Switzerland Mulls Tax Cut For Hedge Funds

by Ulrika Lomas, Tax-News.com, Brussels

18 April 2007

The Swiss government is reportedly mulling a plan to improve the tax regime for hedge funds in a bid to lure more fund managers away from London, which currently dominates the European hedge fund industry.

According to a report in the UK's Daily Telegraph, Hans-Rudolf Merz, the Swiss Finance Minister, has been holding discussions with members of the Swiss banking federation, as well as sounding out opinion from the wider global fund community to formulate a more attractive tax regime for fund managers. One of the key proposals that has been floated includes a special 10% rate for the fund industry, amounting to an effective cut in the marginal tax rate of 35%.

"The financial marketplace is of enormous importance to our country," Merz was quoted as observing in the report. "I know that we have a disadvantage in taxes. We understand the problem, and we have to solve it."

Figures released Monday by International Financial Services London (IFSL), a private sector organisation which promotes the UK's financial services industry, showed that assets managed by hedge fund managers based in London amounted to $360bn in 2006, up 40% on the previous year, and a six-fold increase from 2002. London's share of global hedge fund assets increased from 10% to 21% over the same timeframe. New York remains the leading global location for hedge fund managers, with 36% of global assets in 2006, although its share of global assets has dropped substantially since 2002 when almost half (45%) of global hedge fund assets were managed from the city.

Factors underpinning London's strong position include its local expertise, the proximity of clients and markets, a strong asset management industry and a favourable regulatory environment. London is also a leading centre for hedge fund services, notably prime brokerage services offered by the leading London-based investment banks. More than 90% of European prime brokerage activity is conducted through London.

As a magnet for investments, Switzerland had historically been one of the locations in which investment funds business had developed, but in the '80s, when the modern explosion of funds under management began to take on massive proportions, Switzerland found itself left out. The fact was that Switzerland had been overtaken by competitors which offered more flexible regulatory structures, lower taxes, and access to the lucrative EU market on preferential terms.

However, Merz told Bloomberg that the new policy was not designed as a "frontal attack" on London's hedge fund dominance, but was aimed at stimulating greater jurisdictional competition for fund business in Europe.

"We won't be able to beat London, not even with such measures. That's not my intention either. It's absolutely vital that there's a certain competition," he stated.

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