Published in association with: ADB Altorfer Duss & Beilstein burckhardt Deloitte KPMG Switzerland Tax Partner AG Taxand Switzerland

Transcription

1 T A X R E F E R E N C E L I B R A R Y N O Published in association with: ADB Altorfer Duss & Beilstein burckhardt Deloitte KPMG Switzerland Tax Partner AG Taxand Switzerland Switzerland 5th edition

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3 Switzerland 3 Maintaining attractiveness Strengthening Switzerland s attractiveness for investment Switzerland is amending its tax legislation in order to adapt to the latest international developments. David Ryser and Lisa Airoldi of Tax Partner AG Taxand Switzerland provide an overview of the improvements in the Swiss tax system that will further strengthen the attractiveness of Switzerland as an investment and business location. 8 Group financing Group financing is getting better in Switzerland The Swiss financial centre offers the expertise and access to the financial markets required for financing activities and is the headquarters for many international groups. Rolf Wüthrich and Noëmi Kunz-Schenk of burckhardt discuss the proposed changes being made to the legal framework that will further strengthen the financing activities of groups in Switzerland. 13 Privileged to ordinary taxation Change of status from privileged to ordinary taxation The change of status from privileged to ordinary taxation can already be envisaged before a revised version of the Corporate Tax Reform III (CTR III) enters into force. Fabian Duss and Marc Dietschi of ADB Altorfer Duss & Beilstein explore this possibility and outline why it could prove beneficial for businesses. 18 Substance-based analysis The substance-based approach in Swiss income tax law The term substance in the tax practice can have very different meanings. Peter Brülisauer of Deloitte discusses how it is of fundamental importance for the purposes of a substance-based analysis. 23 VAT Playing with fire Switzerland deviates from international standards The Federal Administrative Court recently rendered its judgment in a case that might cause substantial headaches to companies supplying goods to Switzerland. Laurent Lattmann and Désirée Högger of Tax Partner AG Taxand Switzerland explain the relevant aspects of this case and the potential fallout if this judgment is upheld by the Federal Supreme Court. 28 Withholding tax Swiss federal withholding tax: correction of malpractice Swiss taxpayers will gain some welcome tax repayments from the government after amendments to the Federal Withholding Tax Act (WHTA) entered into force. Olivier Eichenberger of KPMG Switzerland discusses the changes. W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 1

4 E D I T O R I A L Editorial Switzerland is often discussed when the ethics of international tax competition are questioned, but recent events prove the country s willingness to adapt to the latest international standards. However, as the landlocked country tries to adapt its tax system to meet its international commitments, the goal appears to be in direct conflict with its intentions to remain attractive to foreign investors. As Tax Partner AG Taxand Switzerland s article indicates, the country is succeeding in both its objectives, however. Burckhardt s article also touches on the country s ability to adapt to international influences while maintaining its reputation among big businesses as the place to locate key operations. The article looks at what the Swiss financial centre offers and how proposals to amend the Swiss Withholding Tax Ordinance will strengthen the financing activities of groups. However, the onus for change is not always the responsibility of the government. ADB Altorfer Duss & Beilstein s article discusses how companies can voluntarily abandon a privileged tax status and move to ordinary taxation before a preferential regime is abolished. Meanwhile, this guide also summarises the concept of substance in relation to tax matters. The term substance can have very different meanings and Deloitte discusses how it is of fundamental importance for the purposes of a substance-based analysis to avoid disputes particularly those involving cross-border operations. Laurent Lattmann & Désirée Högger of Tax Partner AG Taxand Switzerland believe cross-border issues for companies are unlikely to go away soon. In their article, they discuss a recent VAT judgment issued by the Federal Administrative that will impact companies supplying goods to Switzerland. However, it s not all bad news for companies. Many Swiss taxpayers, who were charged heavy amounts of late interest in relation to dividend payments, will benefit from a total repayment of CHF 600 million ($596 million) from the Swiss Confederation, writes Olivier Eichenberger of KPMG Switzerland. We hope the fifth edition of this Switzerland guide provides useful insight as taxpayers seek to navigate a constantly-evolving landscape. Anjana Haines Editor, International Tax Review 8 Bouverie Street London EC4Y 8AX UK Tel: Fax: Editor Anjana Haines anjana.haines@euromoneyplc.com Deputy editor Joe Stanley-Smith joseph.stanley-smith@euromoneyplc.com Senior reporter Amelia Schwanke amelia.schwanke@euromoneyplc.com Editor, TPWeek.com Salman Shaheen salman.shaheen@euromoneyplc.com Reporter, TPWeek.com Lena Angvik lena.angvik@euromoneyplc.com Production editor João Fernandes jfernandes@euromoneyplc.com Publisher Oliver Watkins owatkins@euromoneyplc.com Associate publisher Andrew Tappin atappin@euromoneyplc.com Business manager Brittney Raphael brittney.raphael@euromoneyplc.com Senior marketing executive Sophie Vipond sophie.vipond@euromoneyplc.com Marketing executive Anna Sheehan anna.sheehan@euromoneyplc.com Subscriptions manager Nick Burroughs nburroughs@euromoneyplc.com Account manager Samuel Webb samuel.webb@euromoneyplc.com Divisional director Danny Williams Euromoney Trading Limited, The copyright of all editorial matter appearing in this Review is reserved by the publisher. No matter contained herein may be reproduced, duplicated or copied by any means without the prior consent of the holder of the copyright, requests for which should be addressed to the publisher. Although Euromoney Trading Limited has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from errors or omissions, or any opinions or advice given. This publication is not a substitute for professional advice on specific transactions. Directors John Botts (Chairman), Andrew Rashbass (CEO), Colin Jones, The Viscount Rothermere, Sir Patrick Sergeant, Paul Zwillenberg, David Pritchard, Andrew Ballingal, Tristan Hillgarth International Tax Review is published 10 times a year by Euromoney Trading Limited. This publication is not included in the CLA license. Copying without permission of the publisher is prohibited ISSN Customer services: UK subscription hotline: US subscription hotline: W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

5 M A I N T A I N I N G A T T R A C T I V E N E S S Strengthening Switzerland s attractiveness for investment Switzerland is amending its tax legislation in order to adapt to the latest international developments. David Ryser and Lisa Airoldi of Tax Partner AG Taxand Switzerland provide an overview of the improvements in the Swiss tax system that will further strengthen the attractiveness of Switzerland as an investment and business location. Developments at national level in Switzerland Rejection of Corporate Tax Reform III On February , 59.1% of the Swiss voters rejected the federal bill on Corporate Tax Reform III (CTR III) adopted by the Swiss parliament in June The main goal of CTR III was to align Swiss tax law with the international tax standards, while retaining the attractiveness of Switzerland as an investment and business location. This objective would have been achieved by replacing the privileged tax status regimes for corporations with new internationally accepted tax measures effective from January The rejection was mainly caused by disagreements on certain new tax measures, particularly the introduction of the notional interest deduction on surplus equity and the deduction of more than 100% of research and development costs incurred in Switzerland. The missing amendment to the partial taxation of dividends from qualified participations (i.e. of at least 10%) was also subject of controversy: the bill presented to the voters did not include the taxation of qualified dividends at 70% as included in the initial dispatch adopted by the Federal Council because this was already rejected by parliament (at present, dividends from qualified participations are taxed at 60%, although this varies from canton to canton). In addition, the opponents argued that CTR III as adopted by parliament in June 2016 would have caused relevant tax losses to be eventually borne by the Swiss population. As a result of the rejection of CTR III, the corporate tax law remains in force and corporations may continue to benefit from the privileged tax status regimes until a new law enters into force. In order to maintain Switzerland s attractiveness as a business and tax location and to improve the tax planning options for corporations, the Swiss Federal Council has already instructed the Federal Department of Finance to prepare a new corporate tax reform proposal by mid However, it seems improbable that the reform will enter into force before In the meantime, cantons may already cut their ordinary corporate income tax rates to maintain their competitive position as business locations. Numerous cantons already boast favourable corporate income tax rates of 12%-15% (effective pre-tax rates including federal income tax). Moreover, in the majority of the cantons it is already possible for companies that benefit from privileged tax status regimes to disclose without any tax impact certain hidden reserves (step-up), W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 3

6 M A I N T A I N I N G A T T R A C T I V E N E S S David Ryser Tax Partner AG Taxand Switzerland Tel: david.ryser@taxpartner.ch David Ryser is an attorney and certified Swiss tax expert. Before turning his interest to tax, he worked as a corporate lawyer with two leading corporate law firms in Zurich. He then joined EY, Zurich, where he became a partner in David was active there as the practice leader in international tax and gained extended experience in the fields of individual and corporate national and international taxation. In 1997, David cofounded Tax Partner AG in Zurich. Apart from his professional activities as a partner of Tax Partner AG, David is also a regular speaker and lecturer at selected important tax seminars and has published various articles on international and national tax themes. Further activities include the membership on selected boards of directors of various companies in Switzerland as well as membership of various professional organisations. Tax Partner is one of the leading tax firms in Switzerland. With a team of 38 professionals, the firm advises a range of multinational and national corporate clients, as well as individuals. In 2005, Tax Partner co-founded Taxand the first global network, with more than 2,000 tax advisers and more than 400 partners from independent member firms in nearly 50 countries. which were developed under the privileged tax regime, in cases of a voluntary transition from privileged taxation to ordinary taxation. Swiss withholding tax In principle, a Swiss company has to declare to the Swiss Federal Tax Administration (FTA) any dividend distributed to the shareholders within 30 days of its due date (i.e. the due date decided during the shareholders meeting or, if no due date has been set, the date of the shareholders meeting) and to deduct and remit the 35% withholding tax. The shareholders may then apply to the FTA for the partial or full refund of the levied withholding tax. In cases of intragroup dividends and hidden dividend distributions, if certain conditions are met, the Swiss company may fulfil its withholding tax obligation by way of declaring and notifying the dividend to the FTA instead of withholding and remitting the withholding tax: relief at source is granted by applying the dividend notification procedure. Based on the Swiss Federal Supreme Court decision of January , the FTA followed a restrictive practice according to which if the Swiss company did not declare and notify the dividend within 30 days after the due date, it could not apply the dividend notification procedure and the withholding tax had to be deducted from the dividend and remitted to the FTA. In addition, the FTA levied interest for late payments of 5% per annum on the withholding tax owed. While the withholding tax was then partly or fully recoverable for the shareholder, the interest for late payment represented a final cost. According to the revised Swiss Withholding Tax Act, which entered into force on February , the restrictive practice of the FTA is no longer applicable. This means that Swiss companies can apply the dividend notification procedure even if the dividend is not declared and notified within the 30-day period, as long as the material conditions for this are met. Furthermore, in this case, no interest for late payment is owed. However, as a consequence of the late filing, an administrative penalty limited to CHF 5,000 ($5,000) can be levied. The new provisions are applicable retroactively from January and interest for late payments levied since this date can be recovered within one year after the amended law came into force, i.e. by February , provided that the tax liability and the interest for late payments have not passed the statute of limitations and have not been finally assessed prior to January The new legislation is a positive signal for domestic and international corporate groups in Switzerland. Developments at international level in Switzerland Spontaneous exchange of information on tax rulings In 2013, Switzerland signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC), which was later ratified in Along with Action 5 of the BEPS Report 2015, Switzerland has now introduced into domestic legislation the mandatory minimum standard for a spontaneous exchange of information on tax rulings. The implementation has taken place by way of a revision of the Federal Act on International Administrative Assistance in Tax Matters, together with a revision of the Federal Ordinance on International Administrative Assistance in Tax Matters, and both entered into force on January The information exchange begins a year later on January and covers tax rulings that were issued after January and which will still be applicable on January Tax rulings are defined in the revised ordinance as any information, confirmation or assurance of a tax administration that is given to the taxpayer, which describes the tax consequences of the facts as presented by the taxpayer, and on which the taxpayer can rely. In line with the recommendations 4 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

7 M A I N T A I N I N G A T T R A C T I V E N E S S of the OECD, the revised ordinance entails five categories of tax rulings covered by the spontaneous exchange of information: 1) Rulings on preferential tax regimes, e.g. rulings on the taxation of holding companies, domiciliary companies, mixed companies, or principal companies, or rulings on the reduced taxation of revenues from intellectual property rights; 2) Unilateral rulings with cross-border implications regarding transfer pricing; 3) Rulings with cross-border implications regarding the reduction of taxable profit in Switzerland that is not disclosed in the financial statements; 4) Rulings regarding the existence or non-existence of permanent establishments and the respective profit allocation; and 5) Rulings regarding related conduit companies. In principle, the country of domicile of the group parent company and the country of domicile of the direct parent company are among the recipient countries. In addition, the recipients include the countries of domicile of those group companies (with at least 25% participation) whose transactions with the Swiss taxpayer are covered by the rulings mentioned above and the countries of domicile of those group companies with a permanent establishment in Switzerland and vice versa. The potential consequences of the spontaneous information exchange on tax rulings have to be assessed individually. If a taxpayer wants to avoid the exchange, existing tax rulings should be rescinded by the end of Automatic exchange of information on financial accounts In 2014, the OECD adopted the new global standard for the automatic exchange of information in tax matters (AEOI) regarding financial accounts. Under the AEOI, certain financial institutions, like deposit-taking banks, custodial institutions, certain investment entities and certain insurance companies, have to collect financial information on their clients as long as they are resident abroad for tax purposes. These financial institutions automatically transmit client details and tax-relevant financial data to the tax authorities in their country, which then forward this information to the tax authorities in the client s country of residence. By the end of 2016, 101 states had committed themselves to this global standard. Of these jurisdictions, 54 will start to exchange information in accordance to the AEOI standard from 2017, the remaining 47 countries, including Switzerland, from At international level, the AEOI implementation can proceed based on two models: 1) It is either possible to agree to AEOI implementation in bilateral treaties (AEOI Agreement) (Model 1); or Lisa Airoldi Tax Partner AG Taxand Switzerland Tel: lisa.airoldi@taxpartner.ch Lisa Airoldi is a senior adviser at Tax Partner AG, the leading independent Swiss firm of tax advisers. Lisa is a Certified Swiss Tax Expert and holds a master s degree in banking and finance from the University of St. Gallen. Her career started in 2006 with UBS AG, where she completed the Wealth Management Graduate Training Program and worked for the wealth planning division. In 2009, Lisa changed to corporate tax consulting and moved to EY in Zurich, working on national and international projects mainly for banks, asset management and insurance companies. In 2013, Lisa joined Tax Partner AG. Lisa s activities are mainly focused on national and international tax planning and reorganisations, as well as on all tax aspects in the area of banking, asset management and financial products. Lisa is fluent in German, English and Italian. Tax Partner is one of the leading tax firms in Switzerland. With a team of 38 professionals, the firm advises a range of multinational and national corporate clients, as well as individuals. In 2005, Tax Partner co-founded Taxand the first global network, with more than 2,000 tax advisers and more than 400 partners from independent member firms in nearly 50 countries. 2) The AEOI can be implemented on the basis of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA), which must be activated bilaterally between the signatory states by means of notification to the secretariat of the coordinating body (AEOI Joint Declaration) (Model 2). At national level, the AEOI is implemented by means of the Swiss Federal Act on the International Automatic Exchange of Information (AEOI Act) and the Ordinance on the Automatic International Exchange of Information on Tax Matters (AEOI Ordinance). The legal provisions for the introduction of the AEOI in Switzerland came into force on January In 2017, the reporting financial institutions in Switzerland and the partner countries will collect financial information from their customers for the first time. The national tax authorities will then exchange this information with each other from In 2015, Switzerland signed the AEOI Agreement with the EU, which applies to all EU member states and replaces W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 5

8 M A I N T A I N I N G A T T R A C T I V E N E S S the taxation of savings agreement between Switzerland and the EU that had been in force since The AEOI agreement entered into force on January and Switzerland and the EU will collect data from 2017 and mutually exchange these data from This new agreement with the EU replaces also the withholding tax agreements with Austria respectively with the UK, which concerned the regularisation of assets held in Switzerland by Austrian respectively UK taxpayers and the taxation of income generated by these assets; these withholding tax agreements were terminated on January The AEOI with the UK has been introduced by virtue of the agreement with the EU despite the Brexit vote and will remain in effect until the UK s exit has actually taken effect. Switzerland also activated the MCAA with effect from January with Australia, Iceland, Norway, Guernsey, Jersey, Isle of Man, Japan, Canada and South Korea. Data collected from 2017 will presumably be mutually exchanged from In order to continue to ensure the integrity, credibility, attractiveness and stability of its financial centre and position as a business location, Switzerland intends to further expand its AEOI network. To date, the Swiss Federal Department of Finance has already initiated the consultation on introducing the AEOI with an approximate additional 40 states and territories. The implementation of the AEOI is planned for January so that the first exchange of information will take place in Finally, since 2015 Switzerland has been negotiating the implementation of FATCA Model 1 with the US, according to which data would be exchanged automatically between the competent authorities on a reciprocal basis. At present, FATCA is implemented in Switzerland based on Model 2, which means that Swiss financial institutions disclose account details directly to the US tax authorities with the consent of the US clients concerned. Automatic exchange of information on country-by-country reports On January , 31 countries, including Switzerland, signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA), which is based on the MAC ratified by Switzerland in 2016 that entered into force this year. In order to create the legal basis for the implementation of the automatic exchange of country-by-country reports in Switzerland, at the end of November 2016 the Swiss Federal Council submitted the CbC MCAA and the respective Federal Act on the International Automatic Exchange of Country-by- Country Reports of Multinationals for approval to parliament. If parliament approves the proposal and no referendum is held, the CbC MCAA and the Federal Act could enter into force at the end of In Switzerland, multinationals in scope of the CbC MCAA would be obliged for the first time to file with the Swiss Federal Tax Administration a CbC report with respect to the fiscal year beginning on or after January within 12 months after their fiscal year ends. It is expected that the first exchange of CbC reports between Switzerland and its partner states would take place during the first half of In the meantime, however, CbC filings for subsidiaries of Swiss groups in other participating countries, will have to be made as early as the 2017 business year, which involves special planning and organisation. Multilateral instrument to modify double tax treaties The OECD announced on November that, along with Action 15 of the BEPS Report 2015, more than 100 jurisdictions, including Switzerland, have concluded negotiations on a multilateral instrument (MLI), which will transpose results from the OECD/G20 BEPS Project into existing double tax treaties worldwide. The MLI has been ready for signing since the end of December A first high-level signing ceremony will take place in the week beginning June , with the expected participation of a significant group of countries. The Swiss Federal Council has not yet decided whether Switzerland will sign the MLI. If Switzerland does sign the MLI, the Federal Council will submit a provisional list setting out the countries and territories in respect of which the MLI should apply for Switzerland as well as the double tax treaty provisions that Switzerland is considering to amend. Once the MLI has been signed, the Federal Council will hold a consultation process and then submit its dispatch to parliament. Double tax treaties Switzerland has more than 100 double tax treaties in place and is continuously expanding its network of treaties. By the end of 2016, Switzerland had signed 54 double tax treaties in accordance with the international standard on exchange of information upon request as entailed in Article 26 of the OECD Model Tax Convention on income and capital, of which 50 were in force. In 2016, new double tax treaties entered into force with Liechtenstein and Oman. Furthermore, protocols for the amendment of the double tax treaties with France, Italy, Norway and Albania entered into force. With this amendment, these treaties became standard-compliant with respect to administrative assistance. Additional double tax treaties or protocols for the amendment of existing double tax treaties should be signed by Switzerland in order to further increase the number of double tax treaties with the provision on the exchange of information upon request as per the OECD international standard. 6 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

9 M A I N T A I N I N G A T T R A C T I V E N E S S Tax information exchange agreements Besides double tax treaties, Switzerland also has agreements with other states and territories on tax information exchange, which only cover the exchange of information upon request and do not serve to avoid double taxation. By the end of 2016, Switzerland had signed 10 tax information exchange agreements, of which nine were in force. The agreements with Belize and Grenada came into force in 2016, while the one with Brazil was approved by the Swiss parliament in December 2016 but is not in force yet. W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 7

10 G R O U P F I N A N C I N G Group financing is getting better in Switzerland The Swiss financial centre offers the expertise and access to the financial markets required for financing activities and is the headquarters for many international groups. Rolf Wüthrich and Noëmi Kunz-Schenk of burckhardt discuss the proposed changes being made to the legal framework that will further strengthen the financing activities of groups in Switzerland. Although Switzerland is a very attractive financial centre for international groups, financing activities including cash-pooling are often carried out outside of Switzerland. While the know-how and facilities for financing activities are readily available in Switzerland, the tax environment is not fostering group financing. Specifically, the Swiss withholding tax of 35% levied on bank interest, as well as interest payments on bonds issued by a Swiss resident company or the Swiss registered branch of a foreign resident company, is a big disadvantage and makes investments in Swiss bonds unattractive for many foreign investors. In 2010, an amendment to the Swiss Withholding Tax Ordinance (WTO) brought the first relief for foreign groups. In September 2016, the Federal Council initiated the consultation procedure to amend the WTO that will now further strengthen the financing activities of groups in Switzerland. Bonds within the meaning of the Withholding Tax Act (WTA) For withholding tax purposes, the term bonds is broader than under securities law and includes debenture certificates and other debt instruments issued for the purpose of collective fund raising. The Swiss Federal Tax Administration (FTA) has issued guidelines on the Swiss tax definition of bonds (Merkblatt Obligationen, dated April 1999; hereafter the guidelines ). Under the guidelines, bonds are defined as written recognitions of debt made out in fixed amounts and that are issued in several numbers for the purpose of collective fund raising, or for the consolidation of debts. Based on this definition, there are two categories of bonds that, for withholding tax purposes, could be relevant for Swiss borrowers (10 and 20 rule): Loan debentures (Anleihensobligationen), which exists where a Swiss resident person raises money from more than 10 creditors (whereby qualifying Swiss and foreign banks are not taken into consideration) against the issuance of recognition of debts at identical conditions, and the aggregate loan principal is at least CHF 500,000 ($493,000). The identical conditions test is met if the debt instruments are linked together through uniform terms of interest, term and repayment conditions or other circumstances (in particular the reference to the aggregate loan amount), under which they appear to form part of one whole debenture (i.e. also in cases of a syndication of a loan). However, the existence of a loan debenture subject to withholding taxes does not 8 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

11 G R O U P F I N A N C I N G depend on the amount of loan principal granted by each relevant creditor, i.e. the tax liability cannot be avoided by issuing debt instruments with differing face amounts. Cash debentures (Kassenobligationen), which exist where a Swiss resident person raises money from more than 20 creditors (whereby qualifying Swiss and foreign banks are not taken into consideration) against issuance of recognition of debts on a continuous basis at differing terms, and the aggregate loan principal is at least CHF 500,000. Contrary to the loan debenture, a cash debenture does not require that the debt instruments are issued at identical conditions. Hence, a cash debenture exists even though the terms of interest and the term and repayment conditions differ from one instrument to another, provided that all the other above listed conditions are met. Bank within the meaning of the WTA The term bank for withholding tax purposes is much broader than commonly used and may also apply to group internal financing companies. A debtor is qualified as a bank for Swiss withholding tax purposes if: The aggregate number of non-bank lenders to that Swiss entity under all of its interest bearing liabilities exceeds 100; and The total of the company s interest bearing liabilities reaches at least CHF 5 million. Earlier legislative measures to facilitate group financing activities In order to facilitate financing and treasury functions in Switzerland, a new Article 14a was introduced to the WTO with effect as from August According to this provision, loans or deposits between companies that are fully consolidated in the consolidated financial statements of a group in accordance with an internationally accepted accounting standard do not qualify as bonds or bank deposits within the meaning of the WTA, irrespective of the currency, interest rate applied or duration of such borrowing. The consolidation criterion basically requires a participation representing more than 50% of the voting rights in a company. The benefit of the exception of intragroup loans and deposits from the definition of bonds or bank deposits is twofold. On the one hand, there is no withholding tax on interest payments on such instruments even if the Swiss resident borrower has issued bonds within the meaning of the WTA. On the other hand, such intragroup liabilities do also not have to be taken into account when applying the above outlined 10, 20 or 100 creditor thresholds. However, this rule does not apply in cases where a Swiss parent company guarantees a foreign bond issued by one of its subsidiaries. The reason for this exemption for Swiss groups is that it would allow them to issue foreign bonds through one of its subsidiaries and to repatriate the funds to Switzerland via intragroup loans or deposits without having to pay Swiss withholding tax on the interest payments. Reform of the withholding tax system In order to sustainably resolve the problems of financing activities out of Switzerland, the Federal Council proposed a profound reform of the WTA and a switchover to the paying agent principle for interest payments. The paying agent principle would for interest withholding tax purposes no longer differentiate between Swiss and foreign debtors, but rather between Swiss and foreign recipients, irrespective of the residence of the debtor of the interest. The project was sent for consultation to all interested parties in December However, the reform has been suspended because the Federal Council is awaiting the outcome of the vote on the popular initiative Yes to protecting privacy. The subsequent timetable is unknown and will certainly take some more years. Proposal by the Federal Council to strengthen financing activities of Swiss groups Against the background of the still uncertain timeline of a potential profound reform of the Swiss withholding tax system (switchover to paying agent principle) and in the light of the global trends such as the OECD s BEPS Project, the Federal Council is proposing a new amendment to the WTO to enhance the appeal of Switzerland as a business location. The Federal Council fears that some structures used by Swiss groups for group internal treasury functions, group financing and cash pools lack adequate substance and functions and could therefore be challenged by foreign tax administrations based on substance requirements, transfer pricing rules or more generally based on information received through the country-by-country reports. The proposed regulation would allow Swiss groups to locate group financing and cash pooling functions in Switzerland together with other main group functions. Structures designated for group financing and cash pooling activities should no longer be necessary and consequently, the risk of inclusion of profit from financing activities by foreign tax administrations should be reduced. Groups established in Switzerland often carry out targeted financing activities abroad. In this way, they avoid withholding tax, which would be due in certain situations were they to conduct the financing via group companies established in Switzerland (e.g. when issuing a bond through a foreign group company with a guarantee by the Swiss parent company and at the same time, funds raised through the bond are used in Switzerland). The Swiss economy thereby misses out on some of the added value in W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 9

12 G R O U P F I N A N C I N G Rolf Wüthrich burckhardt Ltd. Mühlenberg Basel, Switzerland Tel: wuethrich@burckhardtlaw.com Noëmi Kunz-Schenk burckhardt Ltd. Mühlenberg Basel, Switzerland Tel: kunz@burckhardtlaw.com Rolf Wüthrich is an international tax lawyer, focusing his expertise on domestic and international tax planning, inbound and outbound transactions, especially between the US and Switzerland, corporate restructuring and acquisitions, as well as general corporate secretarial services. Noëmi Kunz-Schenk s areas of expertise are domestic and international tax issues and tax planning, particularly in corporate reorganisations, restructurings, structured finance, financial products, acquisitions and divestments, as well as high-net wealth individuals. burckhardt Ltd. provides its clients and their businesses with comprehensive, tailored advice on national and international tax planning issues and structuring, offers corporate secretarial and notary service, supports clients with professional expertise and broad international experience on restructurings, mergers and acquisitions, joint ventures and corporate financing. It also advises on inbound and outbound investments and in all matters related to employment, trade and transport law and private clients. the financing sector. The Federal Council aims to retain this added value in Switzerland. The proposed amendment concerns those groups in which a Swiss group company provides a guarantee for a bond issued by a foreign group company belonging to the same group. Under the existing legal framework, the interest payments on the bond issued by the foreign group company are not subject to Swiss withholding tax, provided the funds raised through the bond are not used in Switzerland. According to the proposed amendment by the Federal Council, forwarding funds from the foreign issuer to a group company established in Switzerland will be possible up to the maximum amount of the equity capital of the issuer without triggering Swiss withholding tax on the interest payments of the bond. The burden of proof that the amount of funds forwarded from the foreign issuer to a Swiss group company is less or equal to the equity of the foreign issuer lies with the Swiss guarantor of the foreign bond. The proposed amendment of the WTO which, in principle, aims to facilitate group financing activities in Switzerland for Swiss groups contains a further change that will be beneficial for group financing activities in general. According to the legal framework, only loans or deposits between companies that are fully consolidated in the consolidated financial statements of a group qualify for the intragroup exemption and, therefore, related interest payments are not subject to Swiss withholding tax. According to the proposal of the Federal Council, the exemption will be broadened to include not only loans and deposits between group companies that are fully consolidated, but also between group companies that are partially consolidated. Appraisal of the proposal by the Federal Council The Federal Council s proposal should be welcomed as it intends to facilitate group financing activities in Switzerland. As identified by the Federal Council, structures (solely) setup for tax planning reasons will face more and more challenges at an international level. Various actions under the OECD s BEPS Project intend to combat low substance structures and potentially questionable risk allocations. At the same time, the global financial crisis has led to tremendous state debt and a search by tax administrations for new and/or broadened sources of income. Multinational initiatives, as well as unilateral measures, intend to tackle tax evasion and at the same time exploit new revenue streams. New reporting obligations, such as country-by-country reporting, provide for more information being available to tax administrations. The risk of tax disputes and double taxation is on the rise. Against this background, the aim of the Federal Council to foster the combination of intragroup financing activities with other headquarter functions should be welcomed. However, the 1 0 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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14 G R O U P F I N A N C I N G question remains over whether the proposed new rules will have the desired effect. Given the uncertain timeline for the also uncertain switchover to the paying agent principle for interest payments, an interim solution based on the existing legal framework makes sense. While the broadened definition of loans and deposits, which fall under the exception of Article 14a of the WTO (i.e. loans and deposits between companies that are fully or partially consolidated in the consolidated financial statements of a group), will theoretically facilitate group financing activities in Switzerland, it is questionable whether the threshold of funds stemming from a foreign bond that may be used in Switzerland under the proposed new rules will be sufficient to repatriate group financing functions to Switzerland. The forwarding of funds from the foreign issuer to a group company established in Switzerland will be possible up to the maximum amount of the equity capital of the issuer. However, in practice the foreign issuers do not tend to be heavily capitalised. Therefore, the amount that could be forwarded to a Swiss group company is likely to be limited. Furthermore, the burden of proof lies with the Swiss guarantor of the foreign bond. Consequently, the administrative burden to adequately document any financial streams and closely monitor the threshold is likely to be significant. As the financial consequences of breaching Article 14a by forwarding funds in excess of the maximum amount that may be forwarded to Swiss group companies are significant, the option of a foreign group financing and cash-pooling activity might still be more appealing to many Swiss groups. Overall, the proposed rules are a step in the right direction but cannot entirely solve the Swiss withholding tax issue related to group financing activities. It remains to be seen what will be the outcome of the consultation process and, more importantly, the potential changes that might be introduced by the Swiss parliament. However, in order to provide for a really attractive withholding tax environment for group financing activities in Switzerland, the WTA requires some profound reforms such as the switchover to the paying agent principle. 1 2 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

15 P R I V I L E G E D T O O R D I N A R Y T A X A T I O N Change of status from privileged to ordinary taxation The change of status from privileged to ordinary taxation can already be envisaged before a revised version of the Corporate Tax Reform III (CTR III) enters into force. Fabian Duss and Marc Dietschi of ADB Altorfer Duss & Beilstein explore this possibility and outline why it could prove beneficial for businesses. Switzerland s corporate tax law recently faced substantial pressure from the EU, the OECD and G20 member states. As a consequence, the CTR III was initiated a few years ago. The CTR III was subject to a referendum on February but was not supported by a majority of the Swiss voting population. Irrespective of this result, it is to be expected that the cantonal preferential tax regimes available in Switzerland (e.g. holding companies, mixed companies and domiciliary companies) will be abolished over the coming years due to international pressure. In any case, it is anticipated that a revised bill, including several measures already foreseen by the CTR III, will be published shortly. This article focuses on the possibility of a change of status from privileged to ordinary taxation before a revised version of the tax reform enters into force. Background Switzerland has a long-standing track record as one of the most attractive locations when it comes to corporate income taxation in Europe. The corporate income tax rates, although varying quite considerably between different cantons and municipalities, are generally moderate (between 12% and 24%, likely even subject to further reductions). Moreover, there are numerous possibilities to defer corporate income taxation by means of accelerated depreciation schemes, lump-sum valuation allowances on assets and accounting for provisions. In addition, Switzerland s corporate tax law includes several preferential tax regimes, leading to an even more attractive taxation of income from certain mobile functions such as group financing, exploitation of intellectual property and international trading activities. Faced with pressure from the EU, the OECD and G20 member states, the preferential tax regimes were reviewed in recent years. The analysis led to the conclusion that the preferential regimes are no longer in line with international best practice and it was therefore decided to abolish them. In order to preserve Switzerland s reputation as an attractive location for corporate taxpayers, several countermeasures were analysed. The latest developments in international taxation, in particular the OECD s BEPS reports, were taken into consideration. The government intended to abolish the preferential tax regimes and to replace them with countermeasures that are fully compliant with the BEPS reports as part of the CTR III. However, the reform was not supported by a majority of the Swiss voting population on February As a result, the tax legis- W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 1 3

16 P R I V I L E G E D T O O R D I N A R Y T A X A T I O N lation remains unchanged. It is now expected that a revised bill with adapted content will be prepared but it is rather unclear how long it will take until the new reform proposal will be available. Due to the concessions made to the EU and the OECD, it is expected that the preferential tax regimes will be abolished irrespective of further developments in connection with the tax reform in the coming years. Change of status The change of status from privileged to ordinary taxation is an immediate consequence of the abolishment of preferential tax regimes, one of the measures foreseen as part of the CTR III. However, a change of status from privileged to ordinary taxation is already possible today, i.e. a privileged tax status can be abandoned voluntarily before a preferential regime is abolished. The question is how hidden reserves that have been built during a preferential regime will be treated upon transition into ordinary taxation. The CTR III contained specific rules for this exercise and this measure of the tax reform was undisputed. It needs to be considered that the question of the realisation of hidden reserves does not only crop up in the context of changes from privileged taxation to ordinary taxation, but also for companies moving to and from Switzerland. According to the rules foreseen by the tax reform, hidden reserves can also be released tax neutrally in case of relocations to Switzerland or transfer of functions into Switzerland. Applicable law From a tax planning perspective, it is interesting to note that, in certain cases, a voluntary change of status before preferential tax regimes are abolished can be advantageous. The change of status will become mandatory for all companies benefitting from tax privileges once the revised tax reform enters into effect, at the latest. Functionality In case of a change of status, the tax treatment of hidden reserves depends upon the respective cantonal tax law and practice. The change from privileged taxation as a holding, mixed or domiciliary company to ordinary taxation only affects cantonal taxes. Some cantons have issued respective regulations. However, the practice of the cantons is not consistent. In principle, two models are applied, as outlined below: Step-up in basis of assets comprising hidden reserves generated during the time of a tax privilege (so-called stepup model): The hidden reserves are realised for tax purposes by way of a tax-neutral step-up in basis at the time of the change of status. The assets concerned are then amortised over a specified period of time. The stepup and corresponding amortisation will only be represented in the tax balance sheet, i.e. no commercial accounting takes place. Amortisation of the realised hidden reserves leads to a reduction in the taxable profit on cantonal level. However, thought should also be given to the fact that the step-up does result in an increased capital tax basis. Further, companies applying accounting standards that are in line with the true and fair view principle (e.g. IFRS, US GAAP) are subject to a one-time effect in the form of deferred tax income as a result of the step-up; and Determination of hidden reserves generated during the time of a tax privilege (so-called pro memoria model): The amount of hidden reserves is determined at the time of the change of status. When realised at a later point in time, the hidden reserves are not, or only partly, subject to ordinary taxation, as they were generated during the time of a tax privilege. A pro memoria model was also foreseen under the CTR III. Arising questions The specific features of these two models differ according to the practices of the individual cantons. However, the following key questions arise in either model: Which valuation method will be used to quantify the hidden reserves? How is self-generated goodwill treated? What is the effect on hidden reserves on specific assets (e.g. real estate or participations) in cases of a change of status? How long will the transitional effect (e.g. amortisation period) last? What is the effect on tax losses carried forward? Only certain cantons (e.g. Zurich, see below) have published specific local directives that deal with the change of status and, in particular, the step-up and release of hidden reserves generated during the time of a cantonal tax privilege. In the absence of corresponding legal provisions, the approach for determination of the company value and, therefore, the amount of hidden reserves should be identical for both models. In any case, a recognised valuation method should be applied (e.g. so-called Praktikermethode as published in a circular letter of the Swiss Tax Conference or a discounted cash flow approach). Practice of the canton of Zurich The canton of Zurich has taken up the questions above and issued an official note on September regarding the change of status from privileged to ordinary taxation by way of a step-up. The note stipulates the following: A company can release its hidden reserves (to the extent of a prior tax exemption) at the time of a change of status 1 4 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

17 P R I V I L E G E D T O O R D I N A R Y T A X A T I O N Fabian Duss ADB Altorfer Duss & Beilstein AG Tel: fabian.duss@adbtax.ch Marc Dietschi ADB Altorfer Duss & Beilstein AG Tel: marc.dietschi@adbtax.ch Fabian Duss is one of seven partners at ADB Altorfer Duss & Beilstein in Zurich and has a broad experience in both domestic and cross-border tax matters. He works mainly in the area of national and international corporate tax, with a particular focus on effective supply chain management, transfer pricing, restructuring and corporate takeovers. He also advises clients in relation to capital market transactions and collective investments and industry-specific issues regarding banks, insurance companies and asset managers. In addition, Fabian advises family offices and executives. Fabian achieved a master s degree in business administration in 2004 and has since been specialising in tax law. He is a Certified Tax Expert, holds an LLM in international tax law from the University of Zurich and acts as lecturer for corporate tax law at the academy of the Swiss Institute of Certified Accountants and Tax Consultants. Marc Dietschi works predominantly in the area of international corporate tax with a particular focus on transfer pricing, international tax planning and tax effective supply chain management. He also advises private clients on tax and social security issues. He achieved a MA in accounting and finance in 2007 and has since been specialising in transfer pricing and tax law. He is a Certified Tax Expert. without tax consequences and amortise the hidden reserves going forward. The hidden reserves released are subject to capital taxes at cantonal level (provided they have not been amortised in prior years). Capital taxes will no longer be calculated using privileged tax rates. The voluntary release of hidden reserves is possible up to the last tax year before the (revised) tax reform enters into force; In general, hidden reserves can only be released tax neutrally to the extent that they have been created under a tax privilege. As a consequence, hidden reserves on real estate of holding, domiciliary or mixed companies cannot be released tax neutrally (since income from real estate is subject to ordinary taxation under all tax regimes). Hidden reserves on assets of domiciliary or mixed companies can only be released tax neutrally to the extent of the applicable (i.e. tax exempt) quota of foreign income. In relation to qualifying participations of holding, domiciliary or mixed companies, only the difference between initial acquisition costs and corporate income tax values is affected by a change of status. The reason behind this is that the participation exemption applies for the difference between initial acquisition costs and sales proceeds (i.e. this difference is tax free). For cantonal tax purposes, losses incurred under the tax privilege of holding companies can no longer be offset after a change of status. Losses incurred under the tax privileges of mixed or domiciliary companies can only be offset with future profits to the extent of the previous taxable quota (note: ordinary taxation applies at federal level under the cantonal tax regimes mentioned); and The hidden reserves released as part of a change of status must be amortised within 10 years. The amortisation is subject to the maximum relief of the cantonal tax base of 80% as foreseen by the CTR III (note: this rule was mandatory for all cantons under the CTR III. However, a new reform may not contain this restriction). In any case, a voluntary step-up should be discussed with the respective tax authorities in advance, i.e. a binding tax ruling regarding the amount of the step-up, the allocation of hidden reserves to the assets as well as the amortisation period should be obtained. New law The CTR III did foresee a uniform regulation for all cantons for the treatment of hidden reserves in case of a change of status to ordinary taxation. This regulation will likely not change in principle under a revised corporate tax reform. W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 1 5

18 P R I V I L E G E D T O O R D I N A R Y T A X A T I O N According to the legislation of the CTR III, it is intended that the amount of hidden reserves will be determined at the time of the change of status (pro memoria model). This will be done by means of an assessment. Companies will receive a questionnaire on the existing hidden reserves. Once returned, the amount of hidden reserves will be examined and determined by way of assessment. It is thereby explicitly stated that hidden reserves also include self-generated goodwill. Insofar as the determined hidden reserves are realised within five years following the change of status, they will be subject to a special, lower tax rate. The level of the applicable tax rate for the five-year period is to be determined by each canton individually. Companies should undertake analysis As described above, there might be significant differences between existing regulations and practices of the cantons and the legislative text foreseen by the CTR III when it comes to the change of status from privileged to ordinary taxation. As the approach in a revised tax reform is likely to be similar to the version of the CTR III it is worthwhile for companies to compare the scenario of an early voluntary change of status from privileged to ordinary taxation based on actual and budget figures. Depending on the actual facts and circumstances, the step-up model appears to be more advantageous since all hidden reserves can be used for subsequent amortisation (at least in case there will be no limitation of the amortisation period based on cantonal regulations or based on the tax reform). In the model, according to the CTR III, the particular question arises as to if and to what extent the hidden reserves can be realised within the timeframe of five years. The abolishment of the tax privileges is in any case necessary in order to avoid further pressure from both the EU and the OECD. Therefore, a potential change of status for companies benefitting from a cantonal tax privilege should be analysed now as part of the tax planning process. Revised tax reform being prepared The opponents of the CTR III only disagreed with certain measures of the reform, namely the notional interest deduction and the insufficient increase of the taxation of dividends at the level of individual shareholders. As such, the reform and the other measures of the CTR III were not disputed. This particularly applies for the abolishment of the preferential tax regimes. Therefore, it is expected that a revised draft with adapted content will be prepared soon. If these two aspects mentioned above will be amended, it may be possible to get the revised bill passed shortly, but only time will tell when those changes can effectively be implemented. The Swiss Federal Council announced that the key elements of the revised reform will be communicated by the end of June However, it is unlikely that the reform will be ready by the beginning of Instead, a delay between one to three years has to be anticipated. 1 6 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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20 S U B S T A N C E - B A S E D A N A L Y S I S The substance-based approach in Swiss income tax law The term substance in the tax practice can have very different meanings. Peter Brülisauer of Deloitte discusses how it is of fundamental importance for the purposes of a substance-based analysis. There is no definition of the term substance in Swiss private law or tax law. In economic terms, the issue of substance is above all associated with the concepts of value added, processes, functions, people, assets, risks, etc. For tax purposes, the concept of substance is most often brought up in connection with the terms operationally justified, caused by operations, domicile, right of use, misuse, etc. These lists show that the concept of substance has many different interpretations and is, therefore, to be understood in a relative sense. This means that the concept of substance takes on a different meaning and content depending on whether it is being used in reference to the real, financial or digital economy. As such, industry-specific considerations are of fundamental importance for the purposes of a substance-based analysis. The relative nature of the concept of substance also makes it clear that a substance-based approach for the purposes of tax law can also be associated with significant potential for conflict. At an international level, classification conflicts are more or less inevitable because at least two different tax jurisdictions are involved that can/will represent different perspectives on legislation and the application of the law. One specific example of this are the diverging perspectives of the industrialised and emerging economies especially the BRIC countries (Brazil, Russia, India and China). While the industrialised economies prioritise education and, therefore, intangible assets, the emerging economies pay more attention to the factor of practical labour and, therefore, tangible assets. These differing viewpoints can become particularly relevant in connection with contract research and development (R&D). BRIC countries often call into question whether local functions and risks are actually being controlled from other countries, or whether local R&D companies can be classified as risk-free, routine service providers. In practice, this can lead to the BRIC countries either demanding very high mark-ups for the purpose of profit allocation, or seeking to deny the recognition of intangible substance in other countries. That being said, it is certainly understandable that the physically locatable factors, such as number of local persons, local turnover and local taxes paid, will also be necessary to report in the future as part of country-by-country reporting (CbCR). These CbCR reports will be used as a starting point for the purposes of a plausibility test. Finally, another important consideration in this respect is that Article 21 (1) of the OECD Model Tax Convention specifies a comprehensive residence-based principle, while Article 21 (3) of the UN Model Tax Convention contains a comprehensive source-based principle 1 8 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

21 S U B S T A N C E - B A S E D A N A L Y S I S Table 1: Overview of fiscal look-through and defensive mechanisms in Swiss tax law Action Abuse of law Tax avoidance Management in Switzerland Legal basis practice Article 8 and 9 of the Federal Constitution Economic interpretation Interpretation Economic interpretation Article 20 of the Federal Law on the Harmonisation of Direct Taxation of Cantons and Municipalities (StHG) Article 50 of the Federal Act on Direct Federal Taxation (DBG) and Article 9 of the Federal Law on Withholding Tax (VStG) Permanent establishment in Switzerland Article 21 of the StHG Article 51 of the DBG Transfer price (TP) adjustment Article 24 of the StHG Article 58 of the DBG Article 21 of the VStG No relief on dividends Article 70 of the DBG and circular No. 27 of the Federal Tax Administration Tax Adjustment of Adjustment of consequences applicable law or formal to refusal to apply applicable law economic fact pattern and respective taxation Fiscal link on grounds of unlimited tax liability in Switzerland Fiscal link on grounds of limited tax liability in Switzerland TP adjustment by classifying transaction as hidden profit distribution or equity contribution Refusal to grant relief on dividends for tax-deductible transactions abroad Interpretation process in substance-based approach that, in practice, is often linked with a limited force of attraction of the permanent establishment. Principle of separation v the fiscal look-through approach The principle of separation, i.e. separate taxation of corporation and owner, constitutes one of the fundamental structural principles in Swiss tax law. The principle of separation has a veiling effect in that the profit generated by the corporation is allocable to it for taxation purposes, and cannot be taxed as profit or income of the investors. Swiss legislation governing the taxation of profits in contrast to VAT law does not contain provisions on the taxation of groups. Moreover, Swiss tax law does not prescribe any explicit rules for controlled foreign corporations comparable to those in other countries, e.g. Australia, Germany, France, UK, Italy, Japan and the US. In Switzerland, however, an extensive range of tools have been developed in connection with the interpretation of tax law concepts linked to economic fact patterns in order to enable the assessment of cross-border cases by reference to substance-based criteria. Table 1 presents an overview of the main correction mechanisms applied in practice. To conclude, it should be noted that the fiscal lookthrough mechanism can be applied irrespectively of whether Switzerland is the state of residence (outbound case), or the source state (inbound case). The doctrines of tax avoidance and abuse of law are outlined hereafter. These institutions are increasingly understood in legislative and judicial practice as the interpretation process integral to the substancebased approach. Tax avoidance v abuse of law According to the opinion of the Swiss Federal Supreme Court, tax avoidance is committed if: i) The legal structure chosen by the parties is unusual (insolite), improper or outlandish and, in any case, appears entirely inappropriate for the economic circumstances; ii) It can be assumed that the chosen legal structure was abusively elected for the sole purpose of saving taxes that would have been owed in normal circumstances; and W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 1 9

22 S U B S T A N C E - B A S E D A N A L Y S I S Peter Brülisauer Partner, International Tax Deloitte Tel: pbruelisauer@deloitte.ch Peter Brülisauer is tax partner at Deloitte in Switzerland. He has extensive experience in advising multinational companies on tax matters. This includes corporate restructuring, acquisition, finance restructuring, IP and R&D planning, cross-border tax planning, tax effective supply chain management, as well as function and risk allocation within multinational groups. He also specialises in permanent establishment (PE) planning and profit attribution between PEs. Peter is lecturer in national and international taxation at the University of St. Gallen and a frequent speaker at tax conferences. He has a PhD in law from the University of St. Gallen and is a Swiss Certified Tax Expert. iii) The chosen procedure would in fact result in a substantial tax saving if the tax authorities were to accept it. It is evident from this description that a substance-based approach is only to be taken in the context of tax avoidance in extreme exceptional cases. The avoidance corrective serves as an emergency mechanism that should only be triggered if a qualified unjust interpretation occurs that the legislator could not have possibly intended. However, it should be noted that with the advancement of the teleological interpretation, tax avoidance has largely lost its previously great practical significance and is increasingly replaced in practice by a regulatory correction in response to a breach of the prohibition on abuse of law and/or arbitrary action. An abuse of law, respectively an arbitrary application of the law, is committed when the decision: i) Is premised on an actual situation that is clearly inconsistent with reality; ii) Grossly infringes on a rule or an undisputed legal doctrine; or iii) Compliant application of law objectionably runs counter to a sense of justice. In contrast to tax avoidance, which takes the fact pattern as its starting point (instead of the legally realised fact pattern), a fictitious (objectively justifiable) fact pattern is supposed and tax is levied thereon. Application of the prohibition on abuse of law and arbitrary action prevents gross infringements of the equal-treatment principle by imposing a replacement regulation, with ultimately the same consequence (as a rule). It is, therefore, of no consequence whether one modifies applicable legislation, so that it fits the fact pattern, or one modifies the fact pattern that it can be subsumed under applicable legislation. Finally, it must be stressed that a correction of the fact pattern or a regulatory correction in the context of tax avoidance or abuse of law cannot be entirely replaced by an extensive teleological interpretation to the taxpayer s detriment. Semantic boundaries have to be imposed on the economic perspective and the process of interpretation cannot be permitted to become a game without limits. This means that laws cannot be ignored and they must be interpreted. Indeed, there are regulations under tax law, which for good reason especially on account of legal certainty considerations are open to avoidance or abuse of law. Furthermore, taxpayers could likewise conceivably appeal to an extensive interpretation as to the teleological intent of a regulation. This can be illustrated by examining the topic of reductions of tax at source. Both in accordance with Article 21 (2) of the Swiss Withholding Tax Act and by virtue of Article 10 (1) and (2) of the OECD Model Tax Convention that state that reductions of tax at source are denied in the event of misuse. If this issue was not (or no longer) instigated by the misuse leading to the denial of a reduction of tax at source, but rather by the profit allocation among the actual beneficial owners, the beneficial owner could also in other cases appeal in his favour on the grounds of the deviation of the economic assessment of the transaction flows from the structure under private law, which can constitute an infringement of the good faith requirement of the prohibition on contradictory behaviour. Substance test v tax rate test The substance test can be understood as an extension of the institution of operational business rationale within the meaning of Article 58 (1) b of the Direct Federal Tax Act, when read in conjunction with Article 59. An expense is generally considered operationally justified if it has operational causes or is entrepreneurially motivated. Consequently, only expenses that serve a business purpose qualify as tax-deductible, i.e. if there is a factual relationship between the expense and the business operations of the company performing the transaction. There is no dispute in Switzerland that the concept of operationally justified, which was further specified in practice in connection with hidden profit distributions, has assumed the function of an arm s length comparison. Against this background and more recently in light of BEPS it can be expected that the assessment of operational justification will no longer be conducted from the perspective of the entity performing the transaction. Instead, an aggregate perspective will increasingly be taken in future and substance-based considerations with regard to the recipi- 2 0 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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24 S U B S T A N C E - B A S E D A N A L Y S I S ent of the transaction will be factored into the assessment. This means that if the source state is of the opinion that a sufficient amount of substance is not allocable to the recipient state, the source state can argue that the operational justification requirement is not satisfied and thus deny tax-deductibility for the expenses charged to the recipient state. In addition, the source state to the extent that it levies tax at source on the expenses charged can deny the recipient use of the otherwise applicable double tax treaties (DTAs). Owing to the fact that the verification of substance in the recipient state by the source state can entail considerable effort, many countries in practice (e.g. France and Austria) increasingly conduct a tax rate test. Thus, if the statutory tax rate in the recipient state falls short of a certain threshold (e.g. 10%), or if the tax rate gap between the source and recipient states exceeds a certain amount, the source state can deny the tax-deductibility of expenses even if they are operationally justified. An even more severe legislation has been introduced in France, where a higher rate of tax at source is levied on expenses charged to non-cooperating countries, especially those that do not take part in information exchange arrangements. Even if such procedures are defensible on the grounds of practicability and procedural efficiency, taxpaying companies particularly also in light of BEPS must be granted the opportunity to demonstrate that a relevant amount of substance is allocable to the recipient state. Such proof of substance can be simplified, for instance, by working with catalogues, so that the activities under review (in the source and/or recipient state) are either listed in an active or positive catalogue that is not harmful or not listed in a passive or negative catalogue that is harmful. From a tax system perspective, refusal to grant taxdeductibility in the source state and the taxation of the same transaction in the recipient state constitutes economic double taxation. Further, the undifferentiated refusal to grant tax-deductibility of expenses that are operationally justified by reference to the fact that profit determination falls exclusively within the scope of unilateral law or the undifferentiated levy of tax at source can infringe on the fundamental principles of international tax law, particularly given that such procedures ultimately annul the scope of application of the otherwise applicable DTA without a qualified substance-based justification or can result in a breach of anti-discrimination rules. 2 2 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

25 V A T Playing with fire Switzerland deviates from international standards The Federal Administrative Court recently rendered its judgment in a case that might cause substantial headaches to companies supplying goods to Switzerland. Laurent Lattmann and Désirée Högger of Tax Partner AG Taxand Switzerland explain the relevant aspects of this case and the potential fallout if this judgment is upheld by the Federal Supreme Court. What happened? At first glance, nothing spectacular. The Swiss VAT authority carried out an audit of a foreign trading company (TradingCo) registered for VAT in Switzerland that sourced goods from abroad, and sold them on to a Swiss-based distributor (DistributionCo). TradingCo ordered the goods from various foreign third party suppliers and was partly responsible for the transport to Switzerland. TradingCo was registered for Swiss VAT purposes ever since, filed its VAT returns and paid its taxes on time. The VAT audit did not uncover any mistakes and no re-assessment notices were issued by the Swiss VAT authority. However, the responsible VAT agent informed Swiss Customs that he suspected fraudulent behaviour because the import values used for the customs clearance of the goods were too low. Soon after having received the report from their colleagues at the VAT authority, Swiss Customs started an investigation against TradingCo. They carried out a thorough onsite investigation and seized almost 7,000 pages of documents. Besides its fraud investigations, Swiss Customs also initiated a penal investigation against staff members of DistributionCo, who filed the import declarations on behalf of TradingCo. Last, but not least, Swiss Customs requested administrative assistance from the country in which TradingCo is established in order to conduct an interrogation of the person in charge of the in-house tax department of TradingCo. This case shows how quickly a company can be facing serious allegations, even if completely unsubstantiated. Swiss Customs accused TradingCo of having committed import VAT fraud of approximately CHF 100 million ($99.2 million) by having under-declared the value of the goods. TradingCo cleared the goods through Customs using the purchase price paid to its various foreign third party suppliers, and was clearly of the opinion that this is in line with the import rules, not only in Switzerland but also worldwide. TradingCo did use its purchase price for the import clearance, as any other Swiss or foreign entrepreneur would have done, and claimed the import VAT paid in full. Which other value should TradingCo have used for the import clearance, given the fact that the goods were imported in the course of a purchase or sourcing transaction? Swiss Customs claimed that the goods should have been imported using the expected sales value in Switzerland, minus a 10% discount for the coverage of local costs (e.g. warehousing, distribution, etc.). It is worthwhile to mention that TradingCo is fully entitled to claim back the W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 2 3

26 V A T import VAT and that no advantage whatsoever resulted for the company. Moreover, since Switzerland levies import duties based on the weight and not ad valorem, the allegations on the import VAT fraud was limited to the import VAT that could be fully claimed by TradingCo. Federal Administrative Court Surprisingly, the Federal Administrative Court (FAC) supported the position taken by Swiss Customs, but with different arguments. The court held, in essence, that the prices charged by the foreign suppliers were not to be taken into account for import clearance purposes because TradingCo was partially organising the transport of the goods from abroad to its own warehouse in Switzerland. The FAC concluded that since the transport was partially conducted by TradingCo, the company had already received the power to dispose the goods outside of Switzerland and that, therefore, the price paid to the foreign suppliers was no longer relevant for the import of the goods. In other words, the sale of the goods from the foreign supplier to TradingCo could no longer be considered relevant as this transaction was overruled just by the fact that TradingCo carried out a part of the transport to Switzerland. The FAC, therefore, ruled that the involvement of TradingCo in the transportation of the goods changed the value to be used for the import into Switzerland. Even though the FAC did not expressly say so in its judgment, the value to be used for the customs clearance formalities would have been different if the foreign suppliers had arranged the entire transport to Switzerland. Contrary to Swiss Customs, the court correctly concluded that the import value could not be the subsequent sales price from TradingCo to DistributionCo minus a discount of 10% for the coverage of local costs. The subsequent sales transactions were only carried out after the goods were stored in the Swiss warehouse of TradingCo and could, therefore, not be taken into account in order to determine the value of the goods at the time of import. The FAC established that the sale transactions carried out between the foreign suppliers and TradingCo were irrelevant due to the transport arrangements between the parties, and also that the sales price between TradingCo and DistributionCo could not be taken into account since the sales transactions happened after the goods were cleared by Customs in Switzerland. As a result, the court correctly came to the conclusion that in such a case, where the purchase transaction is to be disregarded and no sales transaction is leading to the import of the goods, that the value must be the market value. However, this is where it gets really odd: The court first followed the Swiss VAT Act by the word and the international rules of the General Agreement on Tariffs and Trade (GATT) and concluded correctly that the market value is to be understood as the value of the goods in the country of origin. However, the FAC ruled that it was not the price paid by TradingCo as the importer of records that is relevant for the Swiss import clearance, but the purchase price that DistributionCo would have paid to third-party suppliers in the country of origin in order to receive the identical goods. This is despite the fact that the court held TradingCo as the right importer of records and that the sales transaction to DistributionCo could not be relevant for the import. So, even if the court ruled that the local sales price charged by TradingCo for the sales out of its Swiss warehouse was to be disregarded, it considered that the value to be used is the price that the Swiss distributor would have been paid in the country of origin of the goods, even though the court confirmed that TradingCo was the correct importer of records. Moreover, because the court pretended that it could not be established what DistributionCo would have paid in the country of origin in order to purchase similar goods, they concluded that Swiss Customs was entitled to make an educated guess and that therefore the 10% discount on the purchase price payable by DistributionCo was to be confirmed. So, even though the court held that the arguments brought forward by Swiss Customs were incorrect and not justified, it basically confirmed the position taken by Swiss Customs. How absurd the entire case is shows that Swiss Customs, after having engaged penal proceedings against the staff of DistributionCo for filing incorrect customs declarations, closed the file without any further actions against the staff. On the one hand, Swiss Customs claimed that TradingCo committed tax fraud of approximately CHF 100 million, but on the other hand they closed the penal investigations without coming to a conclusion on who committed, or was at least involved, in the CHF 100 million tax fraud. It goes without saying that this result is grotesque and that the decision of the FAC lacks courage to make Swiss Customs see reason. The final say TradingCo appealed against the decision of the FAC and the Federal Supreme Court will have the final say on the question over which value must be used for the import should the power to dispose over the goods be transferred as a result of a split transport organisation. Since every cautious tax adviser knows that the chance to succeed in a court case is at best 50%, the outcome of this fundamental case is yet uncertain. However, it would be more than questionable should the decision be confirmed, and Switzerland would certainly have to explain to foreign parties in the World Trade Organisation how a detail like a split transport responsibility can result in a different value for import purposes and why the local sales price is to be taken into account to estimate a market value in the country 2 4 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

27 V A T Laurent Lattmann Tax Partner AG Taxand Switzerland Tel: laurent.lattmann@taxpartner.ch Désirée Högger Tax Partner AG Taxand Switzerland Tel: desiree.hoegger@taxpartner.ch Laurent Lattmann is a VAT partner of Tax Partner AG. Before joining the firm, Laurent worked for several years with two Big 4 firms, specialising in Swiss and international VAT. He has more than 20 years experience in advising Swiss and multinational clients in numerous industries, including the financial services, insurance and real estate sectors. Tax Partner is one of the leading tax firms in Switzerland. With a team of 38 professionals, the firm advises a range of multinational and national corporate clients, as well as individuals. In 2005, Tax Partner co-founded Taxand the first global network, with more than 2,000 tax advisers and more than 400 partners from independent member firms in nearly 50 countries. Désirée Högger is a Certified Swiss Tax Expert. She started her career in 2012 with an international tax consulting firm. In 2014, she joined Tax Partner AG as an adviser and focuses on Swiss and international VAT. Tax Partner is one of the leading tax firms in Switzerland. With a team of 38 professionals, the firm advises a range of multinational and national corporate clients, as well as individuals. In 2005, Tax Partner co-founded Taxand the first global network, with more than 2,000 tax advisers and more than 400 partners from independent member firms in nearly 50 countries. of origin, especially if the goods come from developing countries where such prices would never be charged. Potential fallout for companies supplying goods from abroad This decision should it be confirmed by the Federal Supreme Court despite being not only technically wrong but also clearly against Swiss law and international agreements that Switzerland committed to observe could have severe impacts on companies selling goods into Switzerland and operating central warehouses in Switzerland from where the goods are distributed to their Swiss customers. First and foremost, Swiss or foreign traders would be at risk for having committed tax fraud, if they were partially involved in the transportation of the goods to their own warehouse and used the purchase price paid to their foreign suppliers as relevant value for the import clearance process. According to our understanding, this would potentially hit all companies who are involved in the transportation of goods to Switzerland irrespectively whether they organise the transport in full or just partially. A closer look of the decision rendered by the FAC indicates that the reason for using a different import value is that the power to dispose over the goods has already been transferred from the foreign supplier to its client. If the power to dispose over the goods becomes decisive for the definition of which import value is to be used, this could also impact the import value of goods supplied to Switzerland using consignment or call-off stocks agreements. For now, Swiss Customs accept that the value agreed upon between the foreign consignor and the Swiss consignee is the value to be used for the import declaration, but if the court decision is confirmed by the Federal Supreme Court and the power to dispose becomes relevant, Swiss Customs might as well claim that the Swiss consignee should have used the price that he would have paid in the country of origin of the goods. Moreover, due to the lack of information, Swiss Customs could estimate the value to be the sales value in Switzerland, less the 10% discount for the coverage of Swiss-based costs of the consignee. Should the margin of the Swiss consignee be higher than 10% of the sales price, he might be at risk as well. As the FAC held that the involvement of the purchaser in the transportation leads to a different value for customs purposes, it could also be that the agreed Incoterms may become relevant to assess which import value should be used for the import clearance. Unless the foreign supplier pays for the entire transportation of the goods up to the Swiss border, the purchase price of the goods could in principle be rejected, should the decision of the FAC be confirmed. Outlook and recommendations The worst-case scenario for Switzerland has not yet been confirmed and trading entities operating either through W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 2 5

28 V A T their own warehouses in Switzerland, or using Swiss consignment or call-off stocks or even Incoterms where the purchaser is partially responsible for the transportation of the goods, do not need to take immediate action. However, should the Federal Supreme Court confirm the judgment of the FAC, traders sourcing goods from foreign suppliers should review their import procedures and adapt accordingly. It is important to note that neither the existing Swiss VAT Act, nor the Customs Act, contain legal provisions that other values than the purchase price paid by the importer of records, or alternatively the market value to be paid by the importer of records in the country of origin of the goods, must be used. Anyone importing goods into Switzerland that uses these two values is entirely in line with the Swiss legislation and should not in anticipatory obedience change the value being used when clearing goods. Since hope always dies last, it is hoped that the Federal Supreme Court makes Swiss Customs withdraw from its wrong position. 2 6 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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30 W I T H H O L D I N G T A X Swiss federal withholding tax: correction of malpractice Swiss taxpayers will gain some welcome tax repayments from the government after amendments to the Federal Withholding Tax Act (WHTA) entered into force. Olivier Eichenberger of KPMG Switzerland discusses the changes. Many Swiss taxpayers, who were charged heavy amounts of late interest as a result of their belated filing of the notification regarding dividend payments, will benefit from an amendment to the WHTA that entered into force on February The Swiss Confederation will have to repay CHF 600 million ($596 million). Background Distributions of the profits of corporations are subject to withholding tax at 35%. In the normal case envisaged in the Act, the company pays 35% to the Federal Tax Administration (FTA) and only 65% to the shareholders. In the case of domestic dividends (Swiss company to Swiss shareholder), the shareholders have to apply for the tax refund by, or in addition to, declaring the distribution as income and they then receive the refund as a separate repayment or as a deduction from their personal income tax liability. The intention is to ensure that the shareholders do in fact declare the receipt of the dividend to the tax authorities responsible for them. Thus, in the Swiss national context, withholding tax has the purpose of safeguarding taxation. In an international context (dividend from a Swiss company to a foreign shareholder) the shareholders may be able to reclaim the withholding tax, in whole or in part, according to the applicable international tax agreement (double tax treaty or EU savings tax agreement). In an international context, therefore, withholding tax primarily has a purpose of charging tax. Where dividends are distributed within a group of companies, the taxpayer can be permitted to perform its withholding tax obligations by making a notification to the FTA where the payment of the tax would lead to unnecessary trouble or to obvious hardship. Provided that the taxpayer fulfils the substantive conditions for being allowed to use the notification procedure, he must declare the taxable payment (the dividend) within 30 days after the date when the claim to tax arose and notify the FTA of it (in an international context, generally if a permit giving permission in principle to use the notification procedure has been granted in advance), or apply for the notification procedure to be used (in a national context). As a consequence of the notification, the obligation to pay the withholding tax ceases to apply. The notification procedure was first introduced in a national context, with the idea of avoiding administrative trouble and the unjustified outflow of liquid funds. The notification procedure thus offers an advantage in cash flow terms, since the shareholder receives 100% of the dividend immediately and, in addition, there is no 2 8 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

31 W I T H H O L D I N G T A X time-consuming refund procedure. The notification procedure is, therefore, used for internal dividends within the group in the majority of all cases. This statutory exception has thus become the general practice. In an international context, there has also been a change from the refund procedure to the notification procedure. In most cases, the above-mentioned 30-day limit begins to run from the date on which the general meeting of shareholders approves the annual accounts and decides to pay the dividend. Should the general meeting decide on a specific (later) due date for payment of the dividend, the time limit starts on that due date. If the notification or the corresponding application is not made within the 30-day time limit, formerly (before 2011) the notification procedure was generally allowed if the other conditions were fulfilled, i.e. the withholding tax did not actually have to be paid, despite the belated filing of the notification, and no late interest was charged. In 2011, in a case concerning the application of the notification procedure for withholding tax and the consequences of a belated notification, the Federal Supreme Court held that the time limit of 30 days mentioned in the Ordinances was to be interpreted as a strict time limit and that the notification procedure could, therefore, not be applied if the notification procedure form was not filed in time. Based on this decision, the FTA considered it legitimate to apply a very inflexible procedure on the notification procedure regarding withholding tax on dividends, without taking into consideration whether the company fulfilled all the substantive conditions for the application of the notification procedure or not. Before 2011, however, belated notifications of dividends were generally accepted without reservation by the tax administration. After 2011, the tax administration refused to approve the application of the notification procedure for dividends in the case of belated notifications (without making a prior announcement of this change of practice, and without any transition period) and demanded that the tax should in effect be paid. This affected both large groups of companies and SMEs equally. Invoices regarding late interest at 5%, allegedly due for the period from the expiry of the above-mentioned time limit until the actual payment of the withholding tax, were then issued by the FTA. However, no tax was actually due because in these cases the substantive conditions for the application of the notification procedure and/or the entitlement to a tax refund were not disputed. Significant claims for late interest arose as a result, varying according to the time that elapsed between the due date of the dividend until the FTA s demand for payment of the withholding tax and/or the actual payment, which were out of all proportion to the taxpayer s erroneous behaviour (belated filing of a form, when all other requirements were fulfilled). The late Olivier Eichenberger Certified Tax Expert, Senior Manager International Corporate Tax KPMG Switzerland Tel: oeichenberger@kpmg.com Olivier Eichenberger is a senior manager with KPMG s international corporate tax group based in Zurich. He has a Doctoral (PhD) and master s degree in business administration (accounting, controlling, finance) and is a certified Swiss tax expert. Olivier joined KPMG Switzerland in 2008 after working for four years as a scientific assistant at the chair of tax law at the University of St. Gallen. Olivier provides tax planning, tax accounting, tax consulting and tax compliance services to various international and Swiss corporates in different sectors, including international restructuring projects and financing. Olivier s areas of work include international and national corporate tax, stamp duties and withholding tax. He also has broad experience in inbound investments into Switzerland and is leading KPMG s working group for the Swiss corporate tax reform where he is closely involved in developments of the Swiss corporate tax legislation. He regularly publishes articles in leading tax publications. interest of 5% thus took on the character of a frequently unreasonably high fine and was not compensated for as is usual where late interest is due by the (here non-existent) advantage gained by the taxpayers of not actually having to pay the withholding tax. Moreover, the charged interest rate of 5% differed considerably from the market interest rate and was incidentally also higher than the maximum rate of interest allowed by the FTA on loans by a shareholder to the company. This led to the FTA demanding a total late interest of CHF 600 million from taxpayers for what are in effect fictitious taxes. For this reason, many taxpayers started legal proceedings with regard to the disputed late interest. As well as the above-mentioned late interest, the taxpayers that were affected also had to pay very large amounts of withholding tax to the FTA in order to stop the late interest growing and so that they could then apply for the refund of this withholding tax on the following day. Such a procedure not only took a disproportionate amount of effort by the taxpayers affected, but in some cases it even led to an existential crisis because, for example, an SME was not in a position to raise the corresponding cash amounts. Furthermore, the procedure was clearly in contradiction to the arguments used W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M 2 9

32 W I T H H O L D I N G T A X with a view to dividends in the Swiss national context when the notification procedure within a group of companies was introduced in 2001, namely that its purpose was to avoid unnecessary trouble and/or unnecessary administrative work for the taxpayer and the tax administration. Political solution This procedure by the FTA caused a considerable loss of confidence and irritation on the part of Swiss and foreign taxpayers and investors, and led to the rule of law being called into question, which alarmed politicians. After exhaustive discussions during the past few years, the Upper Chamber of Parliament, in agreement with the Lower Chamber, passed a retroactive amendment to the Withholding Tax Act in September The result of this was that a belated notification regarding dividends and/or a belated application for the use of the notification procedure should not result in a denial of the notification procedure and thus not lead to late interest, but to a fine (provided that the substantive conditions for the notification procedure are met). Therefore, the change of practice made by the FTA has been reversed. The time limit for starting a referendum on this legal amendment expired on January without being used and the Federal Council put the provisions into force on February Retroactive application of the new provisions The new provisions apply retroactively to situations that occurred before the amendment of the law came into effect, unless the claim for tax or late interest was already statutebarred or finally assessed before January Due to this retroactive application of the new provisions, the cases affected by the unannounced tightening of the practice can, in principle, be corrected. Where a taxpayer has paid late interest from 2011 onwards, although the substantive conditions for the application of the notification procedure were fulfilled, this late interest will now be repaid on application without interest. The application must be filed by February Welcome change The inflexible procedure by the FTA was contrary to the spirit and purpose of the notification procedure and there is no objective justification for the situation where large withholding tax amounts are paid to the tax administration merely due to the late filing of a form, and then have to be reclaimed in a time-consuming process, when it is clear that in the end no withholding tax will remain with the tax authority. It is also difficult to understand from an economic point of view why high late interest claims should arise where no tax will actually remain with the tax authority and the tax authority does not suffer any loss. The strict procedure of the FTA is grossly disproportionate to the taxpayer s misdemeanour (meaning the belated filing of a form). An appropriate fine because of the late declaration or notification accords much better with such misdemeanours. Therefore, it should be noted that this amendment to the Act continues to support the purpose of safeguarding taxation and it does not in any way protect cases where there is no claim to apply the notification procedure or obtain a tax refund. The relief given here will only apply if the substantive conditions for performing the tax obligations by way of the notification procedure are fulfilled. It is undisputed that, if the requirements for the permit in an international context are not met, the notification procedure cannot be applied and late interest is due. In a national context, the FTA also has the possibility to later verify the withholding tax (with interest) being subsequently levied if the notification procedure has been wrongly used. Further, the amendment of the Act is in line with statutory provisions concerning other kinds of tax. In this connection, the provision of the VAT Act (Article 87, paragraph 2) should be noted, which states that no late interest is due if it is the result of an error which, had it been correctly processed, would not have led to loss of tax for the government. Thus, according to the VAT Act (Article 27, paragraph 2 (b)), the FTA would have to waive the levy of VAT that was wrongly shown on an invoice if the taxpayer proves that the government has not suffered a loss of tax as a result. Need for action Companies for which the notification procedure on dividend distributions was not granted during the past few years because of the belated filing of the corresponding forms, and which have consequently paid late interest, should now apply for repayment of the interest by filing form 1 RVZ Application for Repayment of Late Interest Already Paid with the FTA. It is advisable to file the application by registered post, since the burden of proof that the time limit has been met is with the company. Details about the company that paid the interest (including details of its bank account) and about the late interest payment itself (including the attachment of a copy of the late interest statement or the corresponding decision) must be given in the application. No repayment of late interest will be made without an application having to be made. Companies for which the notification procedure on dividend distributions was not granted during the past few years because of the belated filing of the corresponding forms, and which consequently were sent an invoice for late interest, but have not paid any late interest (e.g. in connection with a pending/suspended appeal procedure), should ensure that the invoices are not paid but are cancelled by the FTA. According to the FTA s media release, such late interest invoices should be cancelled without a request having to be made. As soon as the cancellation has 3 0 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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34 W I T H H O L D I N G T A X taken place, a written confirmation should be sent to the companies. In order to obtain clarification in these cases, it is nevertheless advisable to make a request to the FTA using Form 1 RVZ and asking for a confirmation that the late interest is no longer due. For the future Looking ahead, it will still be necessary to ensure that the time limit of 30 days for filing the corresponding forms is met, even if the notification procedure is granted and no late interest is due (provided that the substantive conditions are fulfilled), since the belated filing of the notification procedure will otherwise be punished by a fine up to a maximum of CHF 5,000. When calculating the time limit, weekends are also included. The time limit starts to run either from the date of the general meeting of shareholders, or from the due date fixed at the general meeting. The office responsible for filing the notification procedure must be informed about the events of the general meeting in order to be able to file the forms within the time limit. It is advisable to send the forms to the FTA by registered post so that in case of a dispute it is possible to prove that the notification was made within the time limit. In an international context, with regard to applications for a permit giving permission in principle (forms 823 B / 823 C), it remains advisable to file these in advance of the due date of the dividends and to have the permit extended regularly (before its three-year validity has expired). 3 2 W W W. I N T E R N A T I O N A L T A X R E V I E W. C O M

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