Lending and taking security in Switzerland: overview

A Q&A guide to lending and taking security in Switzerland. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Lending and taking security in country Q&A tool.

This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.

Contents

Overview of the lending market

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

In the past 12 months, a number of non-bank lenders (in particular credit funds) have entered the Swiss lending market. Against this background the (transfer) restrictions resulting from the Swiss 10/20 non-bank rules have become more relevant, as the number of non-bank lenders under a facility agreement with a Swiss borrower is limited to ten (see Question 27). Non-bank lenders must be aware of these restrictions when structuring transactions in Switzerland.

In addition, under two recent decisions of the Swiss Federal Supreme Court concerning intra-group financings rendered in 2014 and 2015 respectively, the Swiss Federal Supreme Court imposed stringent requirements that must be met for up- or cross-stream loans extended by a Swiss company to satisfy the arm's-length test. The Swiss Federal Supreme Court also ruled that up- or cross-stream loans not extended at arm's-length terms can constitute de facto distributions and therefore must not exceed the lender's freely distributable reserves at any point in time. It must be carefully considered on a case-by-case basis whether the extension of up- or cross-stream loan is possible and if so, what cautionary measures should be taken.

 

Forms of security over assets

Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

The definition of real estate (Grundstücke) under Swiss law includes:

  • Parcels of land without buildings.

  • Parcels of land with buildings.

  • Condominium apartments and other co-ownership shares in land (with or without buildings).

  • Rights to build on a parcel of land for a limited period of time (Baurecht).

Common forms of security

Common forms of security over real estate include:

  • Mortgage certificate (Schuldbrief) security transfer/pledge. A mortgage certificate is a financial instrument representing a personal claim against the debtor that is secured by a lien on real property. Mortgage certificates can be either:

    • bearer (Inhaberschuldbrief);

    • registered (Namenschuldbrief); or

    • paperless (Registerschuldbrief).

In whatever form, the mortgage certificate constitutes a negotiable instrument, legal title to which can be transferred for security purposes and which can be pledged. Since there are certain practical advantages for a secured party to have full legal title to the mortgage certificate (for instance, the mortgage certificate does not form part of the bankruptcy estate of the debtor), practitioners generally prefer a security transfer of legal title over the creation of a pledge.

  • Land charge (Grundpfandverschreibung). A land charge is a mortgage that is entered into the land register and that secures any kind of claim, whether actual, future, or contingent. Other than in the case of a mortgage certificate, the secured claim is not entered in the land register and neither the land charge nor the secured claim is evidenced in the form of a negotiable instrument. For a number of reasons, the land charge is less commonly used than mortgage certificates.

With both forms of mortgage security, the secured party's claims can be secured by property belonging to the borrower or a third party (third party security), subject to the rules on financial assistance and similar limitations (see Question 13).

Formalities

Mortgage certificate security transfer /pledge. The formalities are as follows:

  • The mortgage certificate, if not already issued, is created by a notarised deed.

  • The parties then enter into an agreement regarding the security transfer or pledge of the mortgage certificates (no notarisation or filing with the land register is required).

  • The parties transfer legal title to the mortgage certificates in the appropriate form. For registered and bearer mortgage certificates, this involves the transfer of possession of the mortgage certificate. For paperless mortgage certificates, this involves a registration of the transfer of legal title or pledge in the land register.

Land charges. These are created and perfected by the parties:

  • Entering into an agreement regarding the creation of the land charge in the form of a notarised deed.

  • Filing that agreement with the land register. The security is created once the land register has registered the land charge.

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Tangible movable property comprises all tangible assets other than real estate, including, for example:

  • Machinery.

  • Trading stock (inventory).

  • Aircraft and ships.

Common forms of security

Customary forms of security over tangible property include:

  • Pledge (Pfandrecht). A pledge (a limited right in rem) entitles the secured party to liquidate the assets in case of a default (however defined) of the debtor.

  • Security transfer of legal title. The secured party acquires full legal title in the transferred assets and can liquidate the assets in case of a default (however defined) of the debtor, and retain the proceeds up to the amount of its secured claim(s).

Swiss law generally does not recognise the concept of a floating charge or floating lien. Therefore, taking a security over inventory, machinery or equipment is often not practical under Swiss law.

Formalities

The formalities required for the creation and perfection of a security interest in tangible movable property depend on the type of security being given and the asset used as collateral. Perfection of a pledge or a security transfer of legal title requires:

  • A valid security agreement (in any form).

  • The transfer of physical possession of the relevant collateral to the secured party (no security is created as long as the security provider has possession (Besitz) over the relevant tangible movable assets).

An exception applies for certain types of movable assets that are subject to specific laws. Most importantly, security over aircraft, ships and railroads is perfected by the entry of the security in the relevant public register (registration replaces the requirement to transfer possession). The applicable rules are similar to those that apply to land charges (see above).

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Financial instruments

Common types of financial instruments (both in certificated and dematerialised form) over which security is granted include:

  • Shares.

  • Debt securities.

  • Units in collective investment schemes.

Common forms of security

Customary forms of security over financial instruments include:

  • Pledge.

  • Security transfer of legal title.

  • Assignment for security purposes.

Formalities

Creation of security over financial instruments requires a valid security agreement in written form. However, perfection varies depending on the type of financial instrument.

Certificated financial instruments require possession of the certificates to be transferred to the security holder. In addition, registered certificates must be duly endorsed (in blank).

Uncertificated financial instruments must be pledged, transferred or assigned in writing.

The Federal Intermediated Securities Act sets out rules in relation to the granting of security over intermediated securities. Intermediated securities include both debt and equity securities that are booked into a securities account with an intermediary.

A security interest over intermediated securities can be granted in one of the following ways:

  • Security transfer of legal title. This effected is by transfer of the intermediated securities to the securities account of the secured party by:

    • the security provider giving instructions to the bank to make the transfer; and

    • the bank crediting the intermediated securities to the securities account of the secured party.

  • Pledge. The securities remain booked in the account of the security provider. However, the relevant intermediary irrevocably undertakes to comply with any instructions from the secured party under an irrevocable account control agreement with the security provider.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Common types of existing and future claims and receivables over which security is granted are:

  • Trade accounts receivables.

  • Insurance receivables.

  • Intra-group receivables.

  • Bank account receivables, including from cash deposits.

  • Claims under contracts (such as warranty claims under share purchase agreements).

Common forms of security

Customary forms of security over claims and receivables include:

  • Pledge.

  • Assignment for security purposes.

Generally, it is advisable to have security over claims and receivables governed by the law governing the claims or receivables, as the choice of law may not be valid towards the assigned debtor.

Formalities

The perfection of a pledge over rights or receivables requires a valid security agreement in written form.

Perfection of a security transfer of legal title to rights or receivables requires both:

  • A valid security agreement in writing.

  • A written assignment declaration.

In practice, the assignment declaration is usually set out in the security agreement.

If a pledged or assigned claim is represented by an acknowledgment of debt, the transfer of that document to the secured party is required for perfection.

It is not a perfection requirement to notify third-party debtors of the pledge or the assignment for security purposes (unless a second ranking pledge is created, see below). If the debtors are not notified, they can still validly discharge their debt by payment to the assignor. However, it is customary to notify the debtors of intra-group receivables, insurance receivables and bank account receivables at the time the security is created. Debtors of trade receivables are generally only notified on the occurrence of an event of default, in order not to prejudice the business of the security provider.

Where receivables in respect of a Swiss bank account are pledged or assigned for security purposes, the Swiss bank's general business terms usually provide for a first-ranking security interest over the bank account. A third party therefore only gets a second-ranking security interest over a Swiss bank account unless the bank waives its priority rights. To create and perfect a second-ranking security interest, the bank must be given notice.

To ensure that a pledge or assignment for security purposes does not qualify as a "conditional" security interest (arising only once the secured party can notify the debtors), it is important to ensure that the secured party has the right to notify debtors at any time.

Cash deposits

6. What are the most common forms of security over cash deposits? How are they created and perfected?

Common forms of security

The creation of security over cash deposits is based on the same principles that apply to security over bank accounts, claims and receivables (see Question 5).

Formalities

See Question 5, Formalities.

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

Intellectual property

Intellectual property over which security is commonly granted includes:

  • Patents.

  • Trademarks.

  • Copyrights.

  • Designs.

  • Domain names.

  • Pending applications regarding the aforementioned intellectual property rights.

Common forms of security

The two available forms of security over intellectual property are:

  • Pledge.

  • Security transfer of legal title.

Formalities

Pledges and security transfers are both created by a written security agreement. Registration is not required to perfect a security over intellectual property registered in Switzerland (a local law-based assessment is required with respect to intellectual property registered in other jurisdictions). However, registration is recommended so that the security holder can enforce its security interest against a third party who could otherwise rely in good faith on the information registered in the relevant public register.

It is usual to register the pledge or the security transfer of legal title with respect to the core intellectual property rights or the security provider.

 
8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

In general, security can be granted over future and fungible assets. However, the assets that are used as collateral must be determined or at least determinable at the time of accrual.

As Swiss law does not recognise non-possessory security over tangible assets, a pledge over future or fungible assets is only effective once the:

  • Asset has come into existence.

  • Pledgee has taken actual possession over the asset.

Until then, the security is not perfected and there is only a contractual obligation to perfect the security in accordance with the terms of the security agreement. For the same reason, Swiss law does not recognise the concept of a floating charge or floating lien (see Question 3).

In addition, for an assignment or pledge of future claims, any claims that come into existence after the opening of bankruptcy proceedings against the assignor or pledgor fall into the assignor's/pledgor's bankruptcy estate and do not pass over to the assignee/pledgee.

Fungible assets

See above, Future assets.

Where there is a pool of tangible movable assets, the fact that Swiss law does not recognise non-possessory security may pose difficulties.

Other assets

Security can, in principle, be granted over any asset, subject to generally applicable limitations and the specific requirements of certain types of security (see Questions 2 to 6).

 

Release of security over assets

9. How are common forms of security released? Are any formalities required?

The formalities required for the release of a security interest depend on the type of the security interest. For a security of an accessory nature such as a pledge, the security automatically ceases to exist once all secured obligations have been discharged in full (that is, the existence of the security interest depends on the existence of a claim).

The release of a security interest is usually effected by a release agreement (or a clause in the original security agreement governing the release) and the necessary release action according to the type of security interest, as follows:

  • A pledge or security transfer of legal title of mortgage certificates: the re-transfer of the mortgage certificates.

  • A pledge of movable tangible assets or share certificates: the re-transfer of possession of the pledged assets to the pledgor.

  • An assignment of claims or other rights: the re-assignment in writing of the relevant claims to the assignor.

  • An outright transfer of movable properties or book-entry securities: the re-transfer of the relevant assets to the pledgor.

  • A pledge of book-entry securities: the termination of the account control agreement.

  • A security over intellectual property rights: the registration of the release in the relevant registers.

If third parties such as debtors of assigned claims or account banks have been notified about the security interest, it is also advisable to notify those parties about the release of the relevant security.

 

Special purpose vehicles (SPVs) in secured lending

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

It is not usual in Switzerland to set up an SPV holding certain of the security provider's assets for the purposes of a secured lending transaction, except for covered bonds and similar structured transactions.

 

Quasi-security

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Sale and leaseback

Sale and leaseback is mainly used in relation to real estate. Sale and lease back of movable assets is rarely used in practice as the transfer of legal title to the lessor is not recognised under Swiss law if the seller remains in possession of the asset.

Factoring

Factoring, including recourse and non-recourse factoring of receivables, is common in Switzerland. No particular legal risks apply if all formalities required for a valid (security) assignment are observed.

Hire purchase

Hire purchase agreements are common in the area of consumer goods. Such arrangements may not be enforceable if found to be a circumvention of the laws governing the retention of title (Eigentumsvorbehalt) and the requirement for registration of the retention of title with the competent authorities.

Retention of title

Retention of title is common, particularly for consumer goods, often in connection with a hire purchase (see above). However, the effects of a retention of title are limited and subject to a cumbersome registration process for the retention of title, and therefore due to cost/reward considerations the retention of title is usually not registered.

Other structures

To the extent not excluded in the relevant agreements, parties generally have a right to set off claims that are due and payable. Finance leasing is also regularly used in Switzerland. For secured short-term inter-bank financing, the sale and repurchase (repo) of financial instruments is common.

 

Guarantees

12. Are guarantees commonly used in your jurisdiction? How are they created?

Guarantees are widely used in secured lending transactions in Switzerland. A guarantee is an abstract undertaking to pay a specified amount to the secured party on the latter's request and is generally independent of the validity of the secured obligation. There are no specific requirements as to the form of the guarantee agreement. The wording of the undertaking must be carefully drafted to avoid guarantees from being re-qualified as a surety (Bürgschaft). If the undertaking to pay depends on the validity of the underlying contract, it will qualify as a surety. As a surety is of an accessory nature and depends on the validity of the underlying contract, the guarantor (the person providing the surety) has the same defences and obligations as the principal.

 

Risk areas for lenders

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

Swiss law does not provide for specific provisions governing financial assistance and there is little guidance from court precedents. This is true for financial assistance in the form of security, guarantees or loans, as well as debt push-down measures. Therefore, an assessment of specific financial assistance measures for compliance with Swiss law must be made on a case-by-case basis.

In general, the provision of up-stream or cross-stream loans by Swiss companies is subject to far reaching restrictions resulting, in particular, from recent decisions of the Swiss Supreme Court. These should only be made if best practice cautionary measures are taken. For the limitations on the granting of up-stream security and guarantees, see below, Corporate benefit.

Corporate benefit

The directors of a Swiss company must at all times act in the best interest of the company. Therefore, the granting of security or guarantees of an up- or cross-stream nature must generally only be made on arm's-length terms. Since there are no safe-haven rules or other guidance as to what conditions will be considered as arm's-length terms, it is highly recommended to take cautionary measures in case the arm's-length nature of up- or cross-stream security or guarantees is denied after the fact. Best practice standards that have evolved in practice include, among other things, ensuring that:

  • The articles of association of the company provide for the necessary financial assistance clause.

  • The security is entered into subject to customary Swiss limitation language (limiting the guaranteed amount or the use of enforcement proceeds to the freely distributable reserves of the Swiss company).

  • A written board and shareholders' resolution is passed.

Loans to directors

For non-listed companies, there are no specific restrictions under Swiss law on the granting of loans to directors or other related persons (except for certain disclosure obligations), if such loans are extended on arm's-length terms and the extension of the loans is in the best interest of the relevant company.

For Swiss companies listed on a Swiss or foreign stock exchange, loans and other financial accommodation to directors, members of the senior management or members of an advisory board are only permitted if the articles of association contain a provision indicating the maximum permissible amount. This restriction applies on a group-wide basis.

Usury

Except in the area of consumer credit, there are generally no specific limits on the interest rates that can be charged on a loan, subject to manifestly excessive interest rates and certain restrictions regarding the charging of compound interest.

Others

The validity of a loan, security or guarantee can, among other things, be limited by:

  • Applicable bankruptcy, insolvency, re-organisation or similar laws affecting creditors and secured parties in general (including provisions relating to avoidance actions).

  • Laws or principles of general application, including in relation to the abuse of rights (Rechtsmissbrauch), the principle of good faith (Grundsatz von Treu und Glauben) and public policy.

 
14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

There are a number of statutory laws imposing liability for environmental damage. Generally, the entity causing the environmental damage is liable. A lender is generally not responsible for environmental damages caused by a borrower, security provider or guarantor merely as a result of making a loan to or holding or enforcing a security or guarantee from that entity.

However, if a lender enforces its security interest in real property, acquires legal title to the property and continues or permits to continue any polluting activities, the lender can incur liability for any environmental damage caused. In addition, a lender may be held liable for acts or omissions of former owners (including, but not limited to, the borrower) and may have to bear the costs of cleaning up the contaminated real property.

 

Structuring the priority of debts

15. What methods of subordination are there?

Contractual subordination

Subordination of debt is possible under Swiss law. It is achieved contractually through an agreement between the debtor, the subordinated creditor and senior creditor in which the creditor's claims are subordinated to the claims of the senior creditor. It is also possible for more than two parties to agree on more complex ranking systems. Generally, subordination undertakings not only refer to the ranking of the creditors in an insolvency of the debtor, but also contain an obligation of the debtor not to repay the subordinated debt until the senior debt has been repaid in full.

Structural subordination

Structural subordination can be achieved by extending the subordinated loan to a holding company while the senior loan is extended to a subsidiary of the holding company.

Inter-creditor arrangements

Inter-creditor arrangements are regularly used in Switzerland for structured financings. Such inter-creditor agreements, among other things, establish priorities regarding partial payments and enforcement proceeds in case of a credit default.

 

Debt trading and transfer mechanisms

16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

Debt is traded in Switzerland. In particular, bonds are traded on the SIX Swiss Exchange and transferred according to the rules applicable to book-entry securities. Other debts, such as participations in syndicated loans, are traded by an assignment of claims or an assumption of contract (Vertragsübernahme). If the claim is represented by a certificate in paper form (Wertpapier), then the transfer of debt is subject to a valid transfer of the certificate.

Swiss law security of an accessory nature, such as pledges and suretyships, constitute ancillary rights to the secured obligations. Therefore, an assignee of the secured obligations generally automatically also benefits from the security.

Swiss law securities of a non-accessory nature include:

  • Security transfers of mortgage certificates.

  • Assignments of claims for security purposes.

  • Guarantees.

These must be expressly transferred with the (advance) consent of the security provider or guarantor.

 

Agent and trust concepts

17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

The agent concept is recognised in Switzerland and frequently used for syndicated facilities and agency arrangements governed by Swiss or foreign law.

 
18. Is the trust concept recognised in your jurisdiction?

It is not possible to set up a trust under Swiss law. However, foreign trusts can be recognised in Switzerland under the Swiss Private International Law Act (PILA) and the Hague Trust Convention, which was ratified by Switzerland in 2007.

The relevant PILA provisions permit the settlor to choose the law applicable to the trust and to choose a forum (the choice must be made in writing). A Swiss court cannot deny jurisdiction if, among other things:

  • One of the parties, the trust or one of the trustees is domiciled, habitually resident or has a place of business in the canton where the court is located.

  • A major part of the assets of the trust are located in Switzerland.

A foreign decision relating to a trust can be enforced in Switzerland if, among other things, it has been rendered by a court:

  • That has validly designated the decision in writing.

  • Located in the jurisdiction in which the defendant has its domicile, habitual residence or establishment.

  • Located in the jurisdiction where the trust has its seat.

  • Located in the jurisdiction whose laws govern the trust.

A security trustee cannot hold Swiss law-governed security of an accessory nature, such as pledges and suretyships, as the secured parties and the creditors of the secured claims must be identical. For these forms of security, the trustee must therefore act in the name and for the account of the secured parties as direct representative (and not on the basis of a trust relationship).

 

Enforcement of security interests and borrower insolvency

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?

The circumstances under which security or a guarantee can be enforced are determined by general principles of law as well as by the specific provisions of the security agreement.

Generally, a secured party can enforce security if the secured obligations are not paid when due. Swiss security agreements usually make the occurrence of an enforcement event (however defined) a condition for an enforcement of the security. The enforcement event is typically defined by reference to the events of default set out in the underlying finance document.

Swiss law guarantees are independent from the existence and validity of the secured obligations. Therefore, it is sufficient that the conditions for enforcement set out in the guarantee (if any) are fulfilled, which are often merely the secured party stating that a default has occurred and demanding payment. However, depending on the circumstances, the enforcement of a guarantee can constitute an abuse of rights (Rechtsmissbrauch), if the secured obligations do not exist or are not valid.

 

Methods of enforcement

20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

Private enforcement

Private enforcement is generally favourable for secured parties, as it can be effected more expediently and through a less cumbersome process than enforcement by official debt enforcement or bankruptcy proceedings. If legal title to assets has been transferred for security purposes, enforcement can only be effected by a private enforcement. For other types of security (such as pledges), private enforcement is generally only permitted with the (advance) consent of the security provider and as long as no official enforcement proceedings under the Swiss Act on Debt Enforcement and Bankruptcy have been initiated.

Subject to the provisions in the relevant security agreement, a private enforcement (Privatverwertung), including a self-sale (Selbsteintritt) can typically be effected in a manner and at a time as the secured parties deem fit (such as through an auction process). However, assets cannot be sold below fair market value, and any surplus remaining after the application of the proceeds to the secured debt must be returned to the security provider.

Official enforcement proceedings

The enforcement of security follows the rules set out in the Swiss Act on Debt Enforcement and Bankruptcy where:

  • Bankruptcy proceedings have been initiated with regard to the security provider (except where only private enforcement is possible).

  • A pledged asset has been attached or seized in the context of debt enforcement proceedings.

  • The security agreement does not provide for and the parties did not otherwise agree on a private enforcement, or the secured parties or the secured parties prefer official enforcement proceedings over a private enforcement.

In general, official enforcement under the Swiss Act on Debt Enforcement and Bankruptcy is effected through a public auction. However, assets can also be sold through a private sale (freihändige Verwertung) by the debt enforcement officials, among others, where:

  • The assets in question would lose value during the time required to prepare a public auction.

  • The costs for the safe-keeping of the assets are unreasonably high.

  • The assets have a market price (for example, are traded on a stock exchange).

  • All parties agree to the private sale.

Rescue, reorganisation and insolvency

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?

The Swiss Act on Debt Enforcement and Bankruptcy provides for a composition proceeding (Nachlassverfahren) that enables a reorganisation of a Swiss company outside of formal insolvency proceedings and that generally ends in a liquidation of the company. The initiation of composition proceedings can be on application of the company or, subject to certain conditions, creditors of the company.

Composition proceedings typically end when either:

  • The court decides to terminate the composition proceedings on a successful restructuring.

  • There is no longer a prospect of a successful restructuring.

  • There is composition agreement in which creditors agree to a haircut and/or a moratorium in respect of their claims.

The opening of composition proceedings does not render security invalid. However, it is generally not possible to (publicly or privately) enforce security during ongoing composition proceedings, except for assets where the legal title has been transferred to the secured parties (such as receivables assigned to the creditor for security purposes).

 
22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?

On the opening of bankruptcy proceedings, all assets of the bankrupt company, including pledged assets, form part of the bankruptcy estate. Private enforcement of any assets that form part of the bankruptcy estate is no longer possible. Instead, the enforcement of those assets is governed by the Swiss Act on Debt Enforcement and Bankruptcy and effected through official enforcement proceedings.

A pledgee's priority rights are not affected by the opening of the bankruptcy proceedings, and the relevant enforcement proceeds are first used to cover the claims secured by the pledge. If the proceeds from the sale of the pledged assets exceed the secured claims, the surplus is available for distribution to other creditors.

Legal titles to assets that have been transferred for security purposes do not form part of the bankruptcy estate. Therefore, private enforcement regarding those assets is possible during ongoing bankruptcy proceedings.

Generally, lenders must register all claims as well as their pledge rights with the bankruptcy administrator.

 
23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?

Under the Swiss Act on Debt Enforcement and Bankruptcy, the following acts that disadvantage certain creditors, carried out by the debtor or security provider before the opening of bankruptcy proceedings, can be voidable (anfechtbar):

  • The debtor or security provider disposes of assets against no or against inadequate consideration in the year before the adjudication of bankruptcy or an equivalent event.

  • The debtor or security provider carries out certain acts within one year from the opening of bankruptcy proceedings, while it is over-indebted, including:

    • the repayment of un-matured debt;

    • the granting of collateral for previously unsecured debt;

    • the settlement of debt by unusual means of payment.

  • The debtor or security provider carries out any act during the five years before the opening of bankruptcy proceedings that has the purpose of disadvantaging creditors or preferring certain of creditors to the detriment of others (that is, avoidance is the intent).

 
24. In what order are creditors paid on the borrower's insolvency?

In an insolvency of the borrower, pledged assets form part of the bankruptcy estate. However, any enforcement proceeds are first used to satisfy secured claims (on deduction of the costs of the bankruptcy administrator) and only the remainder of any enforcement proceeds can be used to satisfy creditors.

To the extent legal title to any assets has been transferred to a creditor for security purposes, the opening of bankruptcy proceedings does not affect the right of the secured creditors to a private enforcement (meaning the secured creditors rank ahead of all other creditors). Any overvalue resulting from the private enforcement by the secured party must be turned over to the bankruptcy estate.

Where more than one creditor is secured by the same security interest, the ranking of the creditors in principle depends on the time the security was granted (the earlier security ranks ahead of the more recent one). For security over real estate and other assets that must be entered in a register (for example aircraft and ships), the ranking of the security is determined by its rank in the relevant register. Generally, secured parties are free to enter into contractual (inter-creditor) arrangements governing the ranking of their claims.

Unsecured claims (which includes any claims in respect of which security has not been validly perfected) rank in the following order:

  • Claims of the bankruptcy administrator.

  • Claims prioritised by operation of Swiss bankruptcy laws (including, without limitation, claims of employees and pension funds, and certain claims derived from family law).

  • All other unsecured claims.

  • Subordinated claims.

 

Cross-border issues on loans

25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?

Except in the area of consumer credit, there are no restrictions on the making of loans by foreign lenders (and no registration requirements), provided that the lenders do not have infrastructure or employees in Switzerland.

There are very limited restrictions on the granting of security (over all forms of property) or guarantees to foreign lenders. For example, security taken over shares in a regulated company that is required to have a majority of Swiss shareholders would result in limited enforcement alternatives, as the shares could only be purchased by Swiss persons.

If financing is provided for the acquisition of, or is secured by, residential property located in Switzerland, compliance with the Act on the Acquisition of Real Estate by Persons Abroad must be ensured based on a case-by-case analysis.

 
26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

There are no Swiss exchange controls that would restrict payments to a foreign lender under security documents, guarantees, or loan agreements. However, there may be sanctions in place from time to time restricting, among other things, the entering into finance documents with, or the making of payments under finance documents to, certain persons.

 

Taxes and fees on loans, guarantees and security interests

27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security interest?

The granting or enforcement of a loan, guarantee or security does not in itself trigger any Swiss taxes. However, certain transactions may be subject to Swiss tax.

Documentary taxes (cantonal stamp taxes and notary fees)

Generally, loan, guarantee and security agreements do not have to be registered in Switzerland and no documentary taxes become payable. Cantonal stamp duties, such as in the canton of Ticino, must be checked, depending on the specific transaction.

However, if security is granted over real property, the following fees may be payable, depending on the transaction:

  • Notaries' fees.

  • Land register registration fees.

  • Cantonal and communal stamp duties.

In addition, in an enforcement of security over real estate, the transfer of the legal ownership can trigger cantonal real estate transfer tax. Certain exceptions apply, depending on the particular canton. For instance, no real estate transfer tax exists in the cantons of Zurich, Zug and Schwyz.

Cantonal capital gains tax (depending on canton) and federal and cantonal income tax is also imposed on the gain, if any, achieved by the security provider. Certain cantons only apply corporate income tax on real estate gains made by companies (known as the dualistic system), while others apply corporate income tax only on the recapture of past depreciation and a separate real estate capital gains tax on the value above tax acquisition costs (monistic system).

Registration fees

See above, Documentary taxes.

Notaries' fees

See above, Documentary taxes.

Profit tax

Generally, the granting of security for the benefit of affiliates as well as third parties must be made at arm's length, which is why consideration in the form of a commission or guarantee fee is usually payable. Any income so generated by a Swiss company is subject to profit tax at the level of the security/guarantee provider and is generally tax deductible for the Swiss payor of the fee.

The granting of security itself does generally not trigger income tax. However, the transfer of legal ownership in Swiss real estate as security can trigger income tax (see above). The sale of a security in case of enforcement can trigger a taxable capital gain in the difference between fair market value/purchase price and book value. Swiss income tax rates depend, among other things, on the place of the statutory seat, management, permanent establishment or transferred real estate of the company.

Withholding tax on upstream or cross-stream security

Where up-/cross-stream security or guarantees are not granted on arm's-length terms, the difference between the consideration granted by the Swiss affiliate to the security provider (if any) and an arm's-length consideration can constitute a hidden dividend distribution on which Swiss withholding tax (currently 35%) is payable. While withholding tax is generally recoverable if the recipient or beneficiary is a Swiss-resident entity, a non-resident will only be entitled to a refund of the tax according to the application of a double tax treaty.

In an enforcement of up-/cross-stream security or guarantees, any amount recovered by the lenders can also be considered a distribution subject to Swiss withholding tax.

Swiss stamp issuance duty of 1% can become payable by a Swiss subsidiary if no arm's-length consideration is paid to the direct shareholder with respect to downstream guarantees granted for obligations of its Swiss subsidiary.

Guarantees or securities to the benefit of a foreign borrowing subsidiary, in particular those of a downstream nature, can be relevant for the assessment of whether Swiss interest withholding tax on bonds or debentures is triggered by interest payments by the foreign borrowing subsidiary. Swiss interest withholding tax can also apply if a Swiss borrower or a foreign borrower who benefits from (downstream) guarantees of a Swiss affiliate and uses the proceeds directly or indirectly in Switzerland has more than ten non-bank lenders in a facility with comparable terms or more than 20 non-bank lenders in total.

Swiss 10/20 non-bank rules

Generally, interest paid on loans extended to a Swiss borrower is not subject to Swiss withholding tax. However, interest payments on bonds are subject to 35% Swiss withholding tax. The Swiss tax authorities have enforced guidelines under which a loan is considered a bond if either:

  • The aggregate number of non-bank lenders (including sub-participations) exceeds ten under a facility agreement with identical terms.

  • The aggregate number of non-bank lenders of a Swiss borrower exceeds 20 in aggregate.

Transfer restrictions and other Swiss 10/20 non-bank rules related language must therefore be incorporated in the respective loan documentation. The restrictions can also apply where no Swiss company acts as borrower but solely provides security.

Withholding tax on loans secured by Swiss real estate

The Swiss Confederation and the cantons or communes levy a withholding (source) tax on interest that is secured by a mortgage on Swiss real estate. The combined rate of the tax varies between 13% and 33%, depending on the canton and commune the real estate is located in. This interest withholding tax is reduced (to zero) under a number of double tax treaties, including the ones with the US, the UK, Luxembourg, Germany and France.

Securities transfer stamp tax

No securities transfer tax applies to the transfer of bonds or shares (taxable securities) for security purposes only. On enforcement (that is, on transfer against consideration), the transfer of ownership of a bond, note or other securities can be subject to securities transfer stamp tax of up to 0.3%, calculated on the transaction value, if a Swiss bank or other securities dealer (which includes Swiss companies owning securities with a book value exceeding CHF10 million) as defined in the Swiss stamp tax act is involved as a party or intermediary. The tax is payable by the securities dealer. If no securities dealer is involved, no securities transfer stamp tax arises.

In addition to this stamp tax, the sale of bonds or notes by or through a member of the SIX Swiss Exchange can be subject to a minor SIX Swiss Exchange levy on the sale proceeds.

Value added tax (VAT)

The sale of goods for consideration in the course of a business is generally subject to VAT. The standard tax rate is currently 8%. Most banking transactions, including interest payments and transactions regarding the granting of security, are exempt from VAT. However, corresponding input taxes on related costs and expenses are not recoverable.

VAT can be due on enforcement, that is, a transfer of goods (other than receivables or securities) against consideration.

VAT on the sale of real estate is only chargeable if the seller opts for VAT. The option is permissible for buildings (but not for land) unless the new owner uses the buildings only for private purposes.

 
28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security interest?

Swiss real estate should only be considered as security where a foreign lender benefits from a double tax treaty under which Switzerland is not entitled to impose (withholding) tax on interest.

To ensure that the guarantee fee between related parties is arm's length from a tax perspective, obtaining a transfer pricing analysis (and Swiss tax ruling for confirmation) should be considered.

 

Reform

29. Are there any proposals for reform?

There are no major reform proposals which are expected to affect the financing market in Switzerland in the next 12 months.

Common forms of security and required formalities: real estate

Jurisdiction

What are the most common forms of security that can be granted over this asset type?

What formalities are required to make the security interest valid and enforceable?

Security transfer of bearer mortgage certificates.

Security transfer of registered mortgage certificates.

Security transfer of dematerialised certificates.

Security agreement and transfer of possession of bearer certificate.

Security agreement and transfer of possession of endorsed registered certificate.

Security agreement and registration of the security transfer in the land register.

Common forms of security and required formalities: tangible movable property (excluding ships and aircraft)

Jurisdiction

What are the most common forms of security that can be granted over this asset type?

What formalities are required to make the security interest valid and enforceable?

Security over tangible moveable property is generally taken in the form of a pledge.

To perfect a pledge over tangible moveable assets, possession over the assets must be transferred to the pledgee (which is why tangible moveable assets are rarely used as a security in Switzerland).

 

Online resources

W www.admin.ch

Description. Official and up-to-date website maintained by the Federal Chancellery containing non-binding English-language versions of legislation.



Contributor profiles

Till Spillmann, Partner & Co-Head Capital Markets and Finance Practice Groups

Bär & Karrer AG

T +41 58 261 52 87
F +41 58 263 52 87
E till.spillmann@baerkarrer.ch
W www.baerkarrer.ch

Professional qualifications. Admitted to all Swiss Courts; University of Zurich, Dr iur; University of Zurich, lic iur

Areas of practice. Capital markets; banking and insurance; financing; general corporate and commercial; listed companies; corporate governance and board advisory; reorganisation and insolvency; real estate; transport and logistics.

Recent transactions

  • Advising AFG Arbonia-Forster-Holding in connection with its successful placement of shares.

  • Advising Groupe Acrotec on its placement of CHF106 million 4.00% Bonds.

  • Advising OVS and Sempione Retail on their public tender offer for Charles Vögele Holding.

  • Advising Barry Callebaut on its successful placement of EUR450 million 2.375% senior notes.

  • Advising the banks on IPO of VAT Group.

  • Advising EQT VII on its public tender offer for all listed shares in Kuoni Travel Holding Ltd.

Languages. German, English

Professional associations/memberships. Co-editor of a law journal on corporate and capital markets law GesKR (Gesellschafts- und Kapitalmarktrecht (www.geskr.ch)); Swiss Bar Association; Zurich Bar Association; Swiss Lawyers Association (Schweizerischer Juristenverein); International Bar Association

Publications.

  • Spillmann Till/Koller Adrian, Intra-group financing, IFLR magazine, February 2016.

  • Rohde Thomas/Spillmann Till, The Strategic View - Corporate Restructuring in Switzerland 2016, ICLG - The International Comparative Legal Guide, p. 108 ff.

Adrian Koller, Associate

Bär & Karrer AG

T +41 58 261 56 06
F +41 58 263 56 06
E adrian.koller@baerkarrer.ch
W www.baerkarrer.ch

Professional qualifications. Admitted to all Swiss Courts; Chicago-Kent College of Law: LLM (2012); University of Zurich: lic iur. (2010)

Areas of practice. Capital markets; banking and insurance; financing; general corporate and commercial; reorganisation and insolvency; real estate; transport and logistics.

Recent transactions

  • Advises sellers on the sale of SFC Koenig AG to IDEX Corporation and the release of security

  • Advising CSA Energy Infrastructure Switzerland on its acquisition of a stake in the Swiss Transitgas pipeline.

  • Advising EQT on its public tender offer for all listed shares in Kuoni Travel Holding Ltd.

  • Advising SENIOcare Group: CHF56 million debt (re-)financing.

  • Advising lenders and borrowers in international (re-)financing transactions on a daily basis.

Languages. German, English

Professional associations/memberships. Chairman of the Executive Board of a law journal on corporate and capital markets law GesKR (Gesellschafts- und Kapitalmarktrecht) (www.geskr.ch).

Publications. Spillmann Till / Koller Adrian, Intra-group financing, IFLR magazine, February 2016

Ivo von Büren, Associate

Bär & Karrer AG

T +41 58 261 54 74
F +41 58 262 54 74
E ivo.vonbueren@baerkarrer.ch
W www.baerkarrer.ch

Professional qualifications. Attorney-at-law, admitted before all Swiss courts; LLM in International Financial Law from King's College London; Master of Law from the University of Zurich

Areas of practice. Financing; capital markets; mergers and acquisitions.

Recent transactions

  • Advising the underwriters on the CHF4.7 billion rights offering by Credit Suisse Group AG.

  • Advising Barry Callebaut on its issuance of EUR450 million 2.375% senior notes due 2024.

  • Advising Groupe Acrotec SA on its issuance of CHF106 million 4.00% guaranteed bonds due 2021.

  • Advising the underwriters on the CHF207 million rights offering of AFG Arbonia-Forster-Holding AG.

  • Advising borrowers and lenders in a variety of structured acquisition and working capital financing transactions.

  • Advising lenders and borrowers in international (re-)financing transactions on a daily basis.

Languages. German, English

Professional associations/memberships. Member of the Executive Board of a law journal on corporate and capital markets law GesKR (Gesellschafts- und Kapitalmarktrecht (www.geskr.ch)); Swiss Bar Association; Zurich Bar Association

Andrea Giger, Associate

Bär & Karrer AG

T +41 58 261 52 99
F +41 58 263 52 99
E andrea.giger@baerkarrer.ch
W www.baerkarrer.ch

Professional qualifications. Admitted to all Swiss Courts; Tulane University, New Orleans, LLM (2015); University of St Gallen, MA in Law (2010)

Areas of practice. Capital markets financing; listed companies; general corporate and commercial; real estate.

Recent transactions

  • Advising EQT VII on its public tender offer for all listed shares in Kuoni Travel Holding Ltd.

  • Advising Groupe Acrotec SA on its issuance of CHF106 million 4.00% guaranteed bonds due 2021.

  • Advised the underwriters on the IPO of VAT Group.

  • Advising the underwriters on the CHF4.7 billion rights offering by Credit Suisse Group AG.

  • Advised African Bank Limited on its restructuring and re-launch of senior notes issued under the US$6 billion Euro Medium Term Note Programme.

  • Advising lenders and borrowers in international (re-)financing transactions on a daily basis.

Languages. German, English

Professional associations/memberships. Swiss Bar Association; Zurich Bar Association; Swiss Lawyers Association (Schweizerischer Juristenverein).


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