Substance, due diligence and transparency

The Federal Council's commodity reports

The Federal Council first examined the commodity sector as a whole in its background report of 27 March 2013, prepared by the departments of foreign affairs, finance and economic affairs. The report estimated that around 500 companies with some 10,000 employees were active in the sector, including trading, shipping, financing, inspection and testing. It put net receipts from merchanting at about CHF 20 billion, or 3.5 per cent of Switzerland's gross domestic product. It made 17 recommendations on competitiveness, transparency of financial flows, corporate responsibility, the development of states rich in resources and voluntary standards for the industry.¹ The background was a growing international debate on the responsibility of trading companies for conditions in producing countries, prompted by reports of nongovernmental organizations and by the growth of Geneva and Zug as trading centres. A second report of 30 November 2018 found that merchanting receipts had reached 3.8 per cent of GDP in 2017. It adopted 16 new recommendations, five on competitiveness and innovation, seven on integrity and sustainability and four on the analytical framework and the dialogue with stakeholders.² The progress report of 21 April 2021 counted around 900 trading companies and about 10,000 direct employees. They were distributed mainly between Geneva (44 per cent), Zug (21.4 per cent) and Ticino (9.5 per cent), with more than 1,200 further jobs in trade finance. It recorded that the new company law would require extraction companies to report payments to governments from 2022 and that a delegation rule authorized the Federal Council to extend these provisions to commodity trading.³ Ticino's share of about one tenth of the sector's core employment places Lugano third among the Swiss trading centres, a position that Chapter F.I examines from the historical side.

Report Date Key figures and recommendations Background 27 March 500 firms, 10,000 jobs, 3.5 % of GDP; 17 report 2013 recommendations Situation and 30 3.8 % of GDP (2017); 16 recommendations outlook November 2018 Progress report 21 April 2021 900 firms, 10,000 jobs; Ticino 9.5 %

Substance in tax, company and banking practice

The reports did not create a legal concept of substance, but several areas of law converge on the same requirements. In Swiss tax law, a company is subject to unlimited taxation if its registered office or its place of effective management is in Switzerland (Art. 50 DBG). Profit is allocated to a Swiss company on the basis of the functions it performs and the risks it controls, under the arm's length principle.⁴ In Italian law, as the previous sections showed, substance decides whether the Lugano company escapes the CFC rules under Article 167 paragraph 5 TUIR and whether it is a Swiss resident at all under Article 73 TUIR. Under the double taxation convention the place of effective management decides the tie-breaker. The banks that finance commodity traders, finally, require substance as part of their due diligence on the client under the antimoney laundering legislation and their own credit policies, a subject treated in Chapters G.I and G.III.

In practice, substance for a Lugano trading company means the following. The board meets in Lugano, or by video conference with the chair and a majority physically present in Switzerland, and takes the strategic decisions on the basis of written information. The managers who conduct the trading live in Ticino or commute daily from Italy within the limits that the cross-border workers' agreement permits. The company has its own premises, IT systems, trading and risk management tools and bank accounts, and it concludes and signs its contracts in Lugano. Its personnel costs, rent and other expenses are commensurate with its turnover and profit. What counts are the functions that the employees exercise. A company with three traders who actually take and manage positions may have more substance than one with twenty clerks executing orders from elsewhere.⁵

Notes

1. State Secretariat for Economic Affairs (SECO), "Federal Council publishes background report on commodities", press release, 27 March 2013, https://www.seco.admin.ch/seco/en/home/seco/nsb-news.msg-id-48319.html. ↩
2. SECO, "Commodities: Federal Council continues to engage for competitive and morally sound business location", press release, 30 November 2018, https://www.seco.admin.ch/seco/en/home/seco/nsb-news.msg-id-73197.html. ↩
3. Federal Council, progress report of 21 April 2021 (above), https://www.newsd.admin.ch/newsd/message/attachments/66222.pdf. ↩
4. Federal Act on Direct Federal Taxation of 14 December 1990 (DBG), SR 642.11, Art. 50 ("Sitz oder ihre tatsächliche Verwaltung in der Schweiz") and Art. 52, https://www.droit-bilingue.ch/fr-de/6/64/642.11-50-58.html; StHG, Art. 20 para. 1, https://www.droit-bilingue.ch/fr-de/6/64/642.14-20-34.html. ↩
5. Practitioner's summary of the requirements of Swiss tax practice, Italian CFC and residence rules and bank due diligence. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.