By Claire van den Heever,
The first decade of the twenty-first century has seen Switzerland become one of the world’s top locations for housing the international and regional headquarters of multinational companies from around the world. Along with using Switzerland as a base from which to manage their operations, multinational firms are also showing a growing trend towards setting up shared service centers and manufacturing sites here. Because of the reputation as an innovation hub, more and more centers for research and development (R&D) are being established within Switzerland as well. Today, the country is a gateway to Europe for many Fortune 500 companies, small-and-midsized companies, as well as start-ups from virtually every industry sector. China and Switzerland’s recently implemented free trade agreement, which took effect on 1 July 2014, is only expected to fuel this trend.
“It’s not just any FTA – it’s a gateway,” declared a report compiled by PwC, the umbrella under which the member firms of PricewaterhouseCoopers International Limited operate. A May 2014 article on KPMG’s website indicated it held the same view: “Together with the new Double Tax Treaty between Hong Kong and Switzerland that entered into force in October 2012, Switzerland is now a top headquarter location for Chinese or Hong Kong companies as an ideal gateway to Europe”.
One of the primary factors that makes China’s establishment of the FTA with Switzerland a good choice is its links with the European Union (EU), according to Esther Kessler, a senior lecturer in the department of international business at Zurich University of Applied Sciences. Switzerland itself is not a member of the EU, but as one of Europe’s strongest economies – and with a ranking of the world’s most competitive economy for the sixth year in a row – it has plenty of influence on EU member states, and within the continent as a whole. A series of bilateral treaties frames the relationship between Switzerland and the EU, and the adopting of various provisions of European Union law by the Swiss Confederation allows Switzerland to participate in the Union's single market. The China-Switzerland FTA sends a very strong signal to EU countries to further increase trade and investment with China, says Kessler.
There are several reasons that Switzerland has been successful in attracting multinational companies. According to a joint study conducted by the Swiss-American Chamber of Commerce and the Boston Consulting Group, “When it comes to attracting multinational companies, Switzerland not only has the know-how, it also sets the standard.” Switzerland provides an advantageous business environment for multinational companies and, in turn, multinational companies make significant contributions to the Swiss economy. It is nothing if not a win-win situation. “Underlying these mutual benefits,” the report continues, “is a shared focus on R&D and innovation.”
In an interview about the increasing number of foreign multinationals relocating to Switzerland, author of Swiss Made– The Untold Story behind Switzerland’s Success, R. James Breiding explains: “Google employees recently elected Zurich as the most attractive destination network of the company and their local employees are fondly called ‘Zooglers’. Swiss cities are frequently at the top of international rankings for quality of life – critical criterion for knowledge-based industries.”
These advantages, in combination with the new FTA, has made setting up offices or headquarters in Switzerland a great deal more appealing for Chinese companies in particular. KPMG clarifies some of the implications of the FTA: “With the Free Trade Agreement, existing Swiss tariffs on Chinese industrial products will be abolished. Likewise, the vast majority of Switzerland’s industrial exports to China will enjoy full or partial tariff dismantling. The FTA also includes tariff benefits for agricultural and food products.”
The products that are entitled to these preferential duties must originate from either Switzerland or China. Generally speaking – and depending on the specific type of product – Swiss and Chinese producers will need to ensure that products contain up to 70 percent local content, or that one of several stipulated manufacturing processes has taken place. Such details are important in order to ensure that the FTA provides a regulated playing field that is recognized by both countries. China has been an important trading partner for Switzerland for some time, and the FTA enables it to go a step further and expand their commercial ties. KPMG’s May 2014 article reports, “China is Switzerland’s largest trade partner for industrial products in Asia, while Switzerland is China’s seventh largest trade partner and the sixth largest source of foreign investment in Europe.”
The FTA may also have implications for other commodities, such as gold. Michael Vanunger, chief executive officer of CIBC Swiss AG – a banking group that trades a large amount of gold – said that he hopes CIBC's gold exports to China will benefit from the FTA. Due to the high tariffs, most of the gold exports are routed through Hong Kong with the help of agents, Vanunger explained. “Middlemen will need to make some money for themselves, and this drives up prices for Chinese customers. If the FTA eventually gets rid of these tariffs, we will be able to export to China directly and avoid the middlemen,” he said.
Vanunger’s example illustrates how direct transactions between two – rather than three – parties can be more beneficial, which is often the case. But the FTA has also allowed for an advantageous framework of another kind – one that is actually defined by a third party: a trilateral trade “gateway”.
PwC’s report explains that by changing your company’s value chain, in terms of sourcing or manufacturing, to meet the processing regulations laid out in the applicable FTA of the gateway country, significant duty savings can be achieved. In doing so, the report continues, “the China-Switzerland FTA further unlocks ample opportunities for trilateral trade. It widens your market access to China and Switzerland and their respective FTA networks.”
Switzerland and China’s trilateral FTA networks include countries all over the world, from India to Iceland, and Cambodia to Canada, allowing a large number of global markets to be within reach. Naturally, careful planning and in-depth analysis is required before implementing business and value chain transformations, but if done properly, they present huge potential for businesses. This also highlights “the importance of selecting the ‘right’ location for each element in the value chain, including your global and regional headquarters in Europe and Asia,” PwC’s report emphasizes. The impact of China and Switzerland’s FTA is nothing short of immense. “All in all the FTA recasts the international trade landscape by establishing a free trade gateway for cross-border trade.”
In addition to the obvious potential advantages of such a vast FTA network, Switzerland is an appealing location for establishing European headquarters because of the number of double taxation agreements (DTAs) it has negotiated. DTAs are established to avoid double taxation of corporations and individuals generating income in two countries, such as Chinese firms with headquarters or branches in Switzerland. They also assist in making cross-border economic transactions smoother and more cost effective. Switzerland has DTAs with 90 countries, making inefficient and costly taxation procedures a thing of the past.
Indeed, the country’s competitive taxation rates are a draw card in their own right. According to an August 2014 report by KPMG regarding Switzerland as a destination for investment, its central location, highly competitive business environment, and favourable tax regime are all responsible for attracting international corporations to the country. “The competitive corporate taxation as well as available tax holidays generally represents significant incentives for businesses. Furthermore, the Swiss tax authorities are known to be cooperative and business orientated and tax rulings can be obtained within weeks, providing corporations with certainty on the tax treatment prior to their investment,” the report clarifies.
The country is geographically and politically organised into 26 different cantons, which are the equivalent of states within a federal system such as the United States. Corporation taxes are also implemented on a canton-by-canton basis. The fact that the Canton of Zurich offers lower corporate tax rates than other cantons containing major Swiss cities (such as Bern and Geneva) is one reason that the Greater Zurich Area – which includes most of the Canton of Zurich –is quickly attracting Chinese investment across several sectors. Also known as the European Metropolitan Region of Zurich (EMRZ), it is one of Europe’s economically strongest areas, and Switzerland’s economic hub.
Switzerland has become the "Harrods" of business locations for multinational companies, according to a joint study conducted by the Swiss-American Chamber of Commerce and the Boston Consulting Group. The world famous upscale department store makes for a flattering – but apt – metaphor. Harrods represents “a standard against which countries interested in attracting foreign investment and developing businesses measure themselves,” the report explains. And, if the store’s flawless reputation and global success are anything to go by, this is only the beginning for Switzerland.