime will formally enter into force on August 1st, 2017 so that FinTech companies will be able to benefit from these new rules as quickly as possible.

The amended rules provide for the following:

  1. Settlement account exemption: An exemption for settlement accounts will be created. This will allow companies to hold funds in a settlement account for 60 days without the operation of such account being deemed an acceptance of public funds subject to licensing under the BA (Art. 5 para 3 let. c BO). The BO in its current version did not contain a 60-day period of this kind, thereby creating some uncertainty.
     
  2. Innovation space (“sandbox”): Companies are allowed to hold public deposits of up to CHF 1 million without having to obtain a banking license (“sandbox”). Consequently, holding public funds of less than CHF 1 million does not qualify as “operating on a commercial basis”, which is a requirement in order to fall within the scope of the BA and the BO (Art. 6 para 2 let. a BO). According to the BO in its current version, taking public funds from more than 20 persons is deemed as “operating on a commercial basis”. Under the revised version of the BO, the number of persons providing funds is irrelevant as long as the threshold of CHF 1 million is not exceeded. Furthermore, the funds raised may neither be invested nor be subject to interest payments (Art. 6 para 2 let. b BO). Finally, the persons providing the funds must be informed that the respective business model is not subject to supervision by the Swiss Financial Market Supervisory Authority (FINMA) and that the rules on deposit insurance do not apply (Art. 6 para 2 let. c BO). This new innovation space will enable FinTech companies to try out experimental new business models without immediately having to obtain a banking license.

All in all, these innovative amendments to the BA and the BO will substantially facilitate the operation of FinTech business models in Switzerland. Moreover, the revision of the BA and the BO is further evidence of the Swiss government’s commitment to constantly improving and redesigning the regulatory environment in order to boost Switzerland as a major FinTech hub.

Your contacts:

Guenther Dobrauz
Partner|Leader PwC Legal Services Switzerland
Tel. +41 58 792 1497
guenther.dobrauz@ch.pwc.com

Tina Balzli
Director|Legal FS Regulatory & Compliance Services
Tel. +41 58 792 1554
tina.balzli@ch.pwc.com

Simon Schären
Manager |Legal FS Regulatory & Compliance Services
Tel. +41 58 792 1463
simon.schaeren@ch.pwc.com

Newsflash MiFID II

Commodities trading: ESMA has issued comprehensive data determining the EU overall commodities derivatives turnover that help commodities traders to assess whether their trading activities in commodity derivatives can be considered as ancillary to their main business under MiFID II.

Commodities traders trading in commodities derivatives either listed on an EU domiciled trading venue or OTC with a counterparty domiciled in the EU will have to apply for a license under the MiFID II regime that will enter into force on the 3rd of January 2018, unless an exemption applies. One key exemption applicable to commodities traders is the so called “ancillary activity exemption”. The “ancillary activity exemption” comprises a series of tests and compares in particular the proprietary speculative trading activities in commodities derivatives of a commodity trader to the EU overall market trading activity in certain commodities derivatives categories. The EU overall market trading activities in commodities derivatives either being traded on an EU domiciled trading venue or OTC with a counterparty domiciled in the EU have so far not been easy to determine due to missing public data. ESMA has now published EU overall market trading turnover data in the MiFID II-affected commodities derivatives categories.

Commodities traders should now – if they have not already done so – start to evaluate whether they can take advantage from the ancillary activity exemption and how to comply with the rest of MiFID II.

We had the great fortune to be able to assist many commodities traders in their MIFID II implementation and would be delighted to assist also you.

Please call for your free consultation.

Contact

Martin Liebi
Head Commodities Trading Regulation
Tel. +41 76 341 65 43
martin.liebi@ch.pwc.com

Swiss Withholding Tax Refund on Equity Finance Transactions: New Decision of the Federal Supreme Court

On 5 April 2017, the Swiss Federal Supreme Court issued a new decision concerning the Swiss withholding tax refund right of an Italian bank that was engaged in a combination of buy-sell and derivatives transactions with shares of Swiss issuers around dividend payment dates. To a large extent, the decision of the Court concentrated on the evaluation of taxpayers’ compliance with the concept of beneficial ownership requirements aimed at assessing whether relevant transactions entered into by the taxpayer constituted the mere setup of a dividend stripping. Subsequently, the Court denied Swiss withholding tax refund claims due to the failure of the taxpayer to provide the Federal Tax Authorities (“FTA”) with the required information for the identification of the counterparties to the relevant trades, considering this a failure of the taxpayer to cooperate since such information is, in the view of the Court (and of the FTA), an essential element of proof within beneficial ownership testing.

Previous jurisprudence

The judgment represents the further evolution of previous cases delivered by the Federal Supreme Court in similar situations, and in particular, with regard to two Swiss withholding tax refund lead cases dealing with Danish Banks (for further details, please see the following blog posts).

Decision of the Federal Supreme Court of 5 April 2017

Relevant facts:

A bank incorporated in Italy entered into a number of buy/sell and derivatives transactions (futures) with Swiss shares. The bank acquired these securities shortly before the dividend payment date and sold them shortly after the dividend receipt. Further to the dividend payments, the Italian bank filed several withholding tax refund requests with the FTA regarding dividends distributions arising from securities held on ex-dividend dates. While the claims were under consideration, the FTA requested the bank provide additional information regarding the transactions, and in particular, to disclose information enabling the identification of the counterparties to the transactions with underlying securities prior and post the dividend payment event.

Because the Italian bank was unable to provide this information, the FTA and the Federal Administrative Court rejected its Swiss withholding tax refund claims.

Federal Supreme Court decision highlights:

In its decision, the Swiss Federal Supreme Court reiterated its jurisprudence regarding the concept of beneficial ownership, and provided the following arguments:

  • The Federal Supreme Court re-established that Swiss withholding tax refund claim eligibility in the context of the application of a double taxation treaty requires that the claimant be the beneficial owner of the underlying income.
  • To qualify as a beneficial owner of income (a dividend in the case in question), the recipient should be free in determining further faith of income received (this means that the taxpayer should not have any contractual or legal obligation to pass on such income to third parties). The notion of beneficial ownership should be considered while taking into account economic circumstances and not just pure tax reasons (such as the attempt of the recipient of the dividend to benefit from a double tax treaty withholding tax reduction). Consequently, the Court mentioned that although the tax savings is effectively not present, this is not relevant for the double tax treaty eligibility analysis, which precluded the line of reasoning that all counterparties involved in the transaction were residing in treaty countries with the same residual Swiss withholding tax rate under the relevant treaty with Switzerland.
  • Moreover, the Federal Supreme Court recalled that Swiss Tax Law imposes information-sharing and cooperation duty on taxpayers. This duty should apply both to resident and non-resident taxpayers, even if the double tax treaty does not have a specific provision in this respect. The Court stated that during the procedure, the FTA may request information and documentation enabling it to appropriately review and assess a Swiss WHT refund claim. The rules are that the requested evidence must not be obviously inappropriate to make the required assessment (i.e., it must be reasonable and offer suitable proof) and should not result in disproportionate costs for the claimant. The absence of cooperation cannot create a comparative benefit for the taxpayer, and will have negative consequences if the case cannot be properly reviewed and assessed by the authorities.
  • The Federal Supreme Court also stated that brokers used in equity finance transactions will not be recognized as counterparties but only as intermediaries, and that it is the claimant’s duty to provide proof of the effective counterparty behind the broker.

After analysing the facts of the case, the Court found that:

  • The taxpayer could not establish its compliance with Swiss beneficial ownership requirements for double tax treaty benefits application purposes just by providing the names of the counterparties effectively involved in the transactions.
  • The FTA may request information and documentation to make a proper assessment of the facts and circumstances of the transaction which resulted in a Swiss WHT claim. The claimant must provide reasonable documentation as part of his information and cooperation duties. These duties are limited by the principle of proportionality, which means that the requested information should neither be obviously inappropriate to make the required assessment nor result in disproportionate costs for the claimant. Of course, these principles are open for legal interpretation and subject to scrutiny.
  • Moreover, the Court ruled that, by not providing the requested information, the Italian bank deliberately hid essential elements of the facts required for the analysis of its transactions by the authorities, meaning non-cooperation was in fact established. Without the documentation by the claimant, the FTA was put in a position where it was impossible to understand the effective flows and structure, or to analyse the claim against the practice established by the Court. Hence, the claimant was forced to face the consequences of the missing proof of its tax mitigating elements.

Further to the above, the Federal Supreme Court concluded that the withholding tax refund should be denied to the Italian bank (only a non-material claim was sent back to the tax authorities for reassessment due to violation of the formal requirements of the procedure).

What does it mean for you?

The new Court decision clearly shows, in line with previous jurisprudence, an overall trend for assessing compliance with beneficial ownership requirements, and for the detailed review of relevant documentation when withholding tax refund claims are filed within the scope of financial services industry transactions. Market participants using brokers in similar transactions will be required to disclose the effective parties behind the broker, which will in practice make it difficult to establish proof.

The recent jurisprudence makes it clear that all cases should be analysed on the basis of individual facts and circumstances, and that outcomes may vary depending on the analysis of transactions.

We encourage you to review present and previous withholding tax claims filed for similar transactions to determine whether any risks are present, and to develop and implement risk mitigating strategies for the future.

Martin Büeler
Partner, Tax & Legal
martin.bueeler@ch.pwc.com
+41 58 792 43 92
Luca Poggioli
Director, Corporate Tax
luca.poggioli@ch.pwc.com
+41 58 792 44 51
Victor Meyer
Partner, Tax & Legal
victor.meyer@ch.pwc.com
+41 58 792 43 40
Dieter Wirth
Partner, Tax & Legal
dieter.wirth@ch.pwc.com
+41 58 792 44 88
Dmitri Deniskin
Director, Tax & Legal
dmitry.deniskin@ch.pwc.com
+41 58 792 8258

Enhanced auditor’s report: towards trust and transparency

The new auditor’s report required by Swiss legislation is designed to be more informative and insightful, and give the stakeholders of reporting entities greater assurance. We at PwC welcome the new reporting requirements as an opportunity to unlock the ‘black box ’of what we actually do as auditors and increase trust in our role.

We also realise, though, that the new reports and their potential impact on governance have to be discussed and understood – not only by the auditors who produce them, but by reporting entities and their stakeholders, from shareholders to regulators. For this reason we’ve produced a short flyer explaining the major changes and their implications, including a commented overview of the structure of the new report.

You can read the flyer via the link below. Feel free to contact us if you’d like to discuss the new auditor’s report and its implications in more detail.

Download flyer

 

Group financing: changes to the withholding tax ordinance designed to facilitate intragroup financing activities out of Switzerland

  1. Current group financing environment in Switzerland

Interest payments on bonds and client credit balances are generally subject to Swiss withholding tax at a rate of 35%. This may have far-reaching consequences on both the external and internal financing of Swiss-based groups and widely impedes both types of financing activity in Switzerland.

  • With respect to external financing, the withholding tax levied on interest payments makes the issuance of bonds in Switzerland rather unattractive. For this reason, groups established in Switzerland often carry out financing activities abroad.
  • With respect to intragroup financing, the crucial point is whether a particular intragroup obligation (note payable) qualifies as a bond/client credit balance or not. Generally, obligations qualify as bonds if they are issued by a Swiss obligor to more than 10 (if the terms are identical) or 20 (if the terms are similar) non-bank creditors and the total credit amount is at least CHF 500,000. Moreover, if a Swiss company has more than 100 non-bank creditors and a loan volume of at least CHF 5 million, such obligations are deemed to be a client credit balance with the corresponding withholding tax consequences for interest payments. These limitations are generally known as the 10/20/100 non-bank lender rules.

The legislator is aware of these disadvantages and introduced an exemption in the withholding tax ordinance in 2010. From that point on, intragroup obligations between fully consolidated group companies have not qualified either as bonds or client credit balances, provided that no Swiss group company guarantees a bond of a foreign group company by way of a downstream guarantee.

As a result of this constraint, the intragroup financing activities of Swiss groups with foreign-issued bonds outstanding and a Swiss downstream guarantee in place need to take account of the 10/20/100 non-bank rules, which substantially hinders the settlement of intragroup financing and treasury activities in Switzerland. If the 10/20/100 non-bank rule is not observed, there is a risk that interest payments to other group companies will be subject to Swiss WHT.

 

  1. Improved group financing opportunities due to changes to the withholding tax ordinance

In order to facilitate group financing in Switzerland, the federal council has decided to amend the Swiss withholding tax ordinance with effect 1 April 2017. Under this amendment, a downstream guarantee issued by a Swiss group company no longer automatically leads to a situation where the above-mentioned exemption for intragroup obligations is not applicable. The amended withholding tax ordinance states that the intercompany exemption introduced in 2010 shall also be applicable for groups with a foreign bond guaranteed through a downstream guarantee of a Swiss guarantor, provided that the funds that are forwarded by the foreign bond issuer to Swiss group companies do not exceed the equity of the foreign bond issuer.

In addition, the current provision under which the exemption is only applicable to fully consolidated group companies is to be extended to include partially consolidated group companies (for example a joint venture in which an interest of least 50% is held).

 

  1. Expected implications in practice

The amendment of the withholding tax ordinance is a step in the right direction, and will facilitate group financing activities in Switzerland. The main benefit of the change in the withholding tax ordinance is the fact that group of companies with bonds issued abroad with a Swiss downstream guarantee can also benefit from the intercompany exemption under the 10/20/100 non-bank rule. The fact that partially consolidated group companies also qualify for the exemption is helpful as well.

However, the general statement that the financing of Swiss entities from a foreign bond issued does not create a harmful flowback, provided that the financing does not exceed the foreign issuer’s equity, will hardly have a lasting positive impact on intragroup financing activities in Switzerland. This is mainly due to the fact that foreign bond issuing entities generally do not require substantial equity, so the permitted flowback to Switzerland will be minimal.

If the legislator is serious about fostering the settlement of intragroup financing activities in Switzerland, additional measures should be taken quickly.

Contacts:

Martin Bueeler
Partner
Tax and Legal Services
+41 58 792 4392
martin.bueeler@ch.pwc.com

Martin Burri
Manager
Tax and Legal Services
+41 58 792 4500
martin.burri@ch.pwc.com

 

Navigating change – the UK tax environment

Banks and their clients have a short time period to react to the significant changes being introduced to the taxation of UK Resident Non-Domiciled (UKRNDs). These changes are being introduced against a sea change in the industry. So what are the key things to be talking about to your clients? How can you adapt to these changes in a commercial and pragmatic way? And what actions should you and your clients be considering – both pre 5 April 2017 and over the longer term?

Watch the recording of our webcast where Alison Hill, Peter Houghton and Lisa Cornwell from PwC UK take a deeper look in to the UK tax environment, allowing you to navigate through the upcoming changes.

Youtube link to the recording

Contacts

Alison Hill,
Director, Private Client Solutions, PwC UK
alison.hill@uk.pwc.com

Lisa Cornwell,
Director, Private Client Solutions, PwC UK
lisa.cornwell@pwc.com

Peter Houghton,
Senior Manager, Private Client Solutions, PwC UK
peter.houghton@uk.pwc.com

Switzerland’s CRYPTO VALLEY ASSOCIATION Founded To Build World’s Leading Blockchain and Cryptographic Ecosystem

Crypto Valley Association, the Swiss-based not-for-profit association supporting the development of Blockchain and cryptographic related technologies and businesses, today launched with a number of leading companies and startups as members, including ConsenSys, UBS, PwC, Thomson Reuters, Luxoft, Canton of Zug, and Lucerne University.

Switzerland has established itself as one of the world’s leading countries for digital innovation. Home to hundreds of multinational enterprises, technology companies, and financial institutions, the country boasts world-leading infrastructure, a sophisticated workforce, and one of the world’s most decentralized, stable and neutral political systems.

Headquartered in the Swiss canton of Zug, Crypto Valley Association is the independent, government-supported association established to take full advantage of Switzerland’s strengths to build the world’s leading blockchain and cryptographic ecosystem, working with government to foster the development of pioneering digital technologies in Switzerland and internationally. The association will support startups and established enterprises through policy recommendations, initiating and enabling research projects, and organizing conferences, hackathons, and other industry events.

“Emerging technology such as Blockchain and Crypto-technologies are at the heart of the digital transformation of Financial Services. PwC have explicitly made digital one of our key priorities and support a number of initiatives around the world to foster innovation. By supporting and being part of the Crypto Valley in Switzerland, we engage with a rapidly growing ecosystem and contribute our expertise and perspectives on how to leverage technology for positive change in society,” said Manoj Kashyap, Global FinTech Leader for PwC.

Read more about the Crypto Valley Association.