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Switzerland

Switzerland as a captive domicile: an attractive option driven by variety and flexibility

     
 

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.

 
 
 
 
 
 
 
Technical details about Ireland as a captive domicile (pdf file 96 ko)
 
 
   
   

 

 
  Technical details about Ireland as a captive domicile (pdf file 96 ko)      
         
  Link to Supervisory Authority      

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