No. 4 | June 2015

NewsLetter English

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Contents

INTRODUCTION ...............................................................................................................................................3

THE RISK OF LIABILITY LAWSUITS FOR BOARD DIRECTORS ..........................................................4

TAX AND SOCIAL SECURITY LIABILITY RISKS FOR BOARD DIRECTORS .....................................5

OBLIGATIONS OF THE BOARD OF DIRECTORS IN FINANCIAL EMERGENCIES ...........................7

STATUS OF CORPORATE TAX REFORM III (CTR III) .............................................................................8

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Introduction

At the end of March 2015, the Cantonal Court of

Glarus approved the liability claims by the Glarus

Cantonal Bank against former bank directors and

members of executive management as well as the

statutory auditors. Together, the nine defendants

had to pay compensation of around CHF 16 million.

This is one of numerous cases in which the

management bodies of companies are being held

accountable for damage caused.

What is the current situation today regarding

liability claims in Switzerland? To what extent will

forthcoming legislative revisions affect the duties of

board directors (BoD), executive board members or

auditors?

At the end of April 2015, the Federal Council

submitted a revision proposal for the Swiss Debt

Collection and Bankruptcy Act (DCBA) for

consultation. According to this, the members of a

debtor’s executive management body are jointly

liable in future for the costs of a summary

bankruptcy proceeding. In addition, it will now also

be possible for public authority creditors to apply

for bankruptcy proceedings. The parliamentarian

submitting the motion wished to go even further

and impose a waiting period of two years on

bankrupt company owners until they are allowed to

operate again as entrepreneurs in a similar

industry. Whatever the outcome of this revision of

the law, it must be assumed that the legal position

of the creditor will be strengthened and the

number of bankruptcy prosecutions will increase.

A partial revision of the Swiss Code of Obligations

provides for much more extensive obligations for

board directors and executive management

members in the event of imminent insolvency. This

newsletter addresses this topic in greater detail.

A study published a short time ago looked at the

risk, the development and the importance of

accountability lawsuits in the recent past. The study

clearly showed that a substantial number of

lawsuits are brought against companies, executive

management or board members, particularly in the

field of social security law. In this newsletter, we

would like to take a closer look at both the study

and the tax and social security liability of BoD

members.

A final article contains an update on the status of

Corporate Tax Reform III. In our opinion, this is a

very important proposal with regard to the future

positioning of Switzerland in international tax

competition.

We trust that our selection of topics will provide

you with an interesting read.

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The risk of accountability lawsuits for board

directors

From various quarters, reference has recently been

made to the growing importance of accountability

lawsuits without anything backing this up with

figures. The numerical development of

accountability lawsuits was ascertained empirically

as part of an Executive MBA thesis.

Generally speaking, as long as a company is upright,

there are few lawsuits based on accountability from

a corporate law perspective. Between 2000 and

2010, there were 106 such cases in German-

speaking Switzerland. In around half of these cases,

the lawsuits involved breaches of duty on the part

of the bodies concerned. The courts that were

asked about this clearly negated any increase in the

number of cases. The D & O (directors and officers

liability) insurance companies assess the situation

differently. They report a clear rise in case numbers

and higher amounts of damages. Insurance

companies even talk of the number of cases

doubling within a few years.

Nowadays, social insurance lawsuits are clearly in

the majority. For public companies alone, it is

assumed there are around 1,300 cases per year. In

these cases, the much-feared personal joint and

several liability of members of boards of directors

also comes into play. Social security lawsuits are

approved almost without exception because boards

of directors can only dispense with their obligation

to provide social security contributions in very rare

cases.

Looking ahead, it must be assumed there will be a

further increase in accountability lawsuits. The risk

for board directors of being confronted with such

claims will continue to be very significant. The room

to manoeuvre for BoDs and entrepreneurs will

diminish.

The increasing density of regulations is influencing

decisions taken by business executives. Without a

basic knowledge of the legal duties and obligations

and minimum time involvement, it will be

impossible to note and monitor all the tasks with

the due care required. Checking the obligations

within the competence of the board of directors is

increasingly understood as an ongoing duty. Since

SMEs have neither a compliance department nor

often the means to purchase legal advice, they

therefore focus specifically on risk. For the BoDs of

such companies, it is extremely important to assess

the statutory aspects of their activities correctly in

legal terms and act accordingly. Only then can they

handle the ever-tightening corset of do’s and don’ts

for their company and for themselves and reduce

imminent risks not only for the company, but also

in terms of their own responsibility.

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Tax and social security liability risks for board

directors

Entrepreneurial activity is inherently risky. As the

most senior governing body, the board of directors

(BoD) is ultimately responsible. The personal

liability of the board is intended to ensure that the

board complies with the duties prescribed by law

and statutes in its leadership of the company and

thereby maintains the due diligence expected. The

following four conditions must be met for the

board’s personal liability for administration,

management and liquidation:

loss (reduction of assets);

a breach of duty;

a causal link between a breach of duty and

damage;

indebtedness

In civil matters, these four conditions for liability

must be proven by the creditor. The creditors

affected can also include the tax authorities and

social security. However, the burden of proof rests

with the board of directors in such cases.

Liability according to tax law

Direct taxation

Liability with regard to direct taxation can arise

when the tax liability of a legal entity terminates. In

this case, the people responsible for administration

and for carrying out the liquidation are jointly and

severally liable for the taxes owed up to the

amount resulting from the company liquidation or,

if the legal entity transfers its registered office or

actual management abroad, up to the amount of

the net assets of the legal entity.

Withholding tax

The liability of the board or the liquidator for the

payment of withholding tax is specifically regulated

in the Withholding Tax law (Art. 15 WTL). A

distinction is made between the liability in the case

of (even merely factual) liquidation and when

relocating its registered office abroad. For the

relocation of a registered office alongside the

classic transfer of registered office under civil law

also includes dissolution with subsequent re-

establishment abroad as well as the relocation of

the actual management of the company. In

contrast to liquidator liability, which relates to the

liquidation value for the calculation of the

withholding tax owed, liability is based on going

concern value due to the transfer of its registered

office.

Liability relates not only to the withholding tax on

formally determined dividends, but also on other

benefits in kind. For example, anyone who, as the

sole director of a Swiss joint-stock company, grants

a foreign shareholder the right of individual

signature for the company’s bank accounts,

becomes liable for the withholding tax if the

shareholder withdraws the funds abroad. The

director can only exonerate himself by proving that

he has done everything reasonable to secure and

ensure the fulfilment of the tax demand.

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Value-added tax

With the taxable person, on the termination of the

tax liability of a dissolved legal entity, not only are

the people entrusted with the liquidation liable up

to the amount of the company liquidation but also,

in the case of a legal entity that transfers its

registered office abroad, the managing bodies up to

the amount of the net assets. These people are only

liable for tax, interest and cost claims that arise or

become due during their management. There is no

longer any risk of liability for costs previously due.

Liability in social security law Liability for social insurance contributions is also important in practice. While the employees’ contributions are deducted, they are not forwarded directly to the social insurance. The contributions are often used for the interim financing of the company.

Old Age and Survivors’ Insurance

Old age and survivors’ insurance (OASI) has a

separate liability regulation (Art. 52 AHVG). This

stipulates that any losses caused by an intentional

or reckless disregard of the provisions of the

compensation fund, must be compensated by the

employer. If the employer is a legal entity, the

members of management and all persons involved

in management or liquidation are secondarily

liable. When several persons are responsible for the

same losses, they are jointly liable for the entire

loss. Claims for damages expire two years after the

compensation fund has been informed of the loss,

but in any case five years after the occurrence of

the loss.

Occupational pensions

According to Art. 76 of the Federal Law on

Occupational Retirement, Survivors’ and Disability

Pension Plans (BVG), the board faces prison terms

of up to six months or a fine of up to CHF 30,000

(Art. 76 BVG) if they, as employer, deduct

employees’ contributions from their salaries and

use them for purposes other than those intended.

Joint and several liability of the board of directors

for unpaid contributions is not provided for.

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Obligations of the Board of Directors in financial

emergencies

On 28 November 2014, the Federal Council

submitted a preliminary draft for the revision of

corporate law to the consultation process. It is clear

that this legislative amendment significantly

extends the obligations of the board and will make

substantive actions by the management body of

the company necessary at an early stage of a

financial emergency.

According to previous law, the board is called upon

to act in financial emergencies if the company’s

capital and reserves are more than 50% depleted

by loss (half of the capital loss acc. to Art. 725 §1

CO). In such cases, the board is responsible for

ensuring that remedial measures are applied for at

a general meeting. If the losses exceed the total of

capital and reserves (indebtedness), the board

must report its bankruptcy to the relevant court in

accordance with Art. 725 §2 CO.

In the current draft of stock company law, the

board’s obligation to act starts much earlier. In the

event of imminent insolvency, the board must

already take action. In such a situation, the law

provides for the creation of a liquidity plan for the

next 12 months. If the liquidity plan shows that the

next 12 months can be handled by the company,

the liquidity plan must be checked and confirmed

for plausibility by a registered auditor. In contrast,

in a worse case, the board must convene a general

restructuring meeting with due speed and put

forward the appropriate remediation measures at

this meeting.

In situations of lasting (3 years in succession) or

extraordinarily high one-time losses, companies

without statutory auditors must have the last

annual financial statements and the above-

mentioned liquidity plan checked by an approved

auditor.

In the event of over-indebtedness, the board’s

obligations to act are largely the same as those

already in force. It is now possible to dispense with

an appearance before a court if there is a

reasonable prospect of the company’s recovery

within 90 days. The legislature has thus legitimized

a practice already used in the event of over-

indebtedness, which is certainly to be welcomed.

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Status of Corporate Tax Reform III (CTR III)

Following the conclusion of the consultation

procedure, the Federal Council adopted the

proposal. For Switzerland as a location, the creation

of CTR III as yet unfinished remains under pressure.

Headlines recently made the rounds, such as

“Interest on the part of foreign companies in

Switzerland fades”. Apparently, the number of new

companies has declined sharply in recent months.

In addition, Switzerland as a location has seen

significant departures by foreign companies, such

as Tyco (oil services), Weatherford, Noble Corp. and

Yahoo. In addition to recent, home-grown political

initiatives, the OECD action plan to combat tax

avoidance by multinational corporations (Beps) is

casting its shadow on Switzerland as a business

location.

The Federal Council made cuts to the submission.

The abolition of tax privileges for holding

companies and other specialist companies, the core

of CTR III, is considered to be inevitable. However,

the question is whether the proposed alternative

measures can maintain the attractiveness of the

location and prevent a wave of emigration. The

submission by the Federal Council in detail:

The introduction of a separate capital gains

tax was rejected. Administrative outlay and

income were rightly questioned by the

business community.

A new tax deduction based on above-

average equity is to be dispensed with. Its

aim was to keep mobile financial

companies in the country.

No change in the abolition of stamp duty.

The elimination of stamp duty is long

overdue in any case.

Participation exemption is not to be

reformed, but continued in its present

form.

Loss carryforward limited to 7 years is to

remain unchanged and not be of unlimited

duration as in international practice.

Dividends of 10% investments is to remain

privileged. The taxable percentage will be

increased at private level to 70% (now

usually 50% to 60%). Why a dividend for

the privilege has to be from a 10% interest

and not all dividends are worthy of

privilege remains inexplicable.

The tax privilege of intellectual property in

a Licence Box in accordance with

international standards is undisputed. The

criteria for preferential treatment in the EU

are relatively strict (substance, intellectual

property based on a patent, only national

research is fully privileged). Probably only a

few large companies are likely to qualify for

the Licence Box. It is planned to limit the

introduction of the Licence Box to cantonal

level.

Expenses for research spending are to be

more than 100% deductible.

In our view, the alternative measures are

insufficient to compensate for the loss of the tax

privileged companies. In addition, cantonal tax

rates would have to be reduced. The aim is to

achieve a total burden of no more than 12% to 13%

in order to ensure the attractiveness of the

location. It is important to implement CTR III as

quickly as possible to send a clear message

internationally.

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