Setting Up An Investment Fund: Switzerland's Guide

Switzerland is a popular jurisdiction for the registration of investment funds, particularly for those interested in hedge funds and alternative investment funds. The country's robust economy, political impartiality, and protection of banking confidentiality make it an attractive prospect for investors.

The Swiss financial sector is regulated by the Swiss Financial Market Supervisory Authority (FINMA), which is responsible for the authorisation and supervision of fund management companies, asset managers, and investment funds.

There are several laws and ordinances that govern the creation and operation of investment funds in Switzerland, including the Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO).

To set up an investment fund in Switzerland, individuals must follow specific regulatory prerequisites and adhere to various requirements, including demonstrating good standing, guaranteeing proficient administration of the fund, and exhibiting expertise in fund oversight.

The process of registering an investment fund in Switzerland can be complex, and it is recommended to seek assistance from specialists in company formation and registration in the country.

Understand the regulatory framework

Switzerland has a stable regulatory framework for investment funds, with numerous laws addressing the registration, distribution, and permitted investment activities of such funds. The country's financial sector is a central facet of its economy, marked by robust economic stability, political impartiality, and the safeguarding of banking confidentiality.

The regulatory framework for investment funds in Switzerland is governed by several laws and ordinances:

• The Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and its implementing ordinances:
• The Ordinance on Collective Investment Schemes of 22 November 2006 (CISO)
• The Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes of 27 August 2014 (CISO-FINMA)
• The Federal Act on Financial Institutions of 15 June 2018 (FinIA) and its implementing ordinances:
• The Ordinance on Financial Institutions of 6 November 2019 (FinIO)
• The Ordinance of the Swiss Financial Market Supervisory Authority on Financial Institutions of 4 November 2020 (FinIO-FINMA)
• The Federal Act on Financial Services of 15 June 2018 (FinSA) and the Ordinance on Financial Services of 6 November 2019 (FinSO)

Additionally, the Swiss Financial Market Supervisory Authority (FINMA) has issued regulations and entered into agreements with foreign regulatory bodies to supervise and authorise investment funds and their managers.

The establishment and operation of Alternative Investment Funds (AIFs) and their managers are subject to licensing and regulatory requirements set out by FINMA. AIFs must obtain a licence from FINMA, irrespective of their organisational structure, and adhere to specific requirements such as minimum capital requirements. The authorisation process involves a preliminary discussion with FINMA, preparation and filing of a licence application, and demonstration of compliance with regulatory requirements.

Foreign AIFs offered to non-qualified investors in Switzerland must also be authorised by FINMA and meet certain conditions, including public supervision of the collective investment scheme, fund management company, and custodian to protect investors.

The regulatory framework distinguishes between open-ended and closed-ended investment funds, with different vehicles available for each type. Open-ended funds entitle investors to redeem their shares at regular intervals, while closed-ended funds do not. The four types of vehicles for AIFs are:

• Contractual collective investment schemes
• Corporate collective investment schemes with variable capital (SICAV)
• Limited partnerships for collective investments (LPCI)
• Investment companies

Furthermore, investment funds in Switzerland are regulated based on their country of origin (Swiss or foreign regulations) and the category of investors they target (capable or non-capable investors).

Overall, understanding the regulatory framework in Switzerland for investment funds involves comprehending the applicable laws, ordinances, and regulatory body requirements, particularly those set out by FINMA.

Identify the type of fund

When identifying the type of fund you want to set up in Switzerland, it's important to consider the regulatory environment, the type of investors you want to target, and the specific investment strategies you plan to employ. Here are some key points to help you identify the type of investment fund that aligns with your objectives:

Regulatory Environment:

• Switzerland has a well-established regulatory framework for investment funds, with the Swiss Financial Market Supervisory Authority (FINMA) being the main regulatory body.
• The Collective Investment Schemes Act (CISA) is the primary legislation governing investment funds. It distinguishes between open-ended and closed-ended funds, with different rules for each.
• Other key regulations include the Collective Investment Schemes Ordinance (CISO), FINMA's Collective Investment Schemes Ordinance, and FINMA's Ordinance on Bankruptcy of Collective Investment Schemes.

Types of Investors:

• Funds can be offered to both qualified and non-qualified investors.
• Qualified investors typically include financial institutions, banks, financial intermediaries, independent asset managers, and high-net-worth individuals who meet certain criteria, such as financial expertise and minimum wealth requirements.
• Non-qualified investors are those who do not fall into the categories of qualified investors.

Investment Strategies:

• Hedge funds offer alternative investment strategies to traditional investment vehicles. They can be categorized as:
• Equity hedge funds – Invest in stocks with upward trends and use shorting strategies for overpriced equities.
• Relative value hedge funds – Aim to profit from variations in the values of similar securities.
• Activist hedge funds – Invest in companies with the intention of increasing stock prices through cost reduction, asset reorganisation, and board of director changes.

Legal Structures:

• Investment companies with variable capital (SICAV) – These are open-ended funds structured as communal capital enterprises with limited liability and a separate legal entity. They have no predetermined sanctioned holdings or share quantities.
• Investment companies with fixed capital (SICAF) – Introduced as an alternative to closed-ended funds, SICAFs are ventures limited by equity interests, aiming to apportion collective assets, and can include private investors as shareholders.
• Contractual investment funds (FCP) – These are retail funds based on a collective investment agreement between retail investors, the fund administration company, and the custodial depository.
• Limited partnership for collective investment schemes (LP) – LPs are typically used for investing in venture capital, with a regional limited liability company as the main associate. Only "authorised investors" may invest in LPs.

Tax Considerations:

• The taxation of hedge funds varies depending on the vehicle chosen for incorporation. For example, income tax or capital taxes may not apply to certain structures like SICAV, LP, or contractual funds.
• In the case of SICAF, corporate tax regulations apply, resulting in the fund being taxed according to commercial company provisions.
• Withholding tax, issuance stamp tax, and double taxation treaties may also come into play, depending on the structure and jurisdiction.

Remember, it is essential to carefully review the applicable laws and regulations and seek professional advice when identifying the type of investment fund that best suits your needs and objectives in Switzerland.

Know the tax implications

Switzerland's tax system is complex, with taxes imposed at the federal, cantonal, and municipal levels. The federal government imposes a withholding tax of 35% on certain types of income, including dividends from domestic companies and interest on Swiss bank accounts. This tax applies to both individuals and corporations, but it can be reimbursed or offset against personal tax liabilities. Non-Swiss residents cannot reclaim this tax unless their country has a Double Taxation Agreement (DTA) with Switzerland. As of 2022, Switzerland had DTAs with over 100 countries.

Income from foreign sources, such as foreign bonds and notes, is generally exempt from Swiss withholding tax. However, income from foreign securities may be subject to withholding tax in the country of origin, which can reduce overall returns.

In addition to the federal withholding tax, there are also stamp duties imposed on the issuance and transfer of securities, insurance premiums, and certain contracts and banking documents. These taxes have been criticised for hindering the development of Swiss capital markets by increasing transaction costs.

At the cantonal and municipal levels, taxes vary depending on the specific canton and municipality. The tax rates for corporations are based on worldwide income, except for earnings from non-domestic real estate and permanent foreign establishments. The maximum statutory rates on pre-tax income range from 11.9% to 21.04%, including an 8.5% flat rate for federal income tax.

For private investors, capital gains on the sale of stocks or other securities are generally not taxed, as long as they are not generated commercially. However, if the tax office categorises an investor as a commercial investor, their capital gains are considered taxable income. The criteria for this categorisation are not clear-cut, and it is recommended to consult a tax advisor or the tax office directly for clarification.

Wealth tax is also levied annually on the total assets of taxpayers, with tax rates ranging from 1.3 to 11.5 per mille. This tax is based on net assets, after deducting liabilities and cantonal social deductions. Taking out loans for investments can help reduce the tax burden.

When setting up an investment fund in Switzerland, it is important to be aware of the applicable tax laws and regulations at both the federal and cantonal levels. Consulting with a tax professional can help ensure compliance with all relevant tax requirements and optimise tax efficiency.

Choose the right investment vehicle

There are four types of vehicles available to set up an alternative investment fund (AIF) in Switzerland:

• Contractual collective investment scheme
• Corporate collective investment scheme with variable capital (SICAV)
• Limited partnership for collective investments (LPCI)
• Investment company

Swiss AIFs require a licence from the Swiss Financial Market Supervisory Authority (FINMA), regardless of their organisational structure.

The contractual investment fund and the SICAV are open-ended collective investment schemes, meaning investors can request the fund or a related party to redeem their units at their net asset value at regular intervals. The SICAV is an unsealed investment fund with variable capital, a communal capital enterprise with constrained accountability, and a unique juridical personality. It is solely dedicated to joint investment in assets.

Closed-ended investment schemes include the LPCI and the investment company with fixed capital (SICAF). The SICAF is an investment company organised as a company limited by shares that is open to retail investors. The LPCI is a special form of limited partnership reserved for qualified investors.

The contractual investment fund, the SICAV, and the SICAF can be used for any generally permissible investment strategy. Many open-ended AIFs are set up as "other funds for alternative investments", which provide the broadest flexibility in terms of permitted investments.

The LPCI is primarily a vehicle for investments in venture capital, private equity, construction, real estate, and infrastructure, as well as alternative investments.

Most Swiss fund types are eligible to be structured as an L-QIF (Limited Qualified Investor Fund), with the exception of SICAFs. The L-QIF is a new, unregulated fund type that is exempt from licensing requirements and supervision by FINMA. It must be managed by institutions supervised by FINMA and is reserved for qualified investors only.

When choosing an investment vehicle, it is important to consider factors such as the account management fee, possible additional costs, the funds used, withdrawal limits, notice periods for withdrawals, and whether a private account is required.

Be aware of the risks involved

When considering setting up an investment fund in Switzerland, it is imperative to be aware of the potential risks involved. Here are some key points to consider:

• Regulatory Compliance: Switzerland has a comprehensive regulatory framework for investment funds, including the Collective Investment Scheme Act (CISA), the Collective Investment Schemes Ordinance (CISO), and the regulations set by the Swiss Financial Market Supervisory Authority (FINMA). Non-compliance with these regulations can result in heavy fines and penalties. It is crucial to thoroughly understand and adhere to all applicable laws and standards.
• Market and Investment Risks: All investments carry a degree of risk. While Switzerland offers a stable and diverse financial sector, market fluctuations and economic conditions can impact the performance of investment funds. Be cautious of potential hazards and conduct thorough due diligence before establishing an investment fund.
• Operational Challenges: Setting up and managing an investment fund requires expertise in various areas, such as compliance, investment strategy, and risk management. Ensure you have a competent and experienced team in place, including analysts, portfolio managers, and other specialists.
• Cost Considerations: Investment funds in Switzerland may incur relatively high costs, including account fees, fund fees, and additional charges. These expenses can impact the overall returns for investors. Carefully evaluate the cost structure and ensure it aligns with the investment strategy and expectations.
• Investor Suitability: Different types of investors have specific requirements and restrictions. Understand the investor segments your fund will target, such as professional or institutional clients, and ensure compliance with regulatory obligations. Misunderstanding or misrepresenting the target investor base can lead to regulatory issues and financial losses.
• Liquidity and Redemption Risks: Open-ended investment funds offer redemption rights to investors, allowing them to convert their investments into monetary assets. However, certain circumstances, such as illiquid investments or exceptional market conditions, may trigger restrictions on redemptions. Carefully assess the liquidity risks and ensure the fund regulations address these scenarios appropriately.
• Tax Implications: The tax treatment of investment funds in Switzerland can be complex and vary depending on the residency and type of investor. Be mindful of applicable withholding taxes, income taxes, and other tax considerations for both the fund and the investors. Seek professional tax advice to ensure compliance and optimize tax strategies.
• Reputation and Ethical Risks: Maintaining a positive reputation and adhering to ethical standards are crucial. FINMA and other regulatory bodies enforce strict rules and codes of conduct for investment funds and their advisers. Non-compliance with these standards can lead to fines and damage the fund's reputation. Establish robust internal controls and ensure all employees and advisers act with integrity and in the best interests of the investors.

Frequently asked questions