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As one of the leading worldwide financial markets, Switzerland
is also recognized as one of the most important international
insurance and reinsurance centres. It is particularly known
for hosting leading professional (re)insurers. However, contrary
to well established captive domiciles like Luxembourg and
Ireland, its attractiveness and success as a strongly emerging
captive location are still not yet not equally perceived by
the public at large.For a neutral observer, this appears somewhat
surprising and might change considerably in the forthcoming
years.
Embedded in a continually stable political, economic, legal
and fiscal environment and within a traditionally conservative
regulatory approach, captive companies' legislation has been
further adapted by the federal insurance supervisory authorities
to cater for the long-term needs of captive promoters. This
applies in particular to reinsurance captives.
Within the general framework of regulations applying to the
entire reinsurance sector, captive reinsurers enjoy a number
of benefits such as capital and solvency margin relief as
well as a higher degree of flexibility and discretion regarding
reserving and investment policies.
In the captive reinsurance business, a key element is assessing
the regulatory attractiveness concerning the availability
and functioning of technical provisions and more in particular,
as regards special equalization and/or catastrophe loss reserves.
While major European "competitors" such as Luxembourg
and Ireland either set strict rules for their existence and
functioning or exclude their use (in the later case), the
Swiss regulations allow reinsurance captives to use a great
margin of discretion regarding its individual reserving policy.
Equalization and/or catastrophe reserves will be assessed
and approved based on the technical and actuarial particularities
and circumstances of each individual case.
In practice, this can support long-term funding of highly
volatile and catastrophe-related risk exposures as well as
a policy that partly allocates underwriting and financial
profits to reserves that can ultimately be distributed to
the captive shareholders in line with their individual financing
needs.
Whereas the regulatory environment is a purely federal framework,
the fiscal one is both affected by federal and cantonal (and
even municipal) regulations. It is in this respect that the
Swiss domicile offers further, major variety.
Depending on the chosen canton and municipality, standard
pre-tax rates will vary by roughly 15-30%.
Most cantons (including Zurich) offer captives (in line with
general regulations applying to other "Domizil"
companies) a privileged tax status if and as far as the captive
is generating its premiums predominately from non-Swiss sources.
A captive based in Zurich can consequently benefit from a
corporate tax rate of about 10-11%.
However, the main advantage of this fiscal variety is not
a possible reduction of income taxation as such, but more
importantly the possibility of matching foreign national CFC
legislation requirements with the necessary local level of
subsidiary (captive) taxation in order to avoid potential
double taxation.
To escape possible CFC pitfalls (which is not easily achieved
in other leading captive locations), the captive can be domiciled
where it is subject to normal taxation in excess of the required
level. Consequently, emerging domiciles within Switzerland
include high taxation locations such as the city of Chur (canton
of Grisons) as well as locations of low taxation for captives
originating from countries not pursuing stringent CFC legislation
(Zurich and Zug).
Researching Switzerland's success, which is showing one of
the highest growth rates in captive creations over the last
five years (approximately 10% p.a.), one encounters not only
hard but also strong and soft factors.
One major contributing element, often cited by clients and
prospective clients, is the accessibility and the commercial
spirit of the public authorities involved. A (potential) client
is still firstly a client being serviced by the authorities
with a high level of personal flexibility and attention.
With its special mix of success factors, Switzerland has developed
its client base predominately of Scandinavian origin to a
broad European basis over the last years. Ongoing interest
is also being attracted form outside Europe, such as Asia,
South Africa and South America. Currently, the number of Swiss
captives is estimated to be around 35, most of them being
reinsurers, even though the supervisory authorities, do not
yet publish official, separate captive statistics.
On the direct insurance level, Switzerland, not being a member
of either the EU or the EEA, does not allow direct access
to the EU freedom of services. This remains a setback for
direct writing captives and a competitive disadvantage to
domiciles such as Ireland and Liechtenstein in this respect.
Switzerland, like other reinsurance domiciles, is currently
reviewing its regulations with particular regard to capitalization
and solvency margin requirements. Although still in a draft
stage, first proposals aim to link rules closer to a risk-based
capital approach. This reflects a trend that also affects
other domiciles driven also by respective IAIS harmonization
discussions. Based on the ongoing high demand for captive-related
solutions observable in all major markets and in view of an
increased public awareness of the strength of Switzerland
as a domicile, one can easily foresee very positive development
perspectives for the entire scope of Swiss captive locations.
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