However, the Federal Council continues to oppose the introduction of investment controls, considering the cost-benefit ratio to be unfavorable and the existing regulations to be sufficient to the extent required. Indeed, for a country like Switzerland depending largely on exports and foreign trade, this new foreign and security policy driven instrument straight from the trade and investment tool box in times of increased trade (supply chain) disruptions and restrictions may come at a price for Switzerland.

While the consultation has been opened, the law is not expected to enter into force before 2024. Upon deliberations by Parliament the final law could be subject to a referendum vote by the Swiss public. It will depend very much what will ultimately see the light of day and how Switzerland will apply such instrument.  

Key takeaways

Should the Draft ICL enter into force, the following is noteworthy:

• Foreign investments will be subject to notification and approval if the investor is directly or indirectly controlled by a foreign state.
• Foreign investments will be subject to notification and approval if (i) they concern specific sectors related to public order and security; or (ii) on the basis of financial thresholds.
• Fines of up to 10% of the transaction value will be imposed if an investment is implemented without notification.
• Switzerland will still maintain its openness to foreign investments and its attractiveness as an investment hub.

Background and status quo

Switzerland ranks among the world's largest recipients of foreign investments, welcoming foreign investment flows worth USD 37 billion in 2021. It is vital for Switzerland to have an open policy towards foreign investments to ensure both the inflow of sufficient capital and of knowledge to Swiss companies, thereby strengthening economic growth, competitiveness, employment and innovation which Switzerland can boast of. Despite Switzerland's position as a key investment hub, it has not yet, as opposed to many other countries, introduced a cross-sector regime for the systematic screening of foreign investments, and that probably for valid reasons, at least also in the view of the Swiss government.

Today, Switzerland relies on a set of sector-specific measures and regulations such as the state-ownership of critical infrastructures, merger controls, financial market regulations and restrictions on the acquisition of real estate by foreigners. In addition, investments in regulated industries or industries subject to governmental licensing may be subject to authorization or review by the competent Swiss authorities. In such sectors, the origin of the investment or the character of the transaction does not trigger such authorization or review per se, and the relevant laws generally concern both foreign and domestic investments and transactions.

By adopting Motion 18.3021 Rieder, Parliament instructed the Federal Council to draft the necessary legislative basis for foreign investment screening in Switzerland with the aim to tackle perceived threats to public order and security posed by foreign investors acquiring Swiss companies. Possible threats are especially conceivable in cases where an investor has ties to foreign governments. While the Swiss Parliament requests the introduction of foreign investment controls, the Federal Council continues to oppose the introduction of investment controls, considering the cost-benefit ratio to be inadequate and the existing regulations to be sufficient to the extent required.

On 18 May 2022 the Federal Council published the Draft ICL. Continue reading to find out what the Draft ICL entails and could mean once adopted.

Entities subject to approval

The Draft ICL distinguishes between cross-sector and sector-specific reviews of acquisitions. In particular, the following acquisitions fall under the Draft ICL and would therefore be subject to approval:

1. Any acquisition of a domestic company by a foreign investor which is directly or indirectly controlled by a government entity.
2. Acquisitions of any of the following domestic companies, irrespective of whether it is acquired by a foreign state-controlled or private investor:

• companies supplying military equipment or providing services that are essential for the operational capability of the Swiss Armed Forces or other institutions of the Swiss Confederation responsible for state security;
• companies producing goods whose export is restricted under the War Material Act or the Goods Control Act;
• companies operating or owning the domestic transmission network for electricity or distribution networks at network level 3 or lower, if sales of at least 450 GWh p.a. take place via these networks;
• companies operating or owning domestic power stations for the production of electricity with a capacity of 100 MW or more;
• companies operating or owning domestic high-pressure natural gas pipelines;
• companies supplying water to more than 100,000 domestic inhabitants; and
• companies supplying important security-relevant IT-systems or providing respective IT-services for domestic authorities.

3. Acquisitions of any of the following domestic companies provided that they have an average annual turnover (or gross income in case of banks) of at least CHF 100 million in the last two business years, irrespective of whether it is acquired by a foreign state-controlled or private investor:

• university hospitals and general hospitals providing central care;
• companies active in the research, development, production and distribution of medicinal products, medical devices, vaccines and personal medical protective equipment;
• companies operating or owning central domestic hubs for the transport of goods and passengers, namely ports, airports and transshipment facilities where the combined transport is of national importance;
• companies operating or owning domestic railway infrastructure;
• companies operating or owning central domestic food distribution centers;
• companies operating or owning domestic telecommunications networks;
• companies operating or owning systemically important financial market infrastructures; and
• systemically important banks ("too big to fail banks").

The Draft ICL provides for a general exemption for acquisitions of small domestic companies with less than 50 full-time employees and a worldwide annual turnover of less than CHF 10 million in the past two business years.

According to the Draft ICL, only investors acquiring control over a company or parts of a company fall within the law. Therefore, minority shareholders, that do not attain control through the acquisition, are not covered by the law. Furthermore, it is still uncertain whether a domestic subsidiary, which is part of a group of foreign companies, will be classified as a domestic target company or not.

Foreign investors

According to the Draft ICL, the following investors are considered as foreign investors:

1. any company whose head office and principal place of business are outside of Switzerland;
2. any company which is controlled by one or more persons abroad or controlled by another state; and
3. any natural person without Swiss citizenship who acts as a direct investor. However, not considered as foreign investors are natural Individuals from EU/EFTA member states, who intend to take over a Swiss company to pursue a self-employed activity in Switzerland on the basis of the bilateral agreements with the EU or the EFTA agreement.

Two-stage approval procedure by SECO

The State Secretariat for Economic Affairs (SECO), so the same authority which is also responsible for trade restrictions, will be responsible for the implementation of the investment control law. The Draft ICL introduces a two-stage approval procedure:

1. In a first step the foreign investor must submit a notification to SECO, upon which SECO will decide, within one month, whether the acquisition can be authorized or whether a more in-depth review is required.
2. In a second step, if a more in-depth review is required, SECO will decide, within three months, whether to authorize the acquisition.

In principle, SECO will decide on approval in collaboration with any other interested governmental unit and after consultation with the Federal Intelligence Service. In case of disagreement between the offices involved or in case the decision is of considerable political significance, the Federal Council will decide.

SECO will approve the acquisition if there is no reason to believe that the acquisition could endanger public order or safety. In particular, SECO will consider the following assessment criteria which at least partly go beyond typical security concerns and touch on other regulations:

• Does the acquisition have a negative impact on public order or safety?
• Has the investor, or their home state, ever engaged in espionage?
• Is the investor subject to sanctions?
• Does the acquisition create significant distortions to competition?
• Does the investor gain access to critical information or data via the acquisition?
• Is the domestic target company an essential facility?

Sanctions of up to 10% of the transaction value may be imposed if the investment is implemented without notification or implemented based on false statements made in the approval procedure.

Global context and the future of foreign investment in Switzerland

Numerous European and Anglo-Saxon countries have already introduced controls on foreign investment in recent years and up to 60% of global investments are now subject to investment controls. This global rise can be attributed to the privatization of certain sectors of sensitive assets that were previously state-owned as well as to digitalization which facilitates access to the transfer of sensitive data. In addition, countries are starting to see investments through the lenses of public order and national security as investments can generate a change in the control of domestic companies.

The US introduced investment controls as early as 1975 to address concerns about investments from OPEC (Organization of the Petroleum Exporting Countries) countries. Other countries such as Japan and Australia have also already established investment control mechanisms. India, at the very beginning of the pandemic, even introduced a foreign investment control scheme specifically targeting its largest neighbor, without naming it. Over the past decade, many European countries have also become active. Notably the EU has set out a framework for controls which it coordinates with respect to other EU countries. For an in-depth overview of all jurisdictions where foreign investment screening is in place please visit our FINS Blog.

Although foreign investment controls are designed to tackle corporate acquisitions, only very few planned investments have been banned globally in the past years. In 2018, 2019 and 2020, one planned investment was banned in each of these years in Australia, Germany and the US, two in Canada, and none at all in New Zealand. It is yet to be seen how exactly the Draft ICL, that has clearly been inspired by the various foreign investment control laws, will play out for Switzerland. In its report of 2019, the Federal Council predicted that the new law could lead to over 100 cases a year. The Draft ICL allows for the Federal Council to exempt investors of specific countries from the approval requirement, provided that public order and security are not jeopardized by doing so, a concept which already exists in export controls. This could well lead to the negotiation of bilateral and multilateral agreements on trade or investments between Switzerland and countries with comparable value systems to reciprocally waive controls on private investments in specific sectors, which could transform into opportunities for stronger relationships between Switzerland and its key partner countries. What remains clear is that the Swiss market will still continuously aim at remaining as attractive for foreign investors as possible.