The much publicized successes and failures of the Swiss private banking industry should not let us forget there has always been a thriving international commercial banking sector here. Hit by the financial crisis and attacks on offshore, the ability to open corporate bank accounts in Switzerland has suffered. Fortunately, the bigger banks are beginning to mend their ways and looking again at independent entrepreneurs as a source of new legitimate business.
1. Corporate bank accounts in Switzerland – the end of offshore?
On the face of it, due to the flood of new Swiss compliance and due diligence requirements, the opening of traditional offshore corporate bank accounts in Switzerland (for anyone but the most well-heeled of oligarchs or hooray HNWI’s) is a thing of the past.
Many wealth managers and advisers among our readers will be familiar with the following Swiss banking conundrum:
Problem: “My clients are successful international entrepreneurs with business assets and holding companies around the world. They want to open new corporate bank accounts in Switzerland for their family-owned holding companies and for their legitimate offshore commercial and treasury operations. They do not (yet) need - or already have quite sufficient – ‘pure’ private banking portfolio management services but these banks are reluctant and expensive for vanilla corporate banking to cater for regular offshore companies and corporate cash management. The Swiss banks say they only really want to open private client investment accounts – offering a mere banking service is not their role. The only way to get them to play ball is to deposit at least $ 1’000’000 (and preferably much more) into a discretionary management portfolio, without which the gnome will lose any desire to help”.
There are not too many solutions. In reverse order of efficacy these will include:
Option A: give the bank what they want: a private account with a discretionary investment portfolio for $1’000’000 which you will be invited to double within 12 months (cost: at least 2 % p.a. including transaction fees – but good service, ability to borrow – at further cost); request as a pre-condition that they also open additional treasury accounts for the client’s offshore commercial companies – but beware of surreal compliance requirements!
Result: a complicated, potentially reluctant (mainly private) banking service which immobilizes cash and creates new costs.
Option B: reluctantly forget Swiss banks for new offshore accounts ! Their shunning of commercial activities and sole focus on pure play asset management and passive investments is just too irritating. Use and expand the family’s existing corporate banking relationships in various jurisdictions for the new business.
Result: inevitably compromised of asset protection planning; costly load of compliance questionnaires to complete which will insist on disclosures with potentially adverse effects on tax and estate planning strategies longer term.
Option C: find a trust company that has commercial bank relationships in offshore &/or ‘mid-shore’ finance centres - e.g.to name but few obvious condidates: Ireland, UK, Luxembourg, Netherlands, UAE, Mauritius, Singapore, Hong Kong, Canada, Panama, Barbados, etc…. in no particular order.
Result: almost inevitably the beneficial owner client will need personally to visit the new banks and, most likely, to incorporate a local company to start off the banking relationship; more work, more costs, more local directors, tax uncertainties, time zone issues, probably need to engage with smaller bank with low credit ratings and unreliable service.
Option D: (by now you will have guessed!): go local : set up a company in Switzerland - a Swiss commercial &/or holding company, or the branch of a foreign company - with some minimum substance (see below) and simple corporate operations. This provides a legitimate economic base onshore and, for purely statutory and legal reasons, requires a local bank (UBS, CS, a cantonal bank or similar, via a notary) to provide a consignation account to receive the capital deposit for the incorporation.
Result: a banking relationship with the bank’s domestic corporate banking department, which will provide a good basic commercial service. Key point: it also provides a direct route to into the bank’s compliance and operating machinery which forces the banker to consider the client’s global business structure.
In most cases this ‘mini-multinational SME’ will – subject to certain and fee volume requirements –will facilitate the bank opening normal corporate banking accounts and providing selective commercial banking services across the board to the parent group, both on and offshore. Problem solved
2. Advantages of Swiss companies
The combined set-up and running costs of a Swiss company are no greater than those in most OECD jurisdictions – and the procedures, though Civil law, easy to get used to. The minimum cost will come to about CHF 5’000 for set-up and CHF 10’000 annually for maintenance (including filing of accounts but assuming with minimal activity). The minimum initial capital requirements range from CHF 20’000 for an LLC-type vehicle - “Sàrl” or “GmbH”- to CHF50’000 for the issuing of 50% paid up shares in an “SA” – “AG” - see further details inset below. There are a number of details to attend to concerning directorships (which can only be physical persons), and legal and tax options need to be considered relating to choice of canton, tax status, domiciliation, holding structures, financing etc. etc. which are not the subject of this article.
Clearly, Switzerland is not the cheapest nor easiest of jurisdictions in which to establish a new business, but it does have many substantial advantages which make other countries less attractive – for family-owned companies and cross-border entrepreneurs, large and small.
Incorporating a Swiss company (usually an SA or Sàrl - see details in inset above) can offer many valuable benefits to its owners, including:
Low tax rates
Based on a clear and advantageous tax system and the use of tax rulings for special categories such as:
- Holding companies & financing companies
- Trading & IP licensing companies
- Service companies ( ‘auxiliary’ cos for administration of international groups)
- Swiss branches of a foreign company
- Foreign branch of a Swiss company
- Worldwide Double Tax Treaty (DTT) network – permitting efficient tax and exit planning - and Bilateral Investment Treaty (BIT) network for the protection of Swiss corporate investments in many emerging economies
- Relatively inexpensive and simple accounting & tax reporting obligations
Friendly business environment
In addition to this relatively friendly tax friendly environment, the benefits of owning a business in Switzerland, however modest by comparison to the country’s corporate giants, are not to be sneezed at, thanks to a uniquely stable macro-economic and legal infrastructure which offer exceptionally high levels of both corporate and personal security . Even after the tsunami of new compliance and disclosure rules imposed by FINMA and the banks with increasing severity over the last three years, the country’s traditional discretion and liberal view of business means that Swiss companies still enjoy:
- high level of confidentiality and discretion in professional matters (including, for some years still, bearer shares)
- uncompromised attorney–client privilege
- low reporting requirements
- good understanding of cross-border business (throughout financial community
- unsurpassed economic stability
- robust legal environment
3. Minimum substance and the “multi-national SME”
What is ‘minimum substance’ for a company in a rather formalistic and civil law country like Switzerland? Fortunately, not as much as one might expect.
Until the recent financial crisis and crack-down on offshore centres, cross-border families and offshore companies could still find what they were looking for from Swiss banks, who opened accounts for offshore and onshore companies, regardless of substance, without much fuss. This has all changed unrecognizably. From around 2010, it was beginning to look like the combination of FINMA’s new requirements for “cross-border risk management” by banks and intermediaries and the recurrent offshore leaks and tax scandals would close down for ever the possibility of foreign company accounts in Switzerland, other than for the typical large industrial or trading groups with massive balance sheets and huge staff.
Even Swiss letter-box companies – of which there are many thousands all over Switzerland and especially in low tax cantons such as Zug, Schwyz, Luzern - can no longer get accounts open without very onerous conditions attached.
But as banks restructured and the crisis receded, in 2012 and 2013 things started improving.
The big banks have come up with new rules about what constitutes substance for an international group (however offshore it might wish to remain in concept), which can be summarized as:
- local staff including a Swiss-resident manager / director
- Swiss office space
- minimum of commercial / treasury / FX transaction volume
- proof of tax compliance (in Switzerland – which can include outsourcing of up to 80% of business income and costs)
Now a Swiss company with demonstrable substance qualifies for full onshore status and can apply for the whole range of international banking services offered to any domestic company.
Given this basic local substance – which facilitates the newly enhanced anti-money laundering procedures and controls – a client’s group banking needs can be dealt with just like that of any small multi-national and international transactions should be able to without undue obstacles from compliance. The banks have at last understood the process of “onshorisation” – and now are beginning to better understand the needs of legitimate, cross-border “Small & Medium-sized (Multinational) Enterprise” which replace the sector’s excessive dependence on wholly opaque offshore companies.
In addition to which, having got into the domestic banking department of Credit Suisse or UBS with a small Swiss company, the friendly bank manager seems newly prepared – like in the good old days – to go out of his way to expand the relationship – subject to a few volume & pricing issues - and allow additional offshore corporate accounts to be opened to bring in more fees.
The minimal annual banking volume expected for such accounts – from corporate FX, treasury, transfers, etc. - would seem to be around EUR 3’000’000 (approx. USD 5’000’000), generating annual fees from transactions of around CHF 15-20’000…(trust companies with enough volume of business to offer can get these minima reduced for individual companies).
4. Entrepreneur commercial banking – and commercial bankers – making a come-back?
Commercial banking subdued since crisis
Traditional merchant banking has a long history in Switzerland (since the era of the Lombards). “International entrepreneur banking” – defined as the provision of banking facilities to non-Swiss entrepreneurs and their businesses – has been big business for Swiss banks with commercial banking departments for many years and until quite recently constituted, of course, a large and steady source of private banking inflows. But the financial crisis and pressure on offshore tax structuring hit all that.
Until 2008-9, many of the larger banks in Switzerland, including traditional private banks, had specialised sections able to deal with the more complex demands of international entrepreneurs, including activities euphemistically labelled ‘international business banking’, ‘client business solutions’ ‘credit-led’ private banking, etc. all of which are focussed on helping the client make money (and not just waiting for it to drop into investment portfolios afterwards, as became the prevailing theme since!).
These bank’s commercial sections provided not only treasury, funding and facilities to entrepreneurs and their offshore groups, but also the advice for and implementation of the fiduciary holding structures and tax planning that support these businesses.
Quite apart from the fortunes being made in IPO’s and M&A, and fed through to Private Banking from the hugely profitable Investment Banking arms of the big banks (about which much has already been written and which is not the subject of this article), the corporate banking entities within Swiss banks also facilitated vast inflows of funds – especially from fast growing emerging economies and their proliferating HNWI’s and UHNWI’s.
A uniquely profitable example of this was the commodity (and oil) finance sector – a hive of offshore corporate banking activity and of independent entrepreneurship still thriving in Switzerland, though perhaps somewhat subdued. The Swiss banking community was uniquely successful, since the 60-70’s, at creating a niche for world-class trading companies and trade financing banks - specialised in oil, steel, grain and commodity finance - which attracted miscellaneous trading diasporas and fostered the country’s pre-eminence in commodity trading and resource industries.
This sector of the banking industry, which had been a major source of net new money for private banks, was also badly hit by the financial crisis, following draconian cut backs in balance sheets, inter-bank credit lines, lending ratios, etc. The number and size of banks in the commodity sector has declined. The big banks now focus on what is termed ‘le grand négoce’ – big credit lines reserved for the oligopolies of titan traders in various sectors, especially oil, minerals and softs. Other smaller banks – with roots in trading communities and regions, step in the breach for smaller niches – such as the rice or steel trade - but cannot take on the best business of all, which is the oil trade, because of the size of the average cargo (USD20-30m for refined products and USD 100m fir crude). This heralds the emergence of exciting niches in highly profitable trade finance funds, and country risk financing techniques of great interest for savvy investors but too specialised for this article.
New strategies combine commercial and private banking approaches
Is it too much to expect that banks will return to the “entrepreneur banking products” which used to be offered to business owners in the pre-crisis era, including a range of facilities for corporate treasury offshore, FX, and credit products: receivable financing, mortgages for commercial and residential property, and traditional asset finance (for business and pleasure).
On the credit and lending side, things will probably remain subdued for a while – due to past excesses, new balance sheet restrictions and the increasing technical specialisation required for assessing, controlling and laying off credit risks.
But for non-credit activities, the future looks brighter. In recent strategy presentations by some of the leading international banking groups in Switzerland, while still focussed mainly on HNWI and UHNWI’s the use of the terms “entrepreneur” and “business banking” are making a come-back.
While they may not advertise as widely as in the boom years, UBS, Credit-Suisse, Julius Baer and HSBC have each made recent statements about offering pro-active inducements and business products to their preferred targets, especially in emerging markets, with their fast growing constituencies of billionaires who have to be caught early to ensure catching them at all.
For example HSBC specifically mentions that in 2014 every high-level private banker should be accompanied and supported in his or her relationships by and experienced commercial banker sitting by their side to identify cross-selling opportunities.
My own experience, in dealing with business creators in Eastern Europe and Latin America, confirms that the Swiss banks have not lost their touch for seeking out legitimate sources of commercial banking and asset management fees deriving from corporate treasury and FX, trade flows, and, especially, the attractiveness of private pension funds and captive insurance companies for generating new assets to manage.
Educating the clients and the bankers
Proposing the use of onshore companies, in Switzerland or anywhere else, is not so easy if the client – especially from Eastern Europe, Latin America or Asia – has become used to using a favourite zero tax jurisdiction of choice (e.g. BVI or Panama – still world leaders in this sector). The need for annual accounts, some tax reporting, and for a legitimate holding structure with a degree of transparency about the beneficial owner, still go against the grain in some markets. In this context age matters. Younger entrepreneurs seem less hooked on the old culture of absolute confidentiality and zero tax disclosure which was the rule for their parents.
The opposite seems to be the case for bankers. The younger they are, the less they are familiar with commercial realities and the noble merchant banking past of previous generations. There seems to be an unavoidable clash of cultures going on, both inside and outside the big private banks, between the ideal of “pure play” private banking, which strives for perfection in portfolio management alone, and “entrepreneur private banking” which admits the need to help wealthy clients with their business issues.
Outside the mighty investment banking context where deals have to be in the hundreds of millions, finding private bankers and asset managers who are able to help fledgeling entrepreneurs means looking for the right kind of individuals within the large institutions, who are prepared to go beyond the “pure play” area so dear to most of their traditional bosses. In this context the age of the relationship manager is a significant factor. Go for the over 40’s in my view – they know a lot more about business and can still remember the good old days. Fresh-faced MBA’s, imbued with mainly investment banking oriented mantras from business school, tend to misunderstand commercial needs and are obsessed with formal due diligence which will drive the clients away unnecessarily.
As a retired commercial banker myself, I feel commercial and cross-selling skills take time to acquire. The mantra should be to seek out active businesses that have a need for legitimate cross-border transfers – both within a group or outside it (for instance for insurance premiums or cross-border pension contributions) – such business generated income and assets are often treated much more beneficially than the passive income and assets which previous generations of clients sought illegitimately to conceal from their home country tax authorities.
The point is that the (bigger) Swiss banks have, at last, realized that they must revive their commercial and corporate banking skills to stay in touch with “main street” and create lasting relationships at an early stage target entrepreneurs clients who will stay loyal when the liquidity event finally arrives.
So, if Switzerland is where your budding millionaires want to do their banking, a good start is to advise them to set up a (albeit small) business there. It will at least be sure way of getting an account opened and give you and them a chance of finding one of the longer-in-the tooth bankers who will take the time to understand their wider, cross-border commercial banking needs.