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Old 09.01.2017, 16:17
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Mortgage tips and risks

The parents of a close friend of mine are retired. They want to help her buy a flat. They are willing to give 300'000. So far they have been looking for something cheap around 600'000. But with this money you get a flat outside Zurich, nothing nice.

I was thinking if, with the current low interest rates, it would be wise to buy a flat for 1'000'000 and take a fixed mortgage for 15 years. I do not want to advise her something risky. But I thought that having a mortgage, you can use the tax deductions and benefit from the low fixed rate. If, in 15 years, extending the mortgage would become too expensive, you would be able to pay it off, even with an average salary.

Could you let me know your opinion on this? Are there any caveats to consider? One problem I am aware of is the Tragbarkeit. The bank will not give out a loan based just on her income. The question is, can she take the mortgage together with her parents? Regarding background, they are Swiss, and they are typical risk averse people, meaning their savings are sitting on the Sparkonto.
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Old 09.01.2017, 16:47
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Re: Mortgage tips and risks

There's a big risk of margin call. If house prices drop and the mortgage debt gets to be above 80% of the property's valuation, the bank can ask you to cough up more capital or sell, no matter how many years your fixed mortgage still has to run for.

In the last big swiss housing bubble the prices dropped by 30% or so. Should that repeat, you need to be prepared to put on the table roughly 30%*80% = 24% of the price in cash to complement your initial 20% downpayment.

A disadvantage of the extremely long running fixed mortgages like 15 years is that you'll usually pay very heavy penalties, should the circumstances change and you'd need to sell the house and get rid of it. Mortgage won't not stop if they die, it'll get inherited with the house.

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One problem I am aware of is the Tragbarkeit
It's just a formal limit to how much cash the bank is allowed to loan out based on income.

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The bank will not give out a loan based just on her income. The question is, can she take the mortgage together with her parents?
If she would be a co-owner of the property, I think that should work. Ask the banks.
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Old 09.01.2017, 16:57
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Re: Mortgage tips and risks

How will the parents give thir daugther the 300k? As a gift or as a loan?
If as a loan I do not think it will count toward the needed 20% self financing. Means the girl as to bring in 200k on her own, wheras as a maximum of 10% of the purchase value can come from pillar 2.

So we are either at a 500k or a 700k mortgage.

Unfortunatly, until now the Tragbarkeit is calculated based on a 5% interest (25k or 35k), on 1% maintenance cost (10k), and amortisation down to 66% (0 or 2.7k)

This should not be more than 1/3 of the income.
Means she must either earn 105k or 144k.
It may be that if the parents act as a fully liable guarantor (Surety/Bürgschaft) that the income can be lower.

If she gets the loan it is very advisable to safe the difference between the actual mortgage interest and the hypotheical 5% and not use it for an easy, simple, happy life. Because, after 15 years when the mortgage is up you may need this money to knock down the loan. In 15 years it should be possible to save up 400k.
With this you can lower the mortgage either to 100k or 400k and still aford to the loan even if interest rose to a now ubelievable 7%.

Raifaisen want's to intruduce a new caluclation which is suspect to apporval by FINMA.
http://www.nzz.ch/wirtschaft/neue-si...raus-ld.128918
In this caculation a 3% interest is used for a ten year mortgage and the amortization of loan is much higher. Exactly that you have a much lower total dept in ten years and you could afford an interest hike.
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Old 09.01.2017, 17:06
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Re: Mortgage tips and risks

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How will the parents give thir daugther the 300k? As a gift or as a loan?
If as a loan I do not think it will count toward the needed 20% self financing. Means the girl as to bring in 200k on her own, wheras as a maximum of 10% of the purchase value can come from pillar 2.
Not sure of the details but there is also something called a Bürgschaft. It means that you can underwrite somebody else's loan and thus accept that if the person you are helping defaults, the bank can come after you and your assets. The bank can ask you to prove you have the wealth to cover such a case. It thus helps if the person taking on the Burgschaft also owns a property and has a mortgage with the same bank. It also helps if the person is a direct family member as this makes things simpler in case of death/inheritance.
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Old 09.01.2017, 18:14
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Re: Mortgage tips and risks

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There's a big risk of margin call. If house prices drop and the mortgage debt gets to be above 80% of the property's valuation
How does this work? Do they regularly approximate the value of my property? How reliable is this?

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you need to be prepared to put on the table roughly 30%*80% = 24%
So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?). LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?

Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?

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A disadvantage of the extremely long running fixed mortgages like 15 years is that you'll usually pay very heavy penalties
Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.

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If she would be a co-owner of the property, I think that should work. Ask the banks.
would the pension of parents count as a valid income? Is their advanced age not an issue?

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How will the parents give thir daugther the 300k? As a gift or as a loan?
Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?

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Means she must either earn 105k or 144k.
She has a lower salary than that. I was thinking maybe the parents can use their pension for the Tragbarkeit?

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If she gets the loan it is very advisable to safe the difference between the actual mortgage interest and the hypotheical 5% and not use it for an easy, simple, happy life
Yes of course. I was already calculating that, not having to pay the rent, she could save about 40'000 per year. That's 600'000 after 15 years.
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Old 09.01.2017, 18:26
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Re: Mortgage tips and risks

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How does this work? Do they regularly approximate the value of my property? How reliable is this?
If with reliable you mean accurate, not very accurate. The accurate value of a property is a fluffy concept anyhow. If somebody desperately wants to buy, they will overpay, but people are also selling below value because time isn't on their side..

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Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?
If interest rates pick up, I can definitely see prices slide. The general state of the economy / employment is also an important factor. Nobody has a crystal ball.

Another factor that affects prices is the tax rate of the Gemeinde. Some Gemeindes lower taxes to attract richer people and this pushes up property prices. But sometimes Gemneindes also overstretch themselves and may need to put taxes back up with the inverse effect.

But independently of cause, if she is putting in 300 K in cash (plus whatever she has saved up herself), prices would have to slide quite significantly before there was an equity problem.

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Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.
Rules on mortgages are different if you don't inhabit yourself. For example if you're taking money out of your second pillar, you would be forced to pay that back if you moved out.

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would the pension of parents count as a valid income? Is their advanced age not an issue?
I think that's a question for the bank. Some banks have different sets of conditions for pensioners.

You also have to consider, if push comes to shove and the bank come knocking on the parent's door and asking for a big chunk of their savings / assets, would your friend want her parents to live their last years in poverty just because she mis-speculated on her appartment?

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
I think you do pay tax if you receive a large present like that. But being parents maybe not. I'd talk to a tax consultant. Does she have siblings? If yes, then possibly the parents can't actually leave such a large chunk of their estate to one daughter alone.
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Old 09.01.2017, 18:35
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Re: Mortgage tips and risks

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So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?). LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?
Correct.

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How does this work? Do they regularly approximate the value of my property? How reliable is this?


Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates? What was the cause last time?
They will do it once the house prices have considerably dropped. They will do it based on what the house/apartment is worth at that day. Same as they do it now. They could already today say your 1M house is overpriced and only worth 900k.

My bet on the actual cause? A cancellation of the bilateral agreement with the EU which causes a relocation of many multinationals and its workforce out of Switzerland with the result of lot of unneeded housing. Read up on what happened in the 1970ies.
http://www.eso.uzh.ch/modul2/9.html?...twicklung_3_13

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Understood. But what is a realistic scenario that would force you to sell? Even if you can't afford to pay the interest anymore, you just move somewhere cheap and rent that expensive flat to someone else.
Your job moving aboard and no replacement job in Switzerland.
If many people have to sell, because of too high interest or no longer a job, and no one buys prices drop. IF interest rises so will rent.

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
Tax depends on the canton. In some cases gifts are treated like inheritances and are tax free when from parents to children.

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would the pension of parents count as a valid income? Is their advanced age not an issue?
She has a lower salary than that. I was thinking maybe the parents can use their pension for the Tragbarkeit?
You have to discuss this finer details with the institute which will give the mortgage.

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Yes of course. I was already calculating that, not having to pay the rent, she could save about 40'000 per year. That's 600'000 after 15 years.
That's perfect. Two things: Must be a nice flat for so much rent saved. It may be hard not to touch the money.
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Old 09.01.2017, 18:38
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Re: Mortgage tips and risks

Can't she get an appointment at her bank to ask someone there for an educated opinion of her financial situation rather than asking a bunch of weirdos here?
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Old 09.01.2017, 18:39
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Re: Mortgage tips and risks

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I think you do pay tax if you receive a large present like that. But being parents maybe not. I'd talk to a tax consultant. Does she have siblings? If yes, then possibly the parents can't actually leave such a large chunk of their estate to one daughter alone.
No need for a consultant which charges a hefty fee. Just look it up in the tax code of the parents canton.

Or use this handy calculator.
https://www.bkb.ch/de/Service-Center...Steuern-sparen

PS: If the parents live in Canton Zurich the tax is 0.
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Old 09.01.2017, 18:40
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Re: Mortgage tips and risks

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How does this work? Do they regularly approximate the value of my property? How reliable is this?
Each bank probably has their own valuation methodology and own figures. Under normal market conditions, property slowly appreciates and they don't need to do anything. Only a large market-wide drop in prices should force the bank to take a closer look at their portfolio of mortgage debts and make the calls where necessary. You can check housing prices indexes, like ZKB's https://www.zkb.ch/de/pr/pk/finanzie...ndex-zwex.html, to monitor when there's a downwards trend.

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So let's run the numbers. Capital of 200, Mortgage 800. Flat value goes down from 1000 to 700 (who calculates that and how?).
The bank according to their own methodology.

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LTV is now 114%. We raise the capital by 240, the mortgage is now 560, LTV again 80%. Correct?
Yes, if you can pay 240k, that should satisfy the bank.

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Bonus question: In what circumstances would modern flats in Zurich lose so sharp in value? Increasing interest rates?
A big increase in interest price would affect the prices, yes.

For example at a 5% mortgage interest, current prices aren't very sustainable. You only make 3-5% currently in net rent (post NK), out of which you still have to pay maintenance, taxes, mortgage and keep some as a profit.

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax?
If they give the money to her as a gift, it would be free of tax as a gift between parents and children. But this money would just reduce the amount she'd need to loan. She still needs to have enough income to afford to loan the remaining amount.

If they would co-own or sign up to be the guarantors, I guess their pension income can be considered by the bank in addition to the daughter's for the Tragbarkeit calculation.
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Old 09.01.2017, 18:45
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Re: Mortgage tips and risks

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My bet on the actual cause? A cancellation of the bilateral agreement with the EU which causes a relocation of many multinationals and its workforce out of Switzerland with the result of lot of unneeded housing. Read up on what happened in the 1970ies.
http://www.eso.uzh.ch/modul2/9.html?...twicklung_3_13
I don't think multinationals moving away will have such a massive direct effect on the real estate market. Many expats are on short term contracts and thus not owning property. Those that aren't are probably over represented in higher income categories and thus not competing for an appartment in the price range you mention.

What may have a far bigger effect is the exchange rate. The EUR going from around 1.60 to around 1.10 has put enormous pressure on exporting companies and made it easier for imports. One reason the CHF is so strong is that people from across Europe and the world see it as a safe haven in uncertain times. Even if they are just stashing 1000 CHF notes under their mattress. And those uncertain times are not over yet. If the exchange rate slips further we may see many companies go broke or move out of Switzerland. This will lead to higher unemployment and will bring down the property market.
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Old 09.01.2017, 18:49
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Re: Mortgage tips and risks

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Many expats are on short term contracts and thus not owning property.
Whether they own or not is irrelevant. It's whether they occupy Swiss property, whether owned or rented, that matters.
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Old 09.01.2017, 18:56
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Whether they own or not is irrelevant.
Correct. It only relevant that they need some place to live.

From end of Q1 to end of Q3 there are 50k more people living in Switzerland.
As long as people are coming prices are mostly stable or rising. Once people are leaving for whatever reason prices will drop.
https://www.bfs.admin.ch/bfs/de/home...l.1500540.html
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Old 09.01.2017, 20:01
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Re: Mortgage tips and risks

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Correct. It only relevant that they need some place to live.

From end of Q1 to end of Q3 there are 50k more people living in Switzerland.
As long as people are coming prices are mostly stable or rising. Once people are leaving for whatever reason prices will drop.
https://www.bfs.admin.ch/bfs/de/home...l.1500540.html
Well, there are two parts: one which we addressed is the demand side. The other is the supply side.

It's not hard to imagine that Switzerland is being set-up for a large structural correction as inventory of housing increases if demand later falls.

The risk of cancelling the bilaterals seems to have abated, but another risk not really considered by many is the impact of the trend against tax avoidance and the pressure put on CH by the EU. Without a favourable enough tax regime, some multi-nationals will leave for cheaper countries.

The high CHF also pushes some jobs out of CH.
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Old 09.01.2017, 21:33
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Re: Mortgage tips and risks

The current vacancy rate in this area is 0.7%, in Switzerland it is around 1.1%.
And rates of construction are still low. Many places have no buildable land left.

A whole lot of people would have to move very quickly for there to be a sudden impact. A mass exodus is not likely anytime soon.

As to the OP, I think 'your friend' should stick to a budget where she can buy the place on her own. It's her stepping stone property. In 5 years she can look to upgrade.
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Old 09.01.2017, 23:14
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Re: Mortgage tips and risks

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The current vacancy rate in this area is 0.7%, in Switzerland it is around 1.1%.
And rates of construction are still low. Many places have no buildable land left.

A whole lot of people would have to move very quickly for there to be a sudden impact. A mass exodus is not likely anytime soon.

As to the OP, I think 'your friend' should stick to a budget where she can buy the place on her own. It's her stepping stone property. In 5 years she can look to upgrade.
There is plenty of build-able land left, just the owners aren't building on it and until they do, there is a moratorium on de-zoning any other land.
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Old 10.01.2017, 00:31
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Re: Mortgage tips and risks

Canton Zurich is not that dependent on multinationals profiting from tax rulings end holding companies having their fioreign earnigs taxed at lower-than-domestic rates. But Vaud and Geneva do, and a large part of new jobs, directly and indirectly depend on these multinationals- if I recall a third or more. That's why Vaud and Geneva lower their corporate tax rate below 14% while Zurich doesn't with the introduction of corporate tax reform III.
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Old 10.01.2017, 01:01
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Re: Mortgage tips and risks

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There is plenty of build-able land left, just the owners aren't building on it and until they do, there is a moratorium on de-zoning any other land.
Depends on what you mean by 'left'.

certainly there isn't enough construction going on quick enough to change this very low vacancy rate. So little reason to worry about a glut in the market for the medium term future by fleeing foreigners or (for now) over building.
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Old 10.01.2017, 09:58
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Re: Mortgage tips and risks

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Depends on what you mean by 'left'.

certainly there isn't enough construction going on quick enough to change this very low vacancy rate. So little reason to worry about a glut in the market for the medium term future by fleeing foreigners or (for now) over building.
The owners of build-able land are not building on it as it more than retains its' value without a building on it !

The land is their, in zones for building, however you cannot force people to build on land if they don't want too.
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Old 10.01.2017, 11:47
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Re: Mortgage tips and risks

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Definitely not a loan. They want to buy her a flat, or rather a part of it. Does it mean there would be tax? Then can they own the flat together and eventually she inherits it?
The debt situation may still be worth taking a closer look:

There's that thing called Solidarhaftung, Solidarschuldner. What it means is that the parents join the child as s debtor WRT to the mortgage, every Solidarschuldner can be held liable for the full debt. Generally speaking the bank should be interested in such an arrangement as two debtors lower its risk; the benefit for the child, and this is a guess, may be that the parent's income may become usable for the affordability calculation for the child. It may be useful to ask multiple banks.

As odd as it may sound, but one thing to mind with fixed-rate long-term mortageges is the creditor's debt quality:
If the bank goes bankrupt the credit comes due immediately. If that were to happen after interest rates have risen, your friend may need to pay more after refinancing with a different bank. Bankruptcy is near-impossible for most Kantonalbanken because most (I think there are three exception) are protected by Staatsgarantie, i.e. the respective Kanton guarantees the respective bank's debts. So assuming comparable conditions, your friend will proabably want to get the mortgage from a Kantonalbank. I guess the risk is very small but perhaps better be safe than sorry.

Another issue will be to get an overview over currently offered interest rates. The newspaper "Finanz und Wirtschaft" (the local equivalent to the Wallstreet Journal) periodically (once a month I think) publishes a short overview and recent trends plus their short-term outlook; this old article shows what you can expect, I think the article is part of the front page.The paper is available at most not-too-small kiosk, it's published on Wednesdays and Saturdays.
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The risk of cancelling the bilaterals seems to have abated, but another risk not really considered by many is the impact of the trend against tax avoidance and the pressure put on CH by the EU. Without a favourable enough tax regime, some multi-nationals will leave for cheaper countries.
Also cue the national vote next month on corporate tax reform, Unternehmenssteuerreform III.
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