Zug's Secrets: Switzerland's Corporate Hideaway

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In the depths of a freezing winter in 2005, European politicians anguished, as they do during many winters, about supplying heat to millions of homes and businesses. It was a good time for the Russian energy giant Gazprom to strike a deal with European utility companies to construct a hugely ambitious 1,200-km pipeline that would extend from the wilds of Siberia through the Baltic Sea to the German coastline and, starting in 2012, deliver about 55 billion cu m of natural gas annually to Western Europe. With investment in the pipeline venture totaling $7.4 billion, you might have expected the top executives, who include former German Chancellor Gerhard SchrÖder, to set up shop in a splashy metro like Berlin or Moscow. But the firm, now called Nord Stream, was quietly incorporated in a tiny Swiss town called Zug, where the one shopping street, Bahnhofstrasse, runs between a lake and Alpine hills and the best-known product is a cherry-liqueur torte.

Zug could easily pass for a provincial backwater - albeit one with $630,000 Ferraris parked in the local auto showroom. "This is a hick Swiss town," says Christoph Eibl, managing director of Tiberius Asset Management, a hedge fund in Zug. "Nothing much happens here." (See the 15 people who found their 15 minutes of fame in 2010.)

Nothing much, that is, if you ignore Zug's secretive business: the megadeals made by commodities traders in town. Inside Zug's low-rise steel-and-glass buildings, some of the most crucial items on earth are bought and sold by the ton, barrel, kilo or bushel: iron ore, grain, copper, cobalt, tantalum, natural gas, oil, gold, diamonds, aluminum - the list goes on. London, Hong Kong and New York City might have the skyscrapers and glitz. But few meals are consumed without an ingredient traded by the merchants of Zug, and few of our cars or the gadgets on our desks would work without the minerals bought and sold from this spot in central Europe.
Zug canton - there are 26 cantons in Switzerland - is the small nation's smallest state, with just 115,000 people. Yet its commercial registry lists more than 29,000 companies - nearly one for every person in town - and more than 1,000 more companies arrive each year. The registry includes Glencore, the world's largest commodities trader, successor to the empire built by Marc Rich, who fled the U.S. in 1983 after being indicted for the biggest tax-evasion scheme in American history as well as for conducting business with Iran during the 1979 hostage crisis. (See the most unforgettable images of 2010.)
Rich the outlaw removed himself to Zug to take advantage of the anonymity and light taxes it offered, and he made it the center of no-questions-asked trading. For anyone wanting to do deals, be they with oil-rich-if-bloodstained despots or run-of-the-mill democracies, this was the place. For making Zug (pronounced Tsoogk) famous, Rich is still far more of a folk hero than a villain to locals. He was pardoned, controversially, by President Bill Clinton during Clinton's final hours in the White House in January 2001. Rich still runs his affairs from a modest building near Zug's rail station. "Marc Rich put Zug on the map," says Stefan Gisler, a Green Party member of Zug's parliament. "He saw all the advantages of our tax system for massive profits. He was the trendsetter." (See Marc Rich, 2001 - Notorious Presidential Pardons.)
Among the thousands of companies that have arrived since Rich are Biogen, a Massachusetts-based biotech giant, and Transocean, the world's biggest offshore-oil-drilling contractor, which moved to Zug from Houston in 2008, two years before its Deepwater Horizon rig exploded in the Gulf of Mexico last April, causing the most catastrophic oil spill the U.S. has ever seen. In 2009 American oil-services company Weatherford International also moved to Zug, yet, like Transocean, it continues to run its business from Houston. "A lot of commodities trading is done through Geneva, but those are financial transactions," says Bernhard Neidhart, head of the Office of Economy and Labor for Zug canton. "But the traders? They are here."
When those trading companies arrive, they find a warm welcome in Neidhart's small office near the station, which is stocked with brochures the canton publishes featuring local golf courses and international schools. There is minimal paperwork, and it takes about a week to incorporate. Swiss officials, says Neidhart, assume that foreign companies pay taxes where they produce, while choosing Zug as a headquarters because of its genteel lifestyle, its central European location and the 20-minute train trip to Zurich's sophisticated - and discreet - banks. (Read: "Did Credit Suisse Help its German Customers Evade Taxes?")

It's a trip many find unnecessary, since their "headquarters" exist entirely within the stolid post office building, whose hall holds thousands of P.O. boxes retained by foreign companies. "Many company names are not even on any door. They just have a post office box in Zug," says Rolf Schatzmann of PricewaterhouseCoopers in Zurich. "There are other places in the world like that, and Zug is just one of those places," he says. "You can do that in Dubai. But it is easier here."

Zug was once one of Switzerland's poorest cantons, consisting of small dairy farms and two factories, until officials drastically rewrote its fortunes by inventing so-called holdings taxation in the late 1940s. That law, still in effect, allows Zug-registered companies to pay taxes only on income generated in Switzerland - precious little, for many of them. Zug's tax system seems tailor-made for trading companies, which buy vast quantities of oil, gas and minerals - items dug or drilled from the earth thousands of miles away - and then sell them to customers around the world, profiting on the margin those trades generate. On paper, Zug taxes foreign companies 8.8%. But Neidhart says companies can deduct those taxes from their Swiss federal taxes of 8.5%, making their business nearly tax-free.

So what's in it for Switzerland? Even without paying taxes, each company boosts the country's GDP by about $78 million a year, according to Business Network Switzerland in Zurich. Not surprisingly, Zug voters reject all attempts to increase corporate taxes, despite political arguments that Zug's laws boost profits at the expense of the poor nations where those companies operate. "Many of these companies get tax deductions there too because those countries want to attract Swiss companies," Gisler says. "The darned thing about it is that it is perfectly legal." (Read: "Switzerland Celebrates World's Longest Rail Tunnel.")

But how long can it stay legal? In 2007 the European Commission in Brussels accused Swiss cantons like Zug of giving illegal state aid through giant corporate tax breaks. Switzerland, not an E.U. member, has stonewalled Europe's attempts to resolve the dispute. U.S. and E.U. politicians have vowed to crack down on tax havens in order to recoup billions in lost revenue. Both Transocean and Weatherford - which have saved billions by moving their headquarters out of the U.S. - decamped to Zug from the Cayman Islands as U.S. officials began tightening rules over Caribbean tax havens.
So far, Switzerland is resisting calls to change its tax rules, but under relentless pressure from the U.S., it has loosened its rules on banking secrecy, which protect American tax cheats. In Zug, officials admit they are feeling the heat. Last August, in a rare move against a foreign firm, Zug blocked Transocean from a planned cash distribution to shareholders - most of whom were in the U.S. "We decided no," Neidhart says. "The company has huge legal claims against it, and we cannot allow shareholders to take away capital before the judges rule on those cases."

Should taxes increase in Zug, the town has another draw: secrecy. Zug is tight-lipped, even for Switzerland. Tax records are confidential; Neidhart says even he has no access to them. At Zug's documentation center, funded by local groups critical of Zug's tax system, archivists track Zug-registered companies by scouring newspapers because many public records are closed. That privacy can make it difficult to figure out a company's real activities or even who owns it. In 2008 a Norwegian newspaper described how Norway's state-owned energy company StatoilHydro had joined with Gazprom and France's Total to form Shtokman Development AG in order to explore a giant gas field in the Barents Sea. StatoilHydro sent about $32 million to the new company's address - a P.O. box in Zug. "There will probably be around 100 billion kroner (about $17 billion) flowing through the company accounts by 2013," the newspaper wrote. "It would have been nice to know who is going to lead it." Statoil says Zug was Gazprom's choice for pipeline company Nord Stream's headquarters and that the company's taxes will be paid in Russia.

In 2009, Global Witness, an anticorruption organization in London that investigates corporations, found that a Zug gas company called RosGas AG had tried to take over Hungary's largest independent gas supplier, Emfesz, which was headquartered at the address of a mobile-phone company in Zug. And last March, the group found that Angola's state-owned oil company Sonangol had partnered with a mysterious Zug company called Exem Holding, whose ownership was unknown. The one-page company document in Zug's registry lists a Swiss attorney and a Paris-based financier named Konema Mwenenge as directors. Mwenenge told Global Witness he had a "professional" relationship with the son-in-law of Angolan President JosÉ Eduardo dos Santos. But Zug's tight secrecy meant that Global Witness was unable to conclude whether Exem Holding was a legitimate entity or a shell, says Diarmid O'Sullivan, who researches energy companies for the organization. "In a lot of these cases, you run into a wall when you get to Zug," he says. "It goes into a black hole. " (Read: "Switzerland's World War II Bunkers Get a Second Life.")

At least for now. With U.S. and European officials moving in on tax havens, Zug's role as a favorite bolt-hole for traders is not assured. Yet many already there might be loath to leave the bucolic lakeside town even if taxes slowly rise. That includes Nord Stream, which set up shop in Zug during the bitter winter of 2005. Five years on, the company sits in a modern office complex near Neidhart's office, above a traders' watering hole called Amaldobar - the perfect place for a pan-European operation, perhaps. "The pipeline will pass through the waters of five different countries, so the place to be is a country which is not part of it," says Nord Stream spokesman Frank Dudley. "We chose neutral ground." Neutral, yes. And profitable and secretive too.