Switzerland | Immigration | Unlocking opportunities and avoiding pitfalls: The crucial role of ‘substance of a company’ in Swiss immigration law

11 October 2023

Immigration

Unlocking opportunities and avoiding pitfalls: The crucial role of ‘substance of a company’ in Swiss immigration law

Summary

In the dynamic landscape of Swiss immigration, the concept of a company’s ‘substance’ is the linchpin that can either open doors or trigger alarm bells. But why should this matter to you as a client?

Imagine this: You’re a foreign company eyeing the Swiss market, or you’re an individual seeking to work and live in Switzerland. It all seems promising, especially under the Agreement on the Free Movement of Persons (AFMP) between Switzerland and the European Union, which grants EU nationals the right to reside and work in Switzerland with a local employment contract in hand.

However, recent times have witnessed a shift in the winds of immigration scrutiny, particularly in the construction sector, sparked by the aftermath of the Covid-19 pandemic. Authorities are now peering closely into the ‘substance’ of companies operating in Switzerland. This term, ‘substance,’ encompasses a company’s physical presence, its genuine economic activities, and its contribution to the Swiss employment landscape.

Why is ‘substance’ a critical factor, you ask? It’s the litmus test for determining whether a company qualifies as ‘Swiss-based’ under the AFMP, affecting not only the company but also its employees and even its clients.

The risks are real and looming. If your company is found lacking in ‘substance,’ it could face permit revocations, immediate work halts, and employee expulsions, with potential legal repercussions. The financial consequences and damage to your reputation could be staggering.

But fret not, there are solutions on the horizon. In the short term, classifying employees as ‘posted workers’ can help maintain business continuity, albeit with added complexities. In the long term, building ‘substance’ for your Swiss-based company is the path to stability, though it requires strategic planning and investment.

In conclusion, Swiss immigration law’s ‘substance of a company’ is no mere technicality. It’s the fulcrum upon which your Swiss ventures pivot. To navigate this complex terrain and safeguard your interests, professional guidance is indispensable. Your business success and peace of mind in Switzerland depend on it.

Introduction

In Swiss immigration law, the term “substance of a company” refers to the physical presence and genuine economic activity of a company in Switzerland. The concept of substance is important in determining whether a foreign company or foreign employees of a company are eligible to work and reside in Switzerland under the Agreement on the Free Movement of Persons (AFMP) between Switzerland and the European Union.

Based on the AFMP, EU nationals have the legal right to take up residence and work in Switzerland, provided they sign a local (Swiss) employment contract with a Swiss based company.

Recent developments

While the AFMP allows the work and residence of EU nationals in Switzerland, provided they sign a local employment contract, the authorities have been rather lenient with accepting signed employment contracts without further diligence on the employer substance or setup in Switzerland.

Since the Covid-19 pandemic we have noticed an increase in scrutiny by the labor market and migration authorities, whereby they are checking in detail if a company has a real presence in Switzerland or not. We have noticed this increased scrutiny especially in the construction / construction services sector and have since experienced crack-downs in this area.

The problem of substance

It is possible that companies based in the EU/EFTA have established a branch office (or even just a letterbox company) in Switzerland for the provision of services in Switzerland. In this case, the competent cantonal authority must verify whether the Swiss-based company has the necessary infrastructure (“substance”) that indicates that the reported activity is actually being carried out by this company. If this is not the case, employing non-Swiss employees will not be considered as local hiring under Article 6 of Annex I AFMP, but possibly as a posting/ secondment under Article 5 AFMP.

When assessing the substance of a company, immigration authorities consider various factors, including:

1. Physical presence: The company must have a physical office or establishment in Switzerland. A mere virtual presence or a mailbox address is usually not sufficient. Other indicators are the salary payments made via the swiss-based company (and not via the parent company abroad), an independent board of directors / managing director (and not a mandated fiduciary), effective HR-representatives in Switzerland etc. (not an exhaustive list).
2. Economic activity: The company should engage in genuine business activities in Switzerland, such as providing goods or services, conducting research and development, or manufacturing products. Merely holding investments or assets without active operations may not be considered sufficient substance.
3. Job creation: The company should create jobs for Swiss residents or contribute to employment opportunities in Switzerland. It should employ local workers or demonstrate a genuine need for hiring foreign employees.
4. Financial viability: The company should have sufficient financial resources to sustain its operations in Switzerland. This includes demonstrating a viable business plan, adequate capital, and a reasonable expectation of profitability.
5. Compliance with regulations: The company must comply with Swiss laws and regulations related to taxation, social security, labor, and other relevant areas.

The assessment of substance is typically carried out by immigration authorities on a case-by-case basis. So far the assessment has consisted of retrospective controls (in some cases 6 -12 months after the original hire date of the employee) via ad hoc inspections on site (company branch)  or at customer premises.

Lack of substance

It must be emphasized again that the authorities do not determine if a company / branch in Switzerland has been “legally” established (i.e. entry into the commercial registry etc.). Instead the migration authorities are determining if this legally established company / branch has sufficient substance to be considered a “Swiss-based company” for the purpose of employing (foreign) employees on local contracts.

Should the migration authorities come to the conclusion that insufficient substance is provided by the company / branch, then they will revisit the permit status of all the registered employees (“retrospective inspection”) of that company and possibly cancel their work and residence permits immediately and provide a fixed date until when the employees must leave the country. Usually the authorities order an immediate stop / prohibition of work from the date of issuance of this decision. Appeals to this decision will not remove the “immediate stop of work”.

General risk

Based on the above elaborations, the risk for an immediate “stop of work” is genuine and concrete. While monetary penalties and fines might seem low compared to a potential service order and might as such be considered “acceptable risk” when providing services in Switzerland by foreign companies, the potential loss of profit because no further work can be provided (due to an immediate halt of services) in Switzerland will be vastly greater.

Even more, the risk is not limited to the service providing company, but also to the commissioning company. The commissioning company (i.e. the client) and its board of directors might be held liable for contractors- or subcontractors without adequate labor authority and migration authority permissions. We’ve experienced that members of the board of directors have been interviewed by the police.

Based on the potential risk of breach, we recommend taking utmost care in this setup in Switzerland as the reputational and economic damage to a service provider can be immense if handled incorrectly.

Possible solutions

There are two solutions to the above mentioned situation, one for a short term fix and the other one with an eye to the long term should authorities challenge the situation:

1. The short term solution addresses the short term goal, which is the immediate continuation of services for the swiss-based company to limit the economic and reputational damage. As such the authorities offer the solutions in their decision themselves. By classifying the employees not as “local hires” but instead as “posted workers”, taking the regular approach to assignees will help remedying the situation. This means that for all the employees an assignment setup must be prepared and consequently, they should return to an employment with their original parent company (abroad) and be “assigned” to the client site in Switzerland. This requires an application to the labor market authorities and requires that a sufficient salary for the respective industry is paid (possible salary uplifts must be paid out for the days worked in Switzerland) as well as the covering of food, transport and accommodation.
2. The long term solution would be to “create substance” for the Swiss-based company / branch. This means that the above mentioned points must be covered. We recommend doing this in dialogue with the authorities, especially when further services in Switzerland are planned. We classify this as a “long term solution”, since substance cannot be created overnight and requires a certain setup and investments. But once properly set up, in accordance with the authorities, further risks with the labor- and migration authorities are minimized or eliminated completely.

Conclusion

In Swiss immigration law, the concept of “substance of a company” determines eligibility for foreign companies to have foreign employees work in Switzerland. Recent developments have increased scrutiny by authorities on the physical presence and genuine economic activity of companies, particularly in the construction sector.

Failure to meet requirements may result in employees being classified as posted workers instead of local hires. Factors considered in assessing substance include physical presence, economic activity, job creation, financial viability, and compliance with regulations (see above). Consulting legal professionals is crucial for compliance and navigating the immigration process. Insufficient substance can lead to permit revocation, immediate work cessation, and employee departure. The risk is significant for service providers and commissioning companies, potentially holding their directors liable and also for the employees themselves who might feel that the company is sending them to Switzerland illegally, hence creating uncertainty and chaos.

Possible solutions include classifying employees as posted workers in the short term, or creating substance for the Swiss-based company or branch in the long term. Careful attention is necessary to avoid reputational and economic damage.

When dealing with immigration law in Switzerland mitigating risks, ensuring compliance, and seeking professional advice are essential to protect interests and one’s business when operating in Switzerland.

Please reach out to us if you would like further information and guidance on this very important immigration topic.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Ara Samuelian
Partner, Europe and Swiss Immigration Lead
ara.samuelian@vialto.com

Robert Arnaud
Senior Associate
robert.b.arnaud@vialto.com

Further information on Vialto Partners can be found here: www.vialtopartners.com