4 September 2006
For many years Switzerland has been home to a number of large international trading companies whose businesses focus on trading commodities. The commodities themselves - principally oil, petroleum products, grains, sugar and cotton - never actually enter Switzerland but are the subject of international cross-border movement. Many of these companies are based in and around Geneva.
During recent years there has been a trend towards further relocation by traders to Switzerland. Nowadays, the country is arguably one of the most important geographical markets in the world for commodities trading, and its importance appears to be increasing. This phenomenon is widely recognised throughout the commodities industry.
So what is it that attracts such businesses to Switzerland?
For many international companies outside the EU, Switzerland's neutrality provides an attractive and credible business centre from which to base their operations involving the trading of commodities across national borders. Switzerland is a stable, modern market economy with low unemployment, a skilled labour force and a per capita gross domestic product larger than those of the big Western European economies. In recent years the Swiss have brought their economic practices largely into conformity with the EU in order to enhance their international competitiveness. Switzerland is said to remain a safe haven for investors.
Swiss government incentives
The Geneva Economic Development Office (GEDO) offers assistance to companies wishing to relocate to Geneva. For example, when one major independent trader recently relocated its European headquarters to Geneva, the GEDO assisted in administering the move with the various cantonal agencies whose authorisations were required. The GEDO even assisted with finding appropriate accommodation and schooling for the company's employees and their families. The GEDO's website sets out a step-by-step guide with information and guidance upon the establishment of corporate entities in Geneva, with the aim to make it as easy as possible for foreign companies to relocate smoothly by offering a 'one-stop shop'.
Banking and tax benefits
The commercial reasons underlying the strong concentration of commodity traders in Switzerland are numerous, but they are predominantly fiscal.
Large international commodity traders are often given favourable fiscal treatment by the local tax authorities. Corporate tax advantages are undoubtedly a significant factor when companies select locations for headquarters. Swiss corporate tax rates generally range from 15 to 25 per cent, making them among the lowest in Europe. There are also a number of tax incentives. Under both federal and Geneva tax laws (federal tax law is standard throughout Switzerland and, in addition each of the 26 cantons, it has its own separate tax law) losses can be carried forward for up to seven years.
There are a number of corporate tax privileges: the principal company ruling, which is granted to companies that assume certain regional functions on behalf of a multinational group, can mean that the maximum overall effective taxation rate in Switzerland is below 10 per cent; the auxiliary company ruling, which applies to Geneva-based companies that perform their commercial activities outside Switzerland, leads to an effective tax rate of around 12 per cent, and sometimes even lower; and tax holidays of up to 10 years for firms that have been newly founded or are undergoing a restructuring.
Switzerland has also concluded numerous income tax treaties to avoid double taxation, which usually provide for reduced withholding rates on dividends, interest and royalties. Perhaps most significantly, what will initially attract companies to Switzerland will be the fact that it is a major hub of international trading.
The Swiss banking system enjoys an excellent reputation worldwide. The trade finance community in particular is thought of as being at the cutting edge of its sector and has grown on the back of the activities of major trading companies such as Cargill, Glencore and Bunge.
Bank secrecy undoubtedly plays a key role and this has been maintained by the EU-Swiss Savings Agreement, which recently came into force. It applies principally to physical persons. Intra-group payments of dividends, interest and royalties are now free from withholding tax in qualifying relations between Switzerland and EU member states. This clause of the agreement should have an important impact on transnational capital movements in the near future and reinforce the position of Switzerland as a financial hub and as an increasingly attractive jurisdiction for the establishment of holding companies.
International agreements and arbitration
Switzerland has also become one of the world's major arbitration centres. In 1965 Switzerland ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, allowing the enforcement of awards of arbitral tribunals in jurisdictions beyond Switzerland.
In 1987 Switzerland enacted the Private International Law Act (PILA), expanding the recognition and enforcement of all foreign awards and allowing parties in an arbitration the right to waive recourse to state courts and allowing them to choose the procedural rules for arbitration without any interference from local laws (Article 182). It also sought to encourage international trade to utilise its arbitration facilities: Article 177 of the PILA states that "any dispute of financial interest may be the subject of an arbitration". Courts have broadly interpreted 'financial interest', allowing most international commodity trading agreements to be subject to arbitration.
Most recently, the 2004 Swiss Rules were enacted, regulating the former six local chambers of commerce across Switzerland. This effectively created one common set of rules for international arbitration in Switzerland. The Swiss Rules generally follow the United Nations Commission on International Trade Law rules, except where these have been varied to allow institutional arbitration. The Swiss have also incorporated various aspects of arbitration practice sourced from International Chamber of Commerce case law.
The standardisation of arbitration services has already had a positive impact on the use of Swiss arbitration. The Swiss Chamber of Commerce and Industry recently released statistics regarding the use of Swiss arbitration and found that the rate of arbitration has grown significantly in the past 12 months. Research has shown that the majority of parties using Swiss arbitration are from Western Europe, Asia and the Middle East. It is clear that Swiss arbitration is global, commercial and increasingly attractive to international corporations, including those operating in the international commodities environment.
All of these factors go towards explaining the attraction of Switzerland. A prediction for the future is that the significance of Switzerland will only be strengthened as more international trading companies continue to establish a presence there.
Marc Gillieron is a partner at Swiss firm Chabrier & Partners. He was assisted with this article by Lisa Mason, a senior assistant at associated firm Richards Butler