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01 August 2006
Over the past 18 months Switzerland has seen a major increase in both origination and securitization activity in the commercial real estate market, as new foreign lenders and sponsors have entered the Swiss market. Conduit lending has become popular, and two pan-European commercial mortgage-backed securitization (CMBS) transactions of Deutsche Bank AG including Swiss loans came to market in 2005 and 2006. It is expected that this year will see another increase in Swiss CMBS transactions, and that future multi-jurisdictional and pan-European deals including Swiss assets from both existing CMBS conduits and an increasing number of new conduits by new CMBS lenders will be conducted. This update outlines Swiss legal and tax issues in this new market segment.
In Switzerland, securitization has found legal and commercial acceptance, although there are no laws or regulations specifically governing the issuance of asset-backed securities. In the first step of a Swiss CMBS securitization transaction, the loans and their related security are generally sold by the originator to an insolvency-remote special purpose vehicle (SPV) incorporated under Swiss law. Such sale of loans and related security to the SPV constitutes a true sale, insulating the relevant assets from the insolvency risk of the originator, and may be undertaken without any onerous transfer formalities or expenses. The SPV funds the purchase of the loans and the related security by receiving an unsecured loan from the ultimate issuing vehicle, which is in most cases organized outside Switzerland; this unsecured loan constitutes the second step of the transaction structure. In this structure, the non-Swiss vehicle is the issuer of the debt instruments.
Further, CMBS conduit programmes are making increasing use of mezzanine or subordinate 'B' note structures, a trend that seems to have its origin in the strong appetite of a growing pool of investors for such 'B' notes. This often takes the form of a single loan which is tranched into a senior and a junior part, secured together by a single security package (A/B loan structure).
It is recommended to have a security agent structure to deal with syndication and/or securitization at the security level, instead of a security trustee and parallel debt structure. Under Swiss law, the security agent will not acquire legal rights in relation to the security interest, as he acts only as a representative on behalf of the lender(s)/finance parties appointing the security agent. Consequently, there is generally no need to amend security documentation or registrations in case of securitization or syndication. If it comes to enforcement proceedings, the enforcement of the security interest by the security agent requires proof of its appointment and further evidence that the lender(s)/finance parties may begin such enforcement proceedings as set out in the provisions of the relevant agreements between the lender(s)/finance parties and the borrower; again, the security agent does not enforce own claims or rights.
There is no need to register the transfer of the mortgage notes in a public register. Registration in the so-called 'Gläubigerregister', evidencing the creditor of the mortgage note, may be effected (in a few Swiss cantons such registration is not recommended as it may trigger additional taxes), but does not affect the rights of the secured party and need not be amended in the event of the appointment of a security agent.
On July 1 2004 the Swiss Merger Act entered into force. The act provides a new, potentially more cost-effective possibility of transferring title of real estate portfolio transactions. Based on the provisions of the act, a company or a private firm registered in the commercial register is allowed to transfer all of its assets and liabilities, or part thereof, to another legal entity by way of a single act - the so-called 'universal succession'.
The underlying transfer agreement must be concluded in written form. The conclusion of the agreement does not require a resolution of the shareholders or partners of the transferring company; but the shareholders or partners must be informed of the transfer, whether at a general meeting or in the annex to the annual statements and reports. The transfer of the assets itself must be executed by the highest executive bodies of the entities involved (eg, in the case of corporations, by the members of the boards of directors of both the transferring company and the receiving company).
In order to be valid, the transfer agreement must contain an inventory specifying the assets and liabilities to be transferred to the other party; if real estate is to be transferred, exact information from the Land Register in relation to all properties involved is required. Only those assets that can influence the asset position in the balance sheet may form part of the inventory; as a consequence, items such as goodwill cannot be incorporated in the inventory. Further, the inventory, including all assets, must show a net surplus.
If the assets of the transfer consist of one or more properties owned by the transferring company, the provisions in the transfer agreement relating to the acquisition of such property must be executed in the form of a public deed. Based on the understanding in Swiss doctrine, the provisions that must be included in the public deed are those relating to the contractual parties, the assets to be transferred, the part of the consideration applicable to the transferred properties, contractual provisions that refer to the properties and all other provisions that may be considered relevant. This allows the parties to disclose only parts of the transfer agreement. In any case, the parties involved must carefully consider whether notarization of all provisions of the transfer agreement is preferable or even required; if a transfer of property is the main purpose of the transfer agreement, the whole agreement must be notarized.
If notarization of the transfer agreement is required, the notary at the domicile of the transferring company is competent to execute such notarization. The advantage of this regulation is evident if several properties located in various areas are to be transferred: before the Swiss Merger Act came into force, notarization of the agreement transferring ownership of property had to be effected at the location of each single property. Consequently, more than one public deed was required, with each deed generating its own notarization fees. The Swiss Merger Act now allows the parties to effect the transfer with only one public deed and, consequently, with only one notarization fee to be paid.
The transfer of assets becomes legally effective upon registration of the transfer in the relevant commercial register; this means that all assets, as contained in the inventory, are transferred to the acquiring entity by operation of law; no further actions are required from any of the parties. The application to the commercial register, which is submitted by the highest executive body of the transferring company, must be accompanied by the transfer agreement and the resolution of the boards of directors of the companies approving the transfer, if the transfer agreement has not been signed by all members of the boards.
Before the Swiss Merger Act came into force, the acquisition of ownership of real estate was basically dependent on the entry of the new owner in the relevant land register. In contrast, the new provisions foresee that ownership passes over at the time of entry of the transfer agreement in the commercial register; although the new owner must still be entered in the land register, such entry has only declaratory effect (the party acquiring the real estate must inform the land register about the transfer). The prompt entry of the new owner in the land register is in the interests of the acquiring party as third parties, acting in good faith and relying on the information that the transferring party is still the registered owner of the property, may acquire ownership as long as the new owner has not been registered in the land register.
In a typical CMBS transaction, various tax considerations must be addressed. In Switzerland, advance tax ruling confirmations can be obtained from the cantonal and federal tax authorities to ensure that no adverse tax consequences arise in connection with the origination and securitization of Swiss loans.
Special interest withholdings on mortgaged loans
In case of interest payments to a lender that is not a Swiss resident and does not maintain a Swiss permanent establishment to which such interest payments are attributable, interest payments on loans secured by a mortgage, a mortgage note or other rights in rem on Swiss real estate property are subject to a special federal and cantonal withholding tax. In general, the withholding tax rate is between 17% and 23%, depending on the canton in which the real estate property is located. If the non-Swiss resident lender is eligible to enjoy the benefits of a double tax treaty concluded with Switzerland, such special interest withholding may be reduced at source to the applicable treaty rate or even eliminated.
Federal withholding tax and stamp duties
In case of collective (debt) fundraising instruments issued by a Swiss tax resident borrower or by a foreign tax resident borrower with a registered branch office in Switzerland, such issuances trigger Swiss stamp duty on the principal of the debt instruments issued and a 35% Swiss federal withholding tax on interest payments (including original issue discounts and premiums). A company becomes a Swiss tax resident either if it is incorporated under Swiss law or if it is effectively managed and controlled in Switzerland.
In order to provide certainty that interest payments made by the borrower do not trigger Swiss federal withholding as no collective fundraising is involved, care must been taken in the credit agreement to impose appropriate transfer restrictions on the lenders, confirming that no collective fundraising is involved from the outset and that no collective fundraising may occur over the term of the agreement (so-called '10 non-qualifying bank creditor' and '20 non-qualifying bank creditor' limitations).
As regards the 35% Swiss federal withholding tax on interest payments on collective fundraising instruments, it is uncertain whether a gross-up would be valid and enforceable under Swiss law. The Swiss Federal Tax Administration has stated that provisions for interest gross-ups may be upheld provided that all of the following criteria are met:
However, even if these conditions are met, a Swiss court may not be bound by the Swiss Federal Tax Administration's interpretation of the law and may therefore still consider any gross-up provision as null and void.
Local capital gains and transfer taxes, stamp duty
In some cantons capital gains realized by a seller on the transfer of real estate property held as a business asset is subject to a special real estate capital gains tax. In general, the seller is accountable and liable for such tax; if the tax remains unpaid, the competent local tax authorities may impose a lien on the real estate property transferred which takes priority over other security interests. In order to ensure that a lien is not imposed on the real estate property acquired by the borrower, the sale and purchase agreement should provide that a portion of the sales price be put in escrow for the settlement of the capital gains tax triggered on the sale, or that the seller provide security that such tax will be paid on first demand.
The transfer of real estate may be subject to local transfer taxes, registration
or other duties. Further, the creation of a mortgage interest, a mortgage note
or any other real estate property security interest, or the transfer of such
security interest, may be subject to local transfer taxes, registration or other
duties. Local law may provide that such taxes and duties be borne by the seller,
the buyer, the transferor or the transferee of a security interest, or that
they be split among the seller, the buyer, the transferor or the transferee.
Several cantons (ie, the cantons of Basel City, Geneva, Valais, Vaud and Ticino) levy a separate stamp duty on certain instruments and documents, such as written debt recognitions, certain contractual agreements, the issuance or transfer of certain security instruments or the filing of certain documents or instruments with a local court or public body.
The Swiss thin capitalization rules apply if financing is provided by a lender which is a related party to the borrower. This is assumed if the parent or any other upper-tier company provides financing to its subsidiary or affiliate, respectively.
Further, a (constructive) related party financing may be assumed if a third
party provides financing and such third party may benefit from a guarantee or
other security from the parent or any other upper-tier company related to the
borrower (downstream security).
For further information on this topic please contact Johannes Bürgi or Markus Kroll or Charlotte Wieser at Walder Wyss & Partners by telephone (+ 41 1 265 7511) or by fax (+41 1 265 7550) or by email (email@example.com or firstname.lastname@example.org or email@example.com).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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Markus J Kroll