L-QIFs: can the ‘new Swiss RAIF’ entice foreign investment funds?
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L-QIFs: can the ‘new Swiss RAIF’ entice foreign investment funds?

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Silvan Guler and Thomas Zellweger of Tax Partner summarise Swiss collective investment schemes and their taxation, and assess the country’s appeal as an investment fund location after the introduction of limited qualified investor funds

The Swiss fund centre enjoys a high reputation as a location for asset management and the distribution of investment funds, which is partly due to the high density of wealthy investors and an innovative workforce. Switzerland is less present internationally as a location for investment funds, particularly because the authorisation of collective investment schemes in Switzerland is time consuming and costly. Many investors therefore turn to foreign investment opportunities. To strengthen the competitiveness of Switzerland as a fund centre and to promote innovation, the limited qualified investor fund (L-QIF) was introduced as part of the revision of the Collective Investment Schemes Act (CISA) on March 1 2024.

The L-QIF is a new fund category that is essentially modelled on the Luxembourg reserved alternative investment fund (RAIF). A key advantage of the L-QIF is that it does not require authorisation from, and is not supervised by, the Swiss Financial Market Supervisory Authority (FINMA).

This article provides an overview of Swiss collective investment schemes and their taxation.

1 Collective investment schemes under Swiss law

1.1 Collective investment schemes under the CISA

1.1.1 Characteristics

Collective investment schemes are vehicles made available to investors for collective investment and managed for their account. Collective investment schemes may be open-ended or closed-ended. In particular, a collective investment scheme must have the following characteristics.

1.1.1.1 Collectivity

The investment fund must have at least two independent investors. This is the case if the investors contribute assets that are legally and factually managed independently of each other. Collectivity is lacking, for example, if the fund assets are contributed exclusively by a single person. According to the practice of the Federal Tax Administration (FTA), the collectivity of at least two independent investors must exist no later than six months after the establishment of the collective investment scheme.

Exceptionally, the assets of a collective investment scheme may be contributed by a single investor (single investor fund). This is permitted if the investor is:

  • An insurance company;

  • A public entity with professional treasury operations; or

  • A pension fund.

1.1.1.2 Third-party management and typical function holders

Investors must not be able to influence investment decisions. This does not apply to single-investor funds, where the sole investor may, under certain circumstances, make investment decisions.

The investment fund must also have typical fund functionaries, such as an investment manager or custodian.

1.1.1.3 Equal treatment of investors

The investment fund must be managed on equal terms for all investors. The redemption of fund units is generally subject to strict equal treatment. Otherwise, distinctions are permitted if there are objective criteria for unequal treatment (e.g., in the case of different unit classes, provided that the characteristics of one unit class do not disadvantage or otherwise adversely affect the other unit classes and their investors).

The principle of equal treatment may be compromised if more than 95% of the units of a collective investment scheme are held by a single investor. In this case, it is the responsibility of the fund management company or the collective investment scheme to take appropriate measures to ensure the equal treatment of investors. In principle, the circumstances of the individual case are decisive, which is why an investor may hold more than 95% of the units of a collective investment scheme, particularly in the case of large investment volumes, provided that they have no influence on the investment activities of the fund. In this case, however, the facts should be disclosed to the tax authorities in advance (tax ruling).

1.1.2 Types of investment

The CISA distinguishes between the following four investment forms:

  • The contractual investment fund (FCP, an open-ended collective investment scheme) regulates the legal relationship between the investors, the fund management company, and the custodian by means of a collective investment agreement.

  • The investment fund with variable capital (SICAV, an open-ended collective investment scheme) is a company whose capital and number of units are not fixed in advance and that allows investors to redeem their contributions at any time. The purpose of the SICAV is limited to the management of its own assets. It may carry out the management itself or delegate it.

  • The limited partnership for collective investment (LPCI, a closed-ended collective investment scheme) is a company whose sole purpose is collective investment. Closed-ended means that investors do not have the right to redeem their units at net asset value at any time. The term of an LPCI is generally limited. A Swiss corporation acts as the general partner and the investors as the limited partners. The general partner is responsible for the management of the LPCI and generally has unlimited liability. In contrast, the limited partners or investors play a passive role. Their liability is limited to their limited partner contribution.

  • The investment company with fixed capital (SICAF, a closed-ended collective investment scheme) is a corporation whose sole purpose is collective investment.

1.1.3 Limited qualified investor fund

1.1.3.1 Essential features of the L-QIF

The L-QIF is an independently regulated fund category that is established in the form of one of the existing collective investment schemes under the CISA as an FCP, a SICAV, or an LPCI. An L-QIF can therefore be organised as an open-ended or closed-ended fund. It is not possible to establish an L-QIF as a SICAF.

The L-QIF does not require authorisation from FINMA and is not subject to its supervision, which means it can be brought to market more quickly and cost effectively than supervised collective investment schemes. This is an advantage in the area of alternative investments and corporate forms of collective investment schemes.

Investor protection is ensured by the fact that an L-QIF may only be managed by institutions supervised by FINMA, such as fund management companies or asset managers of collective investment schemes. They are subject to stricter transparency requirements; for example, with regard to the investment policy of the L-QIF. For transparency reasons, the fund must be designated as a "Limited Qualified Investor Fund" or an "L-QIF" in the fund documents and in advertising, and reference must be made to the fact that it is not subject to authorisation and supervision by FINMA.

1.1.3.2 Limited circle of investors

The L-QIF is only open to qualified investors within the meaning of the CISA. In addition to pension funds and insurance companies, these include high-net-worth individuals and private investment structures set up for them, who have opted out of being treated as professional clients. Investors with a written investment advisory or asset management agreement are also considered qualified investors unless they have declared that they do not wish to be considered qualified investors.

1.1.3.3 Liberal investment rules

As the L-QIF is only open to a limited group of investors, the investment regulations are relatively liberal; in particular, to encourage innovation. For example, there are no restrictions on possible investments or risk diversification. This flexible structure allows the L-QIF to invest its assets not only in traditional investments but also in more exotic investments such as cryptocurrencies, commodities, infrastructure projects, wine, or art. In the absence of risk diversification rules, the L-QIF may, in principle, invest all its assets in one and the same investment object. However, the requirements for adequate liquidity must be observed.

1.2 Other investment vehicles

Other investment vehicles include the company limited by shares (Ltd), the limited liability company (LLC), the foundation, the investment foundation (including investment foundation groups), the association, the cooperative, the co-ownership, the investment club, and the family office.

This article focuses on the Ltd and the LLC as other investment vehicles.

2 Taxation of FCPs, SICAVs, and LPCIs in Switzerland, including L-QIFs

2.1 Taxation of the L-QIF

As the L-QIF will be established as one of the existing collective investment schemes in the form of an FCP, a SICAV or an LPCI, the L-QIF will be subject to the tax rules applicable to such collective investment schemes.

2.2 Income tax

2.2.1 Funds without direct real estate holdings

FCPs, SICAVs, and LPCIs without direct real estate holdings are taxed transparently for Swiss tax purposes and are not subject to income tax (direct federal tax and cantonal/communal taxes). The income and assets of these collective investment schemes are allocated to the investors on a pro rata basis. This applies to distributing, as well as accumulating and mixed, funds.

2.2.2 Funds with direct real estate holdings

FCPs, SICAVs, and LPCIs holding real estate directly are subject to income tax on income from direct real estate holdings. However, other income is excluded from the tax base. In this respect, these funds are treated as partially transparent for direct tax purposes.

As income from direct real estate is not additionally taxed at investor level, these funds are considered tax efficient. The taxable entity is the fund management company, the SICAV or the LPCI.

FCPs, SICAVs, and LPCIs are exempt from income tax if their investors are exclusively tax-exempt pension funds or tax-exempt domestic social security and compensation funds.

2.3 Capital tax

2.3.1 Funds without direct real estate holdings

FCPs, SICAVs, and LPCIs without direct real estate holdings are not subject to capital tax (tax transparent).

2.3.2 Funds with direct real estate holdings

FCPs, SICAVs, and LPCIs holding real estate directly are subject to capital tax. The net assets of the collective investment scheme are taxable to the extent that they consist of direct real estate holdings. The taxable entity is the fund management company, the SICAV or the LPCI.

FCPs, SICAVs, and LPCIs are exempt from capital tax if their investors are exclusively tax-exempt pension funds or tax-exempt domestic social security and compensation funds.

2.4 Withholding tax (collection)

2.4.1 Tax object

In contrast to income and capital taxes, FCPs, SICAVs, and LPCIs are considered to be non-transparent for withholding tax purposes and are therefore subject to a withholding tax of 35% on all distributed and reinvested income. This is a major disadvantage for Switzerland as a fund location in an international comparison, as fund locations such as Luxembourg, Ireland, the UK, and offshore jurisdictions (in particular, Jersey, Guernsey, Bermuda, the British Virgin Islands, and the Bahamas) do not levy any withholding tax on distributed or reinvested income.

Income from direct real estate is not subject to withholding tax if it is distributed through a separate coupon.

2.4.2 Redemption of units

Investors in open-ended collective investment schemes generally have the right to redeem their units at any time. The payment received in return would, in principle, be taxable income, unless it is a tax-free capital gain, income from direct real estate ownership, or a capital repayment. However, according to administrative practice, this payment is not subject to withholding tax.

2.4.3 Notification procedure for institutional investors

Collective investment schemes with exclusively institutional investors (tax-exempt domestic pension schemes, social security and compensation funds, life insurers subject to federal supervision, and domestic life insurers under public law) may fulfil the withholding tax obligation by way of notification, provided that the beneficiaries would be entitled to a refund of the withholding tax. It is sufficient that the relevant unit class of an FCP or a SICAV consists of eligible investors.

2.4.4 Affidavit procedure for foreign investors

If an FCP, a SICAV, or an LPCI can demonstrate that it derives at least 80% of its taxable income from abroad, the withholding tax obligation for foreign unitholders may be fulfilled by means of a declaration of domicile (affidavit). In this case, distributions and reinvestments of investment income may be made to foreign investors without the deduction of withholding tax. For the application of the affidavit procedure, it is, in particular, irrelevant whether the foreign investor is domiciled in a country with which Switzerland has concluded a double taxation agreement and whether the foreign investor has paid tax on the income in their country of domicile.

2.5 Issuance stamp tax

The issuance of units in FCPs, SICAVs, and LPCIs is not subject to Swiss issuance stamp tax.

2.6 Transfer stamp tax

FCPs, SICAVs, and LPCIs are not securities dealers for transfer stamp tax purposes and are therefore not subject to transfer stamp tax.

FCPs, SICAVs, and LPCIs are treated as exempt investors for transfer stamp tax purposes. As a result, a securities dealer’s transaction with an FCP, a SICAV, or an LPCI is subject to only half of the transfer stamp tax.

2.7 VAT

Services in connection with the distribution of units in collective investment schemes under the CISA or the management of domestic collective investment schemes under the CISA are exempt from VAT if they are provided by a fund management company, a custodian bank, a SICAV (self-managed), an LPCI (self-managed), or their agents.

It is expected that the VAT exemption will also apply to the L-QIF, although no FINMA authorisation is required and there is no direct supervision by FINMA. However, the VAT practice publication is being updated and has not yet been published by the FTA.

3 Taxation of the SICAF and other investment vehicles

3.1 Income and capital tax

Ltds, LLCs, and SICAFs are considered to be non-transparent and are taxed like corporations. No distinction is made between income from direct real estate and other income, but these funds can benefit from the participation deduction.

In addition, the income from these investment vehicles is also taxed at the investor level. The double taxation of income can be mitigated by the partial taxation of distributions from a 10% minimum holding.

3.2 Withholding tax (collection)

Distributions by a SICAF, a Ltd, and an LLC are subject to withholding tax. Retained earnings are subject to withholding tax only at the time of distribution to the unitholders.

Distributed capital gains and income from direct real estate are also subject to withholding tax if they are distributed to unitholders by means of a separate coupon.

Capital repayments are subject to withholding tax unless they are repayments of nominal value or repayments of capital contribution reserves.

3.3 Issuance stamp tax

The issuance of shares by a SICAF, a Ltd, or an LLC, as well as other contributions to equity capital, is subject to issuance stamp tax of 1%.

3.4 Transfer stamp tax

SICAFs, Ltds, and LLCs may become securities dealers for the purposes of transfer stamp tax.

As the SICAF is a collective investment scheme within the meaning of the CISA, it is treated as an exempt investor for transfer stamp tax purposes. As a result, a securities dealer’s transaction with a SICAF is subject to only half of the transfer stamp tax.

The Ltd and the LLC must pay the full transfer stamp tax on transactions unless the counterparty identifies itself as a securities dealer or as an exempt investor. In this case, only half of the transfer stamp tax is due.

3.5 VAT

The distribution of other investment vehicles or the provision of management services is, in principle, a taxable supply of services subject to the applicable place of supply rules. A typical example of services that could be exempt from VAT is intermediation in the context of the sale of participations.

On June 16 2023, the National Council and the Council of States adopted the partial revision of the VAT Act following discussions on several issues, including the elimination of the VAT disadvantage of investment foundations compared with collective investment schemes under the CISA. The distribution of investment groups of investment foundations and the management of investment groups within the meaning of the Swiss Pension Scheme Act by persons that manage or hold them, as well as the custodian banks and their agents, will in future be regarded as services exempt from VAT once the revised law comes into force.

4 Final thoughts on the impact of L-QIFs

Despite the introduction of the L-QIF, Switzerland remains a semi-attractive location for foreign investment funds due to the disadvantages of access to the EU market for Swiss collective investment schemes and the Swiss withholding tax on fund distributions. In the authors’ view, a real revival of the Swiss fund centre could only be achieved through a reform of the withholding tax on fund income.

For tax reasons, the L-QIF may be attractive to domestic private and institutional investors. However, in the case of L-QIFs with predominantly foreign investment, the affidavit procedure can eliminate the aforementioned disadvantages for foreign investors.

Given the liberal investment rules and the lack of risk diversification requirements, the L-QIF could be an interesting alternative to existing foreign competing products, despite the limited access to the European market, and contribute to the desired strengthening of Switzerland as a fund location.

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