Bond financing for Swiss companies through a German financing company

Swiss companies seeking financing through the European (EU) capital market often face a tax structuring issue. If a bond is issued directly by a Swiss company, interest payments on certain Swiss bonds may generally be subject to Swiss withholding tax at a rate of 35%. Swiss withholding tax may be refundable under certain conditions, in particular for investors entitled to treaty benefits. In practice, however, the refund procedure may involve administrative effort, timing delays and additional costs for investors. In the case of a placement with private or institutional investors in the European market, this may significantly reduce the attractiveness of the bond. The Swiss Federal Tax Administration describes Swiss withholding tax as a withholding tax on capital income with a standard rate of 35%.

A frequently more attractive structure is to use a German financing company. In this structure, the Swiss parent company establishes a German GmbH as a financing subsidiary. This German company issues the notes under German law, arranges for the notes to be held in custody with Clearstream Banking AG in Frankfurt am Main and subsequently passes on the issue proceeds to the Swiss parent company on the basis of an intra-group loan. The German financing company therefore becomes the issuer of the bond and the lender to the Swiss company.

Why a German financing company may be advantageous

The main advantage of this structure is that ordinary German fixed-income notes are not subject to a general withholding tax on interest payments to foreign investors comparable to Swiss withholding tax. Interest on most debt securities is generally paid gross; however, German withholding tax may apply to special instruments such as convertible bonds or profit-participating bonds.

Whether withholding tax is deducted from the interest payment made by the German financing company depends on the tax law applicable to the investor’s custodian bank. A German credit institution holding the bond for an investor subject to tax in Germany would withhold capital gains tax (Kapitalertragsteuer – KESt) at a rate of 26.375% including the solidarity surcharge. For an investor not subject to tax in Germany, it would not make such a deduction. If the interest payment is routed to a non-German bank which credits it to the investor, any tax withholding depends on the law of that state; in any event, no German withholding tax or capital gains tax would be deducted.

Forwarding the proceeds to Switzerland

The German financing company raises the capital through the bond. It then grants an intra-group loan to the Swiss parent company. This loan should be governed by a framework financing agreement. In particular, the agreement should regulate the maximum loan amount, disbursement in tranches, interest, repayment, use of proceeds and information undertakings of the Swiss parent company.

Typically, the German financing company receives a margin on the intra-group loan above the interest rate of the notes. This margin is intended to reflect the function and risks of the German financing company. It must be arm’s length and defensible from a tax perspective. The Swiss parent company may also assume the costs of the issuance, including prospectus costs, legal advice, tax advice, paying agent costs, Clearstream fees, ISIN/WKN costs, marketing costs and ongoing administrative costs.

Swiss withholding tax: key points to consider

The structure must be designed so that the bond is not regarded, in economic terms, as an issuance by the Swiss parent company. This risk arises in particular where the Swiss company provides investors with a guarantee, assumption of debt, hard letter of comfort or comparable support obligation. In such cases, Swiss tax practice may, under certain conditions, attribute a foreign bond with a flow-back of funds to Switzerland to the Swiss company with the consequence of Swiss withholding tax (WHT). A soft goodwill statement may, however, be possible.

Management and substance of the German company

A further key point is the actual organisation of the German financing company. The German GmbH should not merely be formally established in Germany. It must also actually operate as a German financing company.

This means in particular that the management of the German GmbH should be exercised in Germany. Management resolutions, payment decisions, contract administration, accounting, bank accounts, communication with the paying agent, Clearstream, prospectus advisers and authorities should be organised in Germany in a verifiable manner. If the German GmbH is de facto managed from Switzerland, this may raise both tax residency issues and Swiss withholding tax issues.

No public placement in Switzerland

For reasons relating to the Swiss withholding tax structure, it is generally not advisable to additionally offer the bond publicly in Switzerland or to register it there. A public offering in Switzerland can, in principle, be structured from a capital markets law perspective. However, it may create undesirable tax connecting factors, because the financing then moves closer to a Swiss capital markets raising.

For a European (EU/EEA) placement, it is therefore advisable to focus the public offering on Germany, Austria, Luxembourg or other EU/EEA states and to expressly exclude Switzerland. The selling restrictions, website notices, subscription documents and distribution processes should consistently reflect this. Subscriptions by investors resident or established in Switzerland should be separately regulated or excluded.

Prospectus Approval in Luxembourg and Notification into the EU

For the capital markets implementation, it may be advisable to have the securities prospectus approved not in Germany, but in Luxembourg by the CSSF. Luxembourg is an established jurisdiction for debt capital markets transactions. Under the Prospectus Regulation, an approved prospectus may be used in other EEA states through the European prospectus passport.

KRONSTEYN supports structuring and implementation

KRONSTEYN advises Swiss companies, corporate groups and investors on the structuring and implementation of bond financings through the European capital market. We support clients in particular with the structuring of the German financing company, the preparation of the securities prospectus, coordination with the paying agent and custodian, preparation of the terms and conditions of the notes, drafting of the subscription documents and coordination of the prospectus approval as well as notification into EU/EEA states.

For Swiss corporate groups in particular, careful tax and regulatory structuring is decisive. Financing through a German issuer may represent an attractive alternative to a direct Swiss bond issuance. However, it must be structured in such a way that no undesired Swiss withholding tax exposure arises.

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Your contact person: Dr. Hendrik Müller-Lankow.