Branch Office Versus Subsidiary Company In Switzerland

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1 Branch Office Versus Subsidiary Company In Switzerland Once you have decided to establish a presence in Switzerland, the next step is to choose the right structure. There are two basic ways in which a foreign company may carry on business in Switzerland. The first one is through a branch office and the other is to set up a subsidiary company. Once the choice has been made, it is not easy to change the concept. Therefore it is advisable to take all the relevant pros and cons into account, including questions of taxation and liability as well as operational issues (the choice of the appropriate entity depends on a number of factors). Which one is better? The choice of a particular structure depends on the aim of the entrepreneur and the degree of autonomy desired in relation to the parent company. There are no serious obstacles to being present in the Swiss market through either the branch office or the subsidiary company. Both forms are employed in practice, and although the subsidiary form remains, for the moment, more common, the use of branches is increasing. The choice between forming a branch office or a subsidiary company may be influenced by commercial considerations (e.g., a company might provide a more stable presence than a branch office) or by considerations of legal certainty (a subsidiary limits the shareholder's liability). Clients will find that from the perspective of actually running a business using a branch office vs. a subsidiary company does not make that much difference. Both can hire people, have sales, can be permanent, etc. There are only a few differences between a branch office and a subsidiary company, but they are important ones. According to Swiss standards, all the companies duly established in Switzerland, regardless of their ownership, are governed by Swiss company law and are subject to the jurisdiction of Swiss courts. While in Switzerland there are several laws that affect multinational groups of companies, there is no law on groups as such. Thus, even though a reference to the groups, regarding the consolidated statement accounts is made, it is generally acknowledged that current Swiss law is not ideally suited to groups, especially where subsidiaries are whollyowned and operate as a division of the group rather than as separate companies in their own right. This approach of the Swiss law assumes that each Swiss company in a corporate group is a separate legal entity with its own rights and duties. There is no single right solution for all cases. In each individual case, the result of an analysis of the operational, legal, and tax-related aspects may be that the best solution is a branch office, a subsidiary company, or a combination of both forms of operation. To understand advantages and disadvantages about branch office or subsidiary formation, it seems necessary to define exactly the legal criteria of these entities. What is a Branch Office? A branch is an office through which a foreign company engages in business in Switzerland. The branch has no independent legal personality (although it is treated in some respects as though it were independent for tax and foreign financial relations purposes). It follows that the foreign company is directly and fully responsible for all liabilities and undertakings of its Swiss branch office. It has to be registered in the Swiss commercial register.

2 A branch office is a satellite operation established and maintained by a business enterprise for any of a number of different reasons, all related to increasing the efficiency and profitability of their operations. Firms maintain their headquarters in a single location and will direct the activities of their branch offices, so these locations can establish a physical presence for the company in locations sometimes far removed from the headquarters. Branch offices are not fully autonomous, however. Although it may often conduct most or all of the transactions normally dealt with by the headquarters, a branch office does not hold the authority to change or make policy or otherwise act independently of the headquarters. The operation and activities of a branch office depend on the nature of the company. A company must take many issues into account when deciding on the location of a branch office. Of course, the office must be situated so as to serve new and existing customers conveniently. Most companies have standards as to an area's population, median income and other demographic data germane to the company's product or services. Companies must also consider tax and similar issues. Whether purchased or leased, staffed with independent contractors or employees, a branch office represents a regular expense that must be met. A Swiss branch office is allowed to conduct any type of business activity that falls within the scope of its parent company and can repatriate its earnings and capital. The portion of the income of the branch office, which is derived from or attributable to the operations carried out outside, will not be subject to taxes. Only the earnings derived from its operations in Switzerland will be subject to the prevailing local corporate tax rates. Swiss branches of foreign companies are assessed on the actual or assumed profit and capital attributable to the branch. Profits of branches are remittable abroad without deduction of withholding taxes. Branches of foreign companies are treated for income tax purposes basically in the same way as those of local corporations. Some cantons apply special rules to Swiss branches of foreign finance companies with headquarters abroad. These finance branches are exempt from cantonal and communal income taxes providing that the activity relates to foreign group companies. Foreign branch income of a Swiss corporation is exempt from Swiss taxation. No withholding tax is imposed on the earnings of a branch that are transferred back to the foreign headquarters. The registration formalities of a Swiss branch of a foreign company are held directly by the commercial register and do not require the involvement of a notary public. At least one of the branch managers must be Swiss resident. A branch office must have a Swiss registered office address too. For the establishment of a Swiss branch of a foreign company the following documentation and information must be provided by the parent company: the name and place of incorporation of the foreign parent company; the certificate of incorporation (duly legalized with apostille); an official translation in French (for French speaking cantons) or in German or Italian (for German or Italian speaking cantons) of the company's memorandum and articles of association;

3 a statement of corporate purpose; the amount of the authorized share capital; the total number of shares; the types of shares (registered or bearer); the amount of paid up capital; the names, addresses and nationality of board members; and the minutes of a board meeting granting authority to establish a Swiss branch, designating the individual(s) who will manage and have the Swiss branch What is a Subsidiary Company? The subsidiary company, on the other hand, is a separate legal entity created under and governed by Swiss law. It is an independent entity from the foreign parent company shareholder and, in principle shareholders have no liability for the debts or undertakings of the subsidiary, the recourse of the subsidiary's creditors or co-contracting parties being limited to the assets of the subsidiary. There is no general requirement for a business license. A subsidiary is a company in which the parent company has a majority shareholding and exercises management control). A subsidiary has its own organs, registered management, rights and obligations, and therefore its own identity. Subsidiaries are established in the local form of a Company Limited by Shares or a Limited Liability Company. The subsidiary offers a somewhat greater measure of flexibility in the sense that, as opposed to the branch office, it may issue or transfer shares to third parties (partners, investors, venture capitalists, managers, employees or other group companies within the framework of a reorganization or joint venture). It may also issue bonds or shares to the public and obtain quotation on a stock exchange. The opening of a subsidiary company in Switzerland generally requires no business permit but a registration in the commercial registry. Advantages and disadvantages Potential structural or personal changes in the parent company have no effect on the business or registration of the subsidiary. Furthermore, through a subsidiary it is possible to avoid situations in which a board member of the parent company becomes liable in respect of business activities that he or she generally does not supervise. The structure of a branch office is considerably lighter. It is not necessary to bind share capital to a branch, and the control of cash flow by way of a cash pooling system is easier to arrange.

4 A branch office has the benefit of being less costly to start. The initial procedure is much simpler. Branches are able to do all the important things that a subsidiary can do: conduct transactions, rent an office, hire staff, and send profits back home. For some companies, a branch office as an extension of headquarters fits better with their legal and tax parent structure. Both branch office and subsidiary company are generally subject to local company tax on their net profits, the rules applicable being often essentially the same. No value-added tax is due upon services invoiced between a head office and a branch. There are certain cases in which using a branch rather than a subsidiary to render services would effectively reduce the amount payable by the foreign company. The transfer of the profits from the Swiss branch office to its parent company is not subject to any withholding tax. However, the payment of dividends from the Swiss subsidiary to its parent company may be subject to a withholding tax. Swiss branch of a foreign company pays the same rates of corporate income tax on profits, income and capital gains as would be paid by a Swiss-resident corporate entity. However, profit repatriated abroad by the branch, is not subject to any tax in Switzerland. For Swiss branches, an additional advantage is linked to the fact that there is no withholding tax on funds remitted by the branch to its parent abroad. Despite the generally greater security that a branch form accords to creditors, by reason of the direct legal liability of the foreign company, in practice local government administrations, banks, suppliers and customers frequently seem to feel more comfortable dealing with a locally incorporated company (although they may nonetheless request the foreign parent s guarantee). Under Swiss law, a branch office can enter into contracts and execute and settle transactions in its own name, and can sue and be sued at its place of business. Legally, however, the branch office is part of the foreign company. If the foreign company is liquidated or falls into insolvency, the effects of such liquidation or insolvency also extend to the Swiss branch office. As far as registration is concerned, there is no difference between a trading and a non-trading branch office. A branch office does not have to publish its annual financial statement,. However, due to the fact that a branch office always constitutes a permanent establishment for tax purposes, the foreign company is required to disclosure certain information with respect to its branch office to the Swiss tax authorities. The customer s attitude is often a factor in favor of establishing a subsidiary. Customers may prefer to buy from a domestic company as opposed to a foreign one. With a local company, it may also be easier to deal with local suppliers, landlords, or authorities. However, this aspect depends largely on the industry in question. In certain business environments the expectations of cooperation partners may even go in the opposite direction because, unlike a subsidiary, a branch office shares the creditworthiness of its parent company.

5 The lightness of the legal framework concerning a branch office is highlighted in a winding-up situation. Subsidiaries can be terminated only by way of a formal liquidation procedure which requires at least half a year. Conversely, a branch can generally be closed down at any given time. If operations in Switzerland are intended to be temporary to begin with, for example in project-type arrangements, or if the prospects for the near future are very uncertain, one may lean towards establishing a branch instead of a subsidiary due to the transaction costs involved in closing down. Operationally, the branch does not require a statutory auditor; however, required accounting services will otherwise be comparable. As opposed to the subsidiary, no annual legal and registration fees are required (in connection with shareholder and board meetings) other than upon the occasion of changes of the branch manager, branch office, etc. On net balance, the branch is somewhat less expensive. The amounts involved however, are such that they would not normally control the decision as to the structure to be employed. Setting up a domestic subsidiary company involves incorporation under Swiss laws. By incorporation, the domestic subsidiary company acquires a juridical personality that is separate and distinct from that of its parent company. The parent company shall not be liable for the obligations of the domestic subsidiary company beyond its subscription to the subsidiary s authorized capital stock, unless there are circumstances that warrant the piercing of the veil of corporate fiction, such as its use for the perpetration of fraud. From the viewpoint of taxation, the subsidiary becomes a domestic corporation while the parent company remains a non-resident foreign corporation. The domestic subsidiary and its parent company are also subject to tax separately. A quite important tax advantage of setting up a branch office is that it may be allowed to deduct a ratable portion of the expenses and other deductions of its parent company from its taxable income from Switzerland if these expenses and deductions are effectively connected with its business being conducted here. Unless relevant tax or cost factors lead to a different conclusion in a specific case, it seems likely that, at this time, the advantages of the local subsidiary formula will generally continue to outweigh the disadvantages. In summary, therefore, it may be more advantageous for a foreign investor company to set up a domestic corporation for purposes of limiting its potential legal liability. Updated Tschiffeli & Partners

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