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Switzerland's tax breaks are less attractive than economic stability for overseas companies looking to expand operations.

The latest survey of 700 global firms by Ernst & Young places Switzerland second as the most desirable country in the world for direct investment, behind Germany.

In the midst of the current economic turbulence, political and legal stability, quality of living and good social climate came out top of the list of desirable attributes.

But Switzerland's famed low cantonal corporate tax rates dropped to 11th in the list of reasons to set up shop in the country. This compared with the fourth place ranking the tax system held in the estimation of overseas enterprises the last time the Ernst & Young survey was conducted two years ago.

One of the report's authors, Dominik Bürgy, believes the ongoing criticism of Switzerland's cantonal tax system from the European Union and the global crusade against tax havens may have unsettled many of the companies questioned.

Recession proof

"People used to take Switzerland's positive tax environment for granted," he said. "But now, with discussions about banking secrecy and tax privileges being highlighted, this does not look so stable in the long term."

"It is important that discussions with the EU on cantonal tax privileges reach a positive conclusion."

Fortunately for Switzerland, the current need for stability and dependability has become more important than ever.

Some 93 per cent of respondents are confident that Switzerland will see off the recession relatively unscathed, with 44 per cent believing it will emerge better off than any other European country.

A large part of this reasoning is based on a belief in the Swiss financial sector, with most foreign firms convinced by the strength of the Swiss banking system. This vote of confidence comes in spite of the coordinated global assault on banking secrecy.

However, companies that are not currently present in Switzerland have greater faith in Swiss banking (69 per cent) than those already operating in the country (62 per cent).

On the other side of the coin, firms with experience of Switzerland have a far greater belief in its innovative capacity (65 per cent), compared to companies with a purely outside view (47 per cent).

This trend of perception is repeated across a range of factors, including quality of research and development and the international experience of Swiss companies.

"Switzerland's strengths need to be more vigorously promoted to close these gaps in perception," Bürgy said. "Switzerland also needs to invest more in education and research and development to keep its place at the high table."

International companies are split down the middle on whether to invest in Switzerland in the future, according to the report. Since the survey was last conducted, 41 per cent of firms had a better image of Switzerland as an economic destination, while 23 per cent thought less of the country.

But despite the generally high regard in which foreign firms hold Switzerland, the country only attracted three per cent of direct global investments in 2008.

This reflected the limited nature of many of the investments. For instance, companies prefer to put money into administrative centres with low overheads than manufacturing plants.

The content of this article is general in scope and is not intended to be comprehensive. It is not a substitute for investment advice.

Published on our website on Sept.27, 2009