Hans Erik Engelbrekts explains what Switzerland has to offer as a captive domicile.

Compared to some of the other domiciles, Switzerland has not been around very long. The first foreign owned captives were established in 1991 as two Swedish companies chose to locate their captive subsidiaries in Zurich. Since its inception, however, the domicile has experienced a constant growth of a couple of captives a year. Today, around 25 captives are domiciled and operated from Zurich and the neighbouring canton of Zug. Another captive is likely to be established later on this year in the canton of Neuchâtel, which will be the first captive domiciled in the French speaking part of Switzerland.

In this article, I will focus on the professional benefits Switzerland offers captive owners. It is a well known fact that Switzerland and in particular the canton of Zurich is both a leading reinsurance marketplace and banking centre.

I will also explain taxation developments, the favourable reserving rules, and our new cell captive concept. But first a current snapshot of the Swiss domicile.

Traditionally, Switzerland, and especially Zurich, is well known for its multinational bank and insurance industry. Bancassurance trends have recently affected the Swiss arena. Last year Credit Suisse Group acquired Winterthur and UBS and SBC merged - a strategy that has strengthened their respective positions in the retail market.

Another, and for the captive owner far more appealing feature of the Swiss market is the growing capacity for alternative risk transfer (ART) solutions, particularly in Zurich. The launch of Swiss Re New Markets in July 1997 (see page 27) brought around 400 highly qualified individuals into an organisation established exclusively for providing integrated insurance solutions directly to the insurance buyer, predominantly the larger corporations.

As the ART market is dominated by a few very large players, of which the Zurich Insurance owned Centre Re is another one, the Swiss Re move made Zurich the world's leading ART marketplace in one stroke. In addition, Germany's Allianz recently established its head office for ART R&D facilities and reinsurance in Zurich.

What good do ART facilities bring to a captive domicile?

ART techniques are developed to help corporate clients cope with their risks in an integrated manner, i.e. the financial risks and operational risks inter-linked with insurable risks. Captives are becoming an important component in these integrated programmes as carrier of the client's own risk capital.

The solutions are typically custom made and require intensive co-operation between the risk carrying partners and the client in the developing stage. Integrated solutions are in strong demand among the large corporations.

We believe it makes a lot of business sense to incorporate a captive in Zurich - the world centre of competence and capacity for ART solutions.

Financial companies

As captive managers, we have recently noticed an increased interest in establishing financial companies in Switzerland for asset management and inter-group financing. This is a development we very much like to see, as it further acknowledges the general benefits of the domicile.

Captive transfer to Switzerland

Since 1996 we have also experienced increased interest in redomiciling captives to Switzerland from domiciles like the Cayman Islands, Bermuda, Guernsey and, recently, Luxembourg. One of the problems of redomiciling, however, is connected to the high exit threshold - in some domiciles reserves set aside over the years are subject to substantial taxes when transferred.

Infrastructure and communications

Switzerland's location in the centre of Europe is an important factor for busy managers who do not want to spend several hours travelling to a meeting. Zurich is within a couple of hour's flight from all European capitals and departures are frequent.


The integration of the world economy and increased mobility of capital has led the Swiss authorities to reform the system of taxation in order to maintain and strengthen the country's competitiveness. Most notably, this has led to reductions in the capital tax rates.

On 10 October 1997 the federal parliament passed a bill on reformation of corporate taxation that will apply during 1998.

For captives, the relevant changes are that federal capital tax is abolished and the currently progressive profit tax is replaced by a flat rate. Further, stamp duty on the issuance of shares is reduced from 2% to 1%.

On 8 June 1997 the people of the canton of Zurich accepted a new tax code in a referendum. It will apply from 1 January 1999 and the most important change is that captives will benefit from an administrative company tax status. This will reduce cantonal capital tax by 80%.

Capital taxes

Federal capital tax has been abolished as of the beginning of this year. The former rate was 0.08% of taxable equity.

The capital tax rate in Zurich will be 0.075% as from 1999.

The canton capital tax rate from 1 January 1999 is 0.03% for holding and administrative companies and 0.15% for all other legal persons. Captives are taxed at the lower rate; this means a sharp reduction from the present rate, which is 0.15% for all companies.

The cantonal capital tax rate is then multiplied by the so-called Steuerfuss. This is a factor varying somewhat from year to year and between the different municipals of the canton. For 1998 the Steuerfuss is 2.5001 in the city of Zurich.

We see that the current actual tax rate is 0.15% x 2.5001 = 0.375% and that it will be 0.03% x 2.5001 = 0.075% from 1999, using the present Steuerfuss.

Income taxes

Taxes are deductible expenses and all rates are therefore expressed as shares of the after-tax profit in Switzerland. Elsewhere, it is more common to express rates as shares of the before-tax profit.

On the federal level, a flat rate of 8.5% is levied on the profit as of 1998. This replaces the progressive taxation (with a rate between 3.63% and 9.80%), which is similar to the cantonal taxation explained below.

As a result of the Master ruling on captives, only between 10% and 15% of the after-tax profit is taxed on the cantonal level. Profitability is measured as a share of taxable equity. The basic cantonal rate is 4% of after-tax profit. Profit above 4% profitability is taxed an additional 5%, and above 8% yet another 5%.

However, in the tax code applicable from 1 January 1999 tax is limited to 10% of after-tax profit. That limit is reached when after-tax profit is 15% of average capital. In the old code, tax is limited to 12% of taxable equity, a limit reached when after-tax profit is 30% of average capital.

The cantonal profit tax is finally multiplied by the Steuerfuss.

The final combined federal and canton income tax rate (before tax income) in Zurich for 1998 is minimum 9.09% and maximum 10.91%.

Equalisation reserves

Captives in Zurich are granted the possibility to reserve for extraordinary events in the so-called equalisation reserve. Such a reserve is created, for example, for failure in the reinsurance protection, currency collapses and similar events. Surplus amounts generated in the captive after reserving into the reported claims reserve and IBNR, can be put aside, pre-tax, to the equalisation reserve. During the first two years of operation all surpluses can be put aside into the equalisation reserve. As of the third year some surpluses have to be shown as profit. The Master ruling prescribes that the minimum profit to be shown shall correspond to an equity yield of Swiss governmental bond interest plus 2%.

The generous and flexible reserving facilities in Switzerland make the growing use of captive as carrier of the owner's risk capital in ART solutions particularly appealing. Unused fund reserves can be reinvested in other ART solutions or de-invested out of the scheme, via captive income to free equity and returned as dividends, or returned directly as claims bonus.

The cell captive concept

Nordic Mutual is currently investigating the possibility of implementing the cell captive concept in Zurich. The cell captive, like the group captive, has several owners. A group captive is a co-operation among equals, in regards of risk profile, the parent's operation and size. Economies of scale are obtained through co-ordination of administration, RM work and the acquisition of reinsurance. A group captive requires a readiness to take mutual responsibility for the operations in the co-owned captive.

In a cell captive, the various co-owners are unknown to each other. Every co-owner literally has his cell wholly separated from the others and the insurance and reinsurance operations are carried out individually. Entry is easy and uncomplicated, as no formal establishment is necessary. The price tag is also lower for the cell owner compared to having a fully owned captive. We hope that this will open the doors for mid-sized and smaller corporations to have their own captive solutions.

The cell captive solution requires a strong owner, who guarantees the common ownership. This "host" guarantees to indemnify the individual cell against claims made on the other cells. Such a guarantee is, in itself, an insurance product and the host should be an insurance company, which, above the insurance competence, has an interest in the ability to offer clients a cell captive solution. The cell shall thus be regarded as a captive and the solidarity between the members in a group captive is replaced with an insurance guarantee issued by the cell captive host.

Leading European captive domicile

The development on the Zurich reinsurance scene and its position as the leading ART market comes with a general shift from tax driven considerations to business and risk transfer aspects. These factors dominate in the selection of a captive domicile. This, combined with the spirit of constructive partnership which Nordic Mutual has experienced with the Swiss authorities since we promoted Zurich as a captive domicile in 1991, makes me very confident that Switzerland will develop into a leading European captive domicile.

Hans Erik Engelbrekts is managing director of Nordic Mutual CMO Zurich AG.