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13 December 2017
Although Switzerland recently decided to facilitate the financing activities of groups operating in or out of Switzerland by easing some restrictions under the Withholding Tax Ordinance, the rather stringent requirements regarding group financings according to corporate law, as well as the rules under banking law and bankruptcy law, remain the same.
Generally, every entity can participate in group financing, particularly cash-pooling arrangements, as either pool leader or participating pool member.
Prohibitions and restrictions regarding board of director decisions
Swiss corporate law does not typically recognise the legal concept of a consolidated view for groups of companies. Certain provisions take into account the fact that a company may be wholly owned by another company or a member of a corporate group, but generally each legal entity within a corporate group must maintain its separate legal and financial structure and destiny. Consequently, directors and officers of a Swiss subsidiary acting as a pool member cannot rely on a consolidated group view and act based on considering only the overall interests of the entire group, those of the parent or, if a different group entity, the pool leader. The financial status of the Swiss pool member must be assessed and secured independently, focusing on the distinct identity and status of the pool member as a legally separate Swiss corporate entity.
The Swiss pool member contributing a positive credit balance to a cash pool in most cases grants an upstream loan if the pool leader is a direct or indirect parent of the Swiss entity or another subsidiary of the parent. Such an upstream loan into a cash pool is admissible only if made according to arm's-length principles. The following conditions must be followed to meet such principles:
An automatic physical zero-balance cash pool is highly unlikely to fully comply with the arm's-length principle. This is particularly the case if the pool member is requested to provide an upstream security to the pool bank without getting adequate consideration. Therefore, the following principles must be followed to ensure that the board of directors of a Swiss pool member can comply with its duties:
It must thereby be taken into account that the repayment of the upstream loan may be inhibited by applicable insolvency laws.
Non-compliance with the above principles may lead to the invalidity of the upstream loan, as well as to personal liability of directors and officers. Further, non-compliance may have adverse tax implications and, under certain conditions in very severe cases, constitute fraudulent conveyance under applicable bankruptcy laws or even a criminal offence (eg, creditor preference or disloyal management). This applies mutatis mutandis if the Swiss pool member grants a cross-stream loan to a sister company (or a subsidiary of the latter) that acts as pool leader.
Prohibitions and restrictions regarding corporate authorisations
Nature of corporate authorisations
The corporate purpose provision in the articles of association of the Swiss pool member should authorise a Swiss pool member to participate in group finance transactions, in particular by providing loans to its direct or indirect parent or other group companies, or by providing credit support (in the form of collateral, guarantees or sureties) for obligations of the latter to third parties, particularly the pool bank.
Further, it is advisable that the participation of a Swiss pool member in an upstream or cross-stream cash pool be formally approved at a shareholders' meeting in order to avoid participation in the cash pool later being deemed to be a (non-authorised) constructive dividend. In addition, shareholder approval gives the directors and officers of the pool member a certain degree of protection against potential liability claims of the consenting shareholder and legal successor, in particular a bankruptcy trustee of such shareholder. However, such approval does not shelter the directors and officers of the pool member against potential claims of creditors of such pool members that suffer a loss in the case of a potential bankruptcy of a pool member.
Up-to-date articles of association of the Swiss pool member should authorise that member to participate in group finance transactions, in particular by providing loans to its direct or indirect parent or other group companies or by providing credit support (in the form of collateral, guarantees or sureties) for obligations of the latter to third parties.
Further, the shareholder's meeting and the board of directors of the Swiss pool member should both approve the participation in the cash-pool arrangement of the group financing.
Filing or registration requirements
No filing or registration requirements apply to any local pool participant in Switzerland. If in the context of entering into the cash-pool arrangement the articles of association of the Swiss pool member are amended, the amended articles of association must be filed by the Swiss pool member with the competent commercial register.
In general, if the cash-pooling arrangements generate compensating claims against other pool members, there are usually normal counterparty risks regarding claims in connection with other cash-pool members. However, in exceptional cases, claims against other cash-pooling members that already had a negative equity before a potential insolvency can be treated in the insolvency procedures of the receiving pool member as equitably subordinated. The biggest risk in a cash-pooling system results from a potential insolvency of the pool leader itself.
Prohibitions and restrictions regarding (nearly) insolvent pool members
If the transfer of sums to a physical cash pool or the granting of, or payment under, an intra-group guarantee is made in contravention of the capital maintenance and profit distribution provisions under Swiss mandatory corporate law, or as a result of these actions the Swiss pool member becomes insolvent due to a lack of liquidity, the members of the board of directors and the management of the Swiss pool member may become personally liable for the shortfall. In certain circumstances, the immediate parent and the ultimate group parent may also become liable as de facto directors or may also be requested to repay certain amounts they received during the applicable clawback periods.
Prohibitions and restrictions regarding set-off mechanism in insolvency proceedings
Where the debtor is bankrupt, its creditors may set-off its claims, even if they are not due, against the claims that the adjudicated bankrupt holds against them. The exclusion or challenge of set-off in the event of the debtor's bankruptcy is governed by the provisions of debt collection and bankruptcy law.
Specific rules govern the set-off of a creditor's claims against a bankrupt and such bankrupt's claims against that creditor. As a matter of principle, the set-off of mutual debt obligations is allowed, provided that:
It is generally accepted that any debt due from the bankrupt arising out of termination of a contract post-bankruptcy is eligible for set-off, provided that the contract was entered into before the proceedings opened.
Avoidance actions affecting claims under cash-pooling arrangements
The following circumstances could lead to the avoidance of a transaction (actio pauliana) in the context of a Swiss bankruptcy:
Prohibitions and restrictions regarding derogation of banking monopoly
A company is considered to be a bank if it is mainly active in the financial sector and in particular:
In general, an institution or person is deemed to act commercially and therefore qualifies as a bank if it accepts on an ongoing basis more than 20 deposits from the public or recommends itself publicly to accept deposits from the public, even if in doing so, fewer than 20 deposits result (Article 6 of the Banking Ordinance). A person or institution accepting public funds up to Sfr1 million is not acting commercially if it does not invest the funds or pay any interest on them, and if it informs the clients that it is not supervised by the Swiss Financial Market Supervisory Authority and that the funds are not subject to the protection scheme for bank depositors.
Deposits of shareholders holding a qualifying equity interest (ie, at least 10%) in the relevant pool member and deposits of persons that are connected to the latter either economically or as affiliates (eg, parents, subsidiaries and other affiliate companies) are not considered to be deposits from the public (Article 5(2) lit (b) and (c) of the Banking Ordinance). Therefore, loans between group companies and cash-pooling arrangements are generally not subject to the banking monopoly.
The Federal Council decided to facilitate the financing activities of groups – particularly cash-pooling arrangements in Switzerland, which entered into force in April 2017. It therefore approved the respective changes to the Withholding Tax Ordinance relating to those groups in which a Swiss group company (guarantor) provides a guarantee for a bond of a foreign group company (issuer) belonging to the same group. Forwarding funds from the foreign issuer to a group company established in Switzerland will be possible up to the maximum amount of the equity capital of the issuer without the interest payments related to those forwarded funds being subject to withholding tax. The amendment of the ordinance is therefore meant to strengthen the establishment of headquarter activities with further central corporate functions, as well as treasury activities, particularly those performed outside Switzerland.
For further information on this topic please contact Alexander Vogel or Reto Luthiger at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (firstname.lastname@example.org or email@example.com). The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.
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