Switzerland may be best known as a centre for banking and finance, but an important and growing strand to its economy is the number of multinational companies setting up their European headquarters in the country, which is rapidly becoming a flood.

Earlier this month, Kraft Foods announced its intention to relocate its European headquarters from London and Vienna to Switzerland, where it will join a host of multinational giants, including General Motors, Hewlett-Packard, Procter & Gamble, Pfizer and Cisco. Gallaher International will swiftly follow if the current takeover bid by Japan Tobacco is successful and, in all, more than 1,000 foreign companies have regional headquarters in Switzerland.

Rules of attraction

The country's attractions to business are manifold. Corporation tax, which is set by the individual cantons which compete with each other to offer the lowest rates, averages just 21.3%, which compares very favourably with equivalent rates in the major economies of the European Union (EU) – such as France (33.33%), Germany (38.34%), Italy (37.25%), Spain (35%), the Netherlands (29.6%) and the UK (30%) – and it is from these countries that many of the recent entrants to Switzerland have come. Additional tax incentives are also available to companies wishing to set up headquarters in Switzerland.

Thanks in part to the existence of a number of major homegrown multi-nationals such as Nestle and Novartis, Switzerland has also developed as a base for multinational companies to conduct cross-border activities. Although its private banking industry sometimes leads to it being bracketed with some of the offshore financial centres, Switzerland is a member of the Organisation for Economic Co-operation and Development (OECD) and has double taxation treaties with 50 countries, including the US, Japan, India, Russia and all the major EU economies.

Switzerland's attractiveness as a base for US companies to set up European headquarters may be enhanced further if the proposed free trade agreement between Switzerland and the US – as proposed by the Swiss Government in 2005 – is ratified. If it is, it would be the only bilateral free trade agreement between a European country and the US.

Standing out from the crowd

Geographically and culturally, the country sits at the heart of Europe, sharing borders with France, Germany, Italy, Austria and Liechtenstein and, although not a member of either the EU or the European Economic Area (EEA), Switzerland has maintained a close relationship with the EU and, according to the European Commission, is its largest trading partner after the US.

As a result, while Switzerland has to keep a close eye on political developments in the EU, the country offers many of the trade and market access advantages of European membership without being subject to some of its more onerous obligations.

Of most relevance to multinational companies in this respect is the 2004 accord signed between the Swiss Government and the EU on the free movement of people, which gives citizens of the 15 pre-expansion EU countries the right to live and work in Switzerland, while citizens of the 10 new entrants should be granted the same rights by 2011.

Increasing numbers of highly-qualified people are being attracted to Switzerland by the quality of life it offers. Switzerland is famous for its scenery, clean air, low crime and high standard of living, and the country is ranked second (of 111 countries) on the Economist Intelligence Unit's most recent quality of life index, based on a variety of factors including material well-being, health, political stability and freedom, family and community life, climate, job security and gender equality.

More than 800,000 EU citizens already live and work in Switzerland, with a further 180,000 frontaliers crossing the border each day on a regular basis. Almost 20% of the workforce – 1,375,000 people – are foreign nationals. These people are swelling the ranks of Switzerland's already skilled, well-educated and multilingual workforce. Another attraction is that Swiss employment law is more liberal than in most of the mainstream European jurisdictions.

The other key business advantage Switzerland enjoys is its infrastructure – all the major European centres are within two hours' flying time, the country has an efficient network of roads and, despite the mountainous terrain, travelling times between its major cities are reasonably short and, yes, the trains really do run like clockwork.

Geneva conventions

Within Switzerland, Geneva is proving to be a particularly popular base for multinational companies, thanks to its position near the French and Italian borders and its reputation as an outward-looking international city. Geneva is home to around half of the 6,500 foreign companies operating in Switzerland and the number moving to Geneva has increased rapidly in the past two years.

Forty percent of Geneva's residents are foreign nationals and Switzerland's historical commitment to neutrality has helped the city to become home to numerous multilateral organisations such as the World Trade Organisation, the United Nations, the World Health Organisation, the International Labour Organisation and the World Intellectual Property Organisation, as well as being one of the world's leading centres for private banking.

Geneva also benefits from being one of the world's leading centres for international arbitration, thanks to its neutrality, the availability of experienced arbitrators, the reluctance of local courts to intervene and the common use of Swiss law in cross-border contracts.

The growth of foreign companies in Switzerland is set to continue, and it is surprising that so few international law firms have yet seen the opportunities that this is creating. Winston & Strawn is experiencing a significant increase in demand for cross-border services from our Geneva-based clients for a wide range of legal services, including cross-border acquisitions, international arbitration, intellectual property and corporate restructuring.

Other international law firms that are here have yet to develop beyond some specialist practice areas. As key decision-makers are attracted to Switzerland in ever-increasing numbers, the corporate lawyers will inevitably follow our lead. It is only a matter of time before Switzerland develops as a major centre for the practice of corporate and M&A law.

Carl Liederman is a partner in the corporate group of Winston & Strawn, based in the firm's Geneva office.