1 The Fintech Landscape
1.1 Please describe the types of fintech businesses that are active in your jurisdiction and the state of the development of the market, including in response to the COVID-19 pandemic and ESG (Environmental, Social and Governance) objectives. Are there any notable fintech innovation trends of the past year within particular sub-sectors (e.g. payments, asset management, peerto-peer lending or investment, insurance and blockchain applications)?
Switzerland offers a friendly environment for companies in the fintech sector. According to a market study, a total of 483 fintech companies were active in Switzerland by the end of 2023 in comparison to 437 by the end of 2022 (an increase of 10.5%). The number of companies active in the field of blockchain/distributed ledger technology ("DLT") increased to 135 companies in 2022 vs. 113 in 2021 and continued to rise to 175 companies in Switzerland and Liechtenstein (all figures: IFZ Fintech Study 2024, pp 6–8). Overall, the Swiss fintech industry is very broadly diversified, and the distinction between fintech and traditional financial services continues to be blurred.
Swiss-based fintech businesses are, for instance, active in payments, investment and asset management services, exchange services, crowdfunding and crowdlending, insurance-related services (insurtech) as well as in various platform services, e.g. for the purposes of fundraising and/or distribution of financial instruments. Many businesses with a focus on DLT are based in the so-called "Crypto Valley" in the Canton of Zug, which initially became known as a hub for initial coin offerings ("ICOs"). While cryptocurrencies and related services such as staking remain an active topic, security tokens and their issuance and trading infrastructures have in the more recent past received increasing attention. In November 2021, the Swiss stock exchange SIX ("SIX") launched a separate, fully regulated digital platform under the name SIX Digital Exchange ("SDX"), which provides a fully integrated end-to-end trading, settlement and custody service for digital assets. Another focus in the market has been on decentralised finance ("DeFi") applications, which aim to achieve decentralisation and reduce the need for intermediaries in the financial sector through the use of smart contracts. Although there are still many open questions as to the legal and regulatory treatment of DeFi, it has been a rapidly growing sector (FINMA Risk Monitor 2022, p. 19).
Generally speaking, the fintech market has begun to see more mature projects, many of which are backed or launched by established financial institutions and technology companies. The new wave of start-ups in the financial sector more readily accepts and embraces regulation, with several projects aiming to become licensed and supervised by the Swiss Financial Market Supervisory Authority ("FINMA").
Swiss fintech businesses were also among those affected by the FTX scandal in 2022 and its enduring effects on the sector. However, the Swiss fintech market may to some extent also benefit from the uncertainties created given Switzerland's reputation as a stable and reliable jurisdiction.
Separately, the demand for sustainable financial services has increased in recent years, and so has the number of sustainability-related financial products that are labelled green or ESG. In this context, FINMA recognised early on the risk of greenwashing and took measures to protect investors and clients, in particular with respect to the supervision of investment funds that focus on sustainability. Furthermore, according to its "Risk Monitor" report, FINMA in 2021 launched a multiyear project to integrate climate risks into its supervisory practice (FINMA Risk Monitor 2021, p. 19). Among the first measures are transparency requirements regarding climate risks (both quantitative and qualitative) of Swiss banks and insurers. This has further been supplemented through ESG-focused self-regulation in the financial sector, e.g., by the Swiss Bankers Association ("SBA") and the Asset Management Association Switzerland ("AMAS").
In an effort to support the development of environmentally conscious fintech businesses, the Swiss Federal Council launched the Green Fintech Network in 2020. The network presented its first action plan with 16 concrete measure proposals in 2021.
While Switzerland is currently in a relatively good position in terms of regulatory quality, the fast technological developments will also require a dynamic adaptation of the law to the emerging technologies such as, e.g., large language models and AI. The importance and impact of AI on the financial markets was also stressed by FINMA (FINMA Risk Monitor 2023, p. 24).
1.2 Are there any types of fintech business that are at present prohibited or restricted in your jurisdiction (for example cryptocurrency-based businesses)?
Switzerland has no specific prohibitions or restrictions in place with respect to fintech businesses or cryptocurrencyrelated activities, but general Swiss laws and regulations for the financial sector apply. With few exceptions, Swiss financial regulation is technology-neutral and principle-based, which has so far allowed the market and the competent authorities to cope well with technological innovation. Depending on the nature and scope of their business activities, fintech operators may be subject to regulation and supervision by FINMA or by self-regulatory organisations. In accordance with the principle of "same business, same risks, same rules", FINMA takes an economic approach when assessing the relevance and application of Swiss laws on DeFi projects, e.g., financial services, antimoney laundering ("AML"), collective investment schemes, financial market infrastructures, banks, insurance companies, securities firms and/or data protection (FINMA Risk Monitor 2022, p. 19). Therefore, each case needs to be assessed individually (see question 3.1). With regard to ICOs, stablecoins and cryptocurrencies in particular, FINMA published several guidance papers in which it emphasised the concept of an individual review of each business case regarding the regulatory impact. It is therefore prudent for fintech start-ups to seek clearance from the regulator before launching their project on the market.
2 Funding For Fintech
2.1 Broadly, what types of funding are available for new and growing businesses in your jurisdiction (covering both equity and debt)?
Switzerland has an active start-up scene and various funding opportunities are available for companies at every stage of development. There are seed and venture capital firms for early funding as well as mature debt and equity capital markets for companies at a later stage. In addition, there are many financial institutions that have a potential interest in buying an equity stake in fintech companies or in a full integration, e.g. to ensure new distribution channels. Foreign investment is also common and currently not specifically restricted.
Crowdfunding and crowdlending as alternative sources of funding had shown rapid growth rates in Switzerland in the last years, further driven by the COVID-19 pandemic (according to the 2021 Crowdfunding Monitor Study of the University of Lucerne, 14,984 projects were crowdfunded via crowdsupporting/crowddonating at a total amount of CHF 44.6 million in the course of 2020), both in terms of the number of platforms and the funds raised; however, since then, crowdfunding has decreased in 2021 and 2022. At the end of April 2023, according to a market study, 35 platforms were maintaining an active physical presence in Switzerland (compared to only four in 2014 and 38 in 2020) and several non-domestic platforms were active on the market on a crossborder basis. The legislator has facilitated crowdfunding and crowdlending platforms by way of the introduction of fintech regulation in Switzerland as follows: a) on 1 August 2017, the maximum holding period during which the acceptance of funds for the purpose of settlement of customer transactions does not yet qualify as taking deposits from the public (and therefore does not count towards a potential banking or fintech licence requirement) was extended from seven to 60 days; and b) a so-called "regulatory sandbox" was introduced in the Banking Ordinance ("BankO"), according to which more than 20 deposits from the public can be accepted on a permanent basis without triggering a banking licence requirement, as long as i) the deposits accepted do not exceed CHF 1 million, ii) no interest margin business is conducted, and iii) depositors are informed, before making the deposit, that the person accepting the deposits is not supervised by FINMA and that the deposits are not covered by the Swiss depositor protection scheme (see question 3.3 for further details). Furthermore, on 1 January 2019, a regulatory licence type geared towards fintech operators with a need to hold deposits from the public in limited amounts was introduced in the Banking Act ("BankA").
Moreover, Switzerland hosts a range of incubator and accelerator programmes for both Swiss-based and international fintech companies, either exclusively fintech-related (such as the association F10 or Thomson Reuters Labs – The Incubator) or focused on digital innovation in general including fintech (such as Kickstart Accelerator) or blockchain (CV Labs Blockchain Incubator). In addition, there are organised challenges aiming to support mainly fintech companies that generally involve a prize (such as the Swiss Innovation Challenge).
2.2 Are there any special incentive schemes for investment in tech/fintech businesses, or in small/ medium-sized businesses more generally, in your jurisdiction, e.g. tax incentive schemes for enterprise investment or venture capital investment?
There are no specific tax or other incentives for the benefit of the fintech industry in Switzerland. However, depending on the tax domicile of the company and the residence of the shareholders, there are certain tax benefits for start-up companies and tax schemes granting some relief to investors.
Generally speaking, depending on the tax domicile of the company, the ordinary profit tax rate in Switzerland can be as low as 11.22% (tax rates vary between the different Swiss cantons and municipalities).
Further, there are various general special regimes for corporate income tax purposes available in Switzerland. Under the patent box regime, cantons tax profits from qualifying patents and comparable rights at a reduced rate for corporate income tax purposes. Additionally, cantons can also provide for special R&D "super deductions" from corporate income tax and/or exempt a part of the equity (to the extent attributed to qualifying participations, patents and loans to group companies) from the annual capital tax. Cantons with a statutory cantonal and communal tax rate of at least 13.5% at the cantonal capital may also provide for a notional interest deduction on so-called "security capital". Currently, only the Canton of Zurich meets this requirement and accordingly introduced the deduction for equity financing.
Start-ups may benefit from a tax holiday on the cantonal and federal level if their tax domicile is located in a structurally less developed region of Switzerland. Furthermore, if a company sells a stake of at least 10% of the capital held in another company that has been held for at least one year prior to the sale, a participation deduction can be applied to the realised profit. In addition, Swiss resident individuals are not taxed on capital gains realised on privately held assets. Dividend payments to companies that hold a participation of at least 10% or with a fair market value of at least CHF 1 million in the dividend paying company also benefit from the participation deduction. Dividend payments to Swiss resident individuals on substantial participations of at least 10% are taxed at a reduced rate.
Switzerland levies annual wealth taxes. To lessen the tax burden for start-up investors, start-up companies are often valued at their substance value for wealth tax purposes (e.g. in the Canton of Zurich).
In terms of management/employee incentives, Switzerland offers attractive ways to structure participation schemes. If structured as an equity participation, such schemes generally aim to obtain a tax-exempt capital gain (instead of taxable salary) for the Swiss resident managers upon an exit. However, in case of an acquisition of employee shares for which a fair market value was unavailable or not accepted at the time of acquisition, part of the capital gain at exit might be taxed in case of a sale within five years after the acquisition. In any case, founder shares will not be regarded as employee shares and will as such generally provide for a tax-exempt capital gain.
Finally, it is common in Switzerland to discuss the tax consequences of an envisioned structure with the competent tax administration and there is an uncomplicated process of obtaining advance tax rulings.
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Originally Published by The International Comparative Legal Guides
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