Swiss L-QIF: A New Unregulated Fund Solution – Legal and Tax Aspects
I. New Fund Vehicle
The Limited Qualified Investor Fund ("L-QIF"), a new fund vehicle, will be introduced to the Collective Investment Scheme Act ("CISA"; new article 118a) and should enter into force in August 2023 at the earliest.
This unregulated newcomer will increase the attractiveness of Switzerland as a fund jurisdiction and represents an important step forward for Switzerland to become a leading asset management centre. For qualified investors, it is an indigenous alternative to equivalent foreign products, such as the Luxembourg Reserved Alternative Investment Fund ("RAIFs"). It should also help to promote innovation and enhance the attractiveness of the Swiss investment fund market.
The L-QIF and its documentation (e.g., partnership agreement, marketing material) will be subject to very light regulatory requirements, and no authorisation or licence approval by the Swiss Financial Market Supervisory Authority ("FINMA") will be needed. It will thus be a quick-launched and cost-efficient structure.
The L-QIF is not a new form of collective investment in legal terms and can be set up in the existing form of open-end structures such as a Swiss contractual fund or a SICAV, or as a closed-end structure, namely the Swiss LP (Société en commandite de placements collectifs). Only qualified investors within the meaning of CISA will be eligible to invest in an L-QIF.
An L-QIF is intended to be a flexible product: there will be no limitation as regards investment possibilities or risk diversification imposed by law. Limitations will probably naturally arise from risk management and investors’ demands, but L-QIFs' flexibility will still allow to invest in various financial products and instruments, according to specific strategies. This will typically include private equity and venture capital investments but also more exotic underlying assets, such as infrastructure project, luxury goods, art, wine, etc. For open-end funds, such as contractual fund and SICAV, investing into real estate will also be possible.
While not being directly supervised by FINMA, L-QIF is open to qualified investors only and must be managed by a FINMA-licensed and supervised financial institution (such as banks, asset or fund managers). Open-end structures (contractual funds and SICAV) will be required to have a depositary bank, which is by nature subject to FINMA supervision. It will also be subject to annual audit.
II. Swiss Direct Taxation Aspects
From a tax perspective, the L-QIF will be subject to the same tax treatment applicable to collective investment schemes in Switzerland, which consists of an approach by full tax transparency and that will apply to L-QIF, to the same extent it applies to the other tax transparent CISA-regulated vehicles.
As regards real estate L-QIF, they will benefit from the same particular attractive existing tax regime (see below A. (v) and B. (iii)).
The taxation rules for the L-QIFs and their shareholders will, in a nutshell, be as follows:
A. Direct Taxes on Income and Wealth
(i) The following paragraphs only concern Swiss based L-QIFs and shareholders.
(ii) As a fully tax-transparent entity, the Swiss L-QIF will not be subject to Swiss corporate profit and equity taxes.
(iii) The units in the L-QIF will represent a taxable element of wealth and be taxed at the level of each investor as unitholder.
(iv) The income generated by the L-QIF will be taxable at the level of each investor as unitholder. Capital-gains realized by the L-QIF will not be taxable at the level of the individual investor, if duly and separately booked as such in the L-QIF.
(v) As for other fund vehicles, an exception to tax-transparency will exist for L-QIFs that directly own Swiss or foreign real estate property. In this case, only the L-QIF will be taxable on Swiss-based real estate income and wealth, to the exclusion of the investors. Distributions of the related real estate income to Swiss resident investors will thus not be subject to income/profit tax at their level. Investors will also be exempt from wealth tax, pro rata to the fund's real estate assets. New provisions will be introduced in the Federal Tax Act and in the corresponding cantonal tax acts, to enforce the applicability of these tax principles to L-QIF.
(vi) The L-QIFs financial statements will have to accurately book capital gains and real estate income so that the corresponding favourable tax treatment applies.
B. Swiss Withholding Tax
(i) L-QIFs' undistributed reinvested income, as well as distributed income, to either Swiss or foreign investors, are subject to 35% Swiss withholding tax ("WHT").
(ii) L-QIFs undistributed reinvested capital gains, as well as distributed capital gains, are not subject to withholding tax if they are separately booked by the L-QIF.
(iii) Income resulting from directly owned real estate property are not subject to withholding tax when distributed. Therefore, regarding L-QIF whose only purpose and effective activity will be to hold real estate property, distributions of income will be fully withholding tax exempt; as regards foreign residents, the withholding tax exemption will apply regardless of the State of residence of the beneficiary.
(iv) The L-QIFs financial statements will have to accurately book capital gains and real estate income so that the corresponding favourable withholding tax treatment applies.
C. Refund of Swiss Withholding Tax
Withholding Tax refund or exemption or both are available as follows:
- Swiss-resident investors will as a rule receive full refund of withholding tax, if they declare the income in their tax return (individuals) or book it in their financial statements (self-employed and companies);
- foreign-resident investors are entitled to a full or partial refund depending on existing double-tax treaties (DTT) between Switzerland and the country of residence; and
- foreign-resident investors may also qualify for a full withholding tax exemption under the affidavit procedure if at least 80 per cent of the L-QIF’s income is derived from non-Swiss source investments and the investors are not Swiss residents.
Overall, L-QIFs are a very welcomed legal development that, associated with traditional Swiss strengths, such as stable political and efficient legal systems, measured tax regimes and skilled workforce, may offer good opportunities for structuring certain investments, notably in the private equity and venture capital sectors.
On another note: Good news for Swiss groups as they benefit from a withholding tax relief.