Tax Partner AG – Taxand Switzerland Switzerland · financing activities and is the headquarters for many international groups. Rolf Wüthrich and ... Marc Dietschiof ADB Altorfer

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ADB Altorfer Duss & BeilsteinburckhardtDeloitteKPMG SwitzerlandTax Partner AG – Taxand Switzerland

T A X R E F E R E N C E L I B R A R Y N O 1 1 3

Switzerland 5th edition

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3 Maintaining attractivenessStrengthening Switzerland’s attractiveness for investmentSwitzerland is amending its tax legislation in order to adapt to the latest international develop-ments. David Ryser and Lisa Airoldi of Tax Partner AG – Taxand Switzerland provide anoverview of the improvements in the Swiss tax system that will further strengthen the attractive-ness of Switzerland as an investment and business location.

8 Group financingGroup financing is getting better in SwitzerlandThe Swiss financial centre offers the expertise and access to the financial markets required forfinancing activities and is the headquarters for many international groups. Rolf Wüthrich andNoëmi Kunz-Schenk of burckhardt discuss the proposed changes being made to the legalframework that will further strengthen the financing activities of groups in Switzerland.

13 Privileged to ordinary taxationChange of status from privileged to ordinary taxationThe change of status from privileged to ordinary taxation can already be envisaged before arevised version of the Corporate Tax Reform III (CTR III) enters into force. Fabian Duss andMarc Dietschi of ADB Altorfer Duss & Beilstein explore this possibility and outline why itcould prove beneficial for businesses.

18 Substance-based analysisThe substance-based approach in Swiss income tax lawThe term “substance” in the tax practice can have very different meanings. Peter Brülisauer ofDeloitte discusses how it is of fundamental importance for the purposes of a substance-basedanalysis.

23 VATPlaying with fire – Switzerland deviates from international standards The Federal Administrative Court recently rendered its judgment in a case that might cause sub-stantial headaches to companies supplying goods to Switzerland. Laurent Lattmann and DésiréeHögger of Tax Partner AG – Taxand Switzerland explain the relevant aspects of this case andthe potential fallout if this judgment is upheld by the Federal Supreme Court.

28 Withholding taxSwiss federal withholding tax: correction of malpractice Swiss taxpayers will gain some welcome tax repayments from the government after amendmentsto the Federal Withholding Tax Act (WHTA) entered into force. Olivier Eichenberger ofKPMG Switzerland discusses the changes.

Switzerland

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Switzerland is often discussed when the ethics of international taxcompetition are questioned, but recent events prove the country’swillingness to adapt to the latest international standards.

However, as the landlocked country tries to adapt its tax system tomeet its international commitments, the goal appears to be in direct con-flict with its intentions to remain attractive to foreign investors. As TaxPartner AG – Taxand Switzerland’s article indicates, the country is suc-ceeding 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 bigbusinesses as the place to locate key operations. The article looks atwhat the Swiss financial centre offers and how proposals to amend theSwiss Withholding Tax Ordinance will strengthen the financing activ-ities of groups.However, the onus for change is not always the responsibility of the

government. ADB Altorfer Duss & Beilstein’s article discusses how com-panies can voluntarily abandon a privileged tax status and move to ordi-nary 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 differentmeanings and Deloitte discusses how it is of fundamental importance forthe purposes of a substance-based analysis to avoid disputes – particularlythose involving cross-border operations.Laurent Lattmann & Désirée Högger of Tax Partner AG – Taxand

Switzerland believe cross-border issues for companies are unlikely to goaway soon. In their article, they discuss a recent VAT judgment issued bythe Federal Administrative that will impact companies supplying goods toSwitzerland.However, it’s not all bad news for companies. Many Swiss taxpayers,

who were charged heavy amounts of late interest in relation to dividendpayments, will benefit from a total repayment of CHF 600 million ($596million) from the Swiss Confederation, writes Olivier Eichenberger ofKPMG Switzerland. We hope the fifth edition of this Switzerland guide provides useful

insight as taxpayers seek to navigate a constantly-evolving landscape.

Anjana HainesEditor, International Tax Review

Editorial

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’sattractiveness for investment

Switzerland isamending its taxlegislation in order toadapt to the latestinternationaldevelopments.David Ryser andLisa Airoldi of TaxPartner AG – TaxandSwitzerland providean overview of theimprovements in theSwiss tax system thatwill further strengthenthe attractiveness ofSwitzerland as aninvestment andbusiness location.

Developments at national level in SwitzerlandRejection of Corporate Tax Reform IIIOn February 12 2017, 59.1% of the Swiss voters rejected the federal billon Corporate Tax Reform III (CTR III) adopted by the Swiss parliamentin June 2016. The main goal of CTR III was to align Swiss tax law withthe international tax standards, while retaining the attractiveness ofSwitzerland as an investment and business location. This objective wouldhave been achieved by replacing the privileged tax status regimes for cor-porations with new internationally accepted tax measures effective fromJanuary 1 2019.

The rejection was mainly caused by disagreements on certain new taxmeasures, particularly the introduction of the notional interest deductionon surplus equity and the deduction of more than 100% of research anddevelopment costs incurred in Switzerland. The missing amendment tothe partial taxation of dividends from qualified participations (i.e. of atleast 10%) was also subject of controversy: the bill presented to the votersdid not include the taxation of qualified dividends at 70% as included inthe initial dispatch adopted by the Federal Council because this wasalready rejected by parliament (at present, dividends from qualified par-ticipations are taxed at 60%, although this varies from canton to canton).In addition, the opponents argued that CTR III as adopted by parlia-ment in June 2016 would have caused relevant tax losses to be eventuallyborne by the Swiss population.

As a result of the rejection of CTR III, the corporate tax law remainsin force and corporations may continue to benefit from the privileged taxstatus regimes until a new law enters into force.

In order to maintain Switzerland’s attractiveness as a business and taxlocation and to improve the tax planning options for corporations, theSwiss Federal Council has already instructed the Federal Department ofFinance to prepare a new corporate tax reform proposal by mid-2017.However, it seems improbable that the reform will enter into forcebefore 2020.

In the meantime, cantons may already cut their ordinary corporateincome tax rates to maintain their competitive position as businesslocations. Numerous cantons already boast favourable corporateincome tax rates of 12%-15% (effective pre-tax rates including federalincome tax). Moreover, in the majority of the cantons it is already pos-sible for companies that benefit from privileged tax status regimes todisclose without any tax impact certain hidden reserves (step-up),



which were developed under the privileged tax regime, incases of a voluntary transition from privileged taxation toordinary taxation.

Swiss withholding taxIn principle, a Swiss company has to declare to the SwissFederal Tax Administration (FTA) any dividend distributedto the shareholders within 30 days of its due date (i.e. thedue date decided during the shareholders’ meeting or, if nodue date has been set, the date of the shareholders’ meeting)and to deduct and remit the 35% withholding tax. Theshareholders may then apply to the FTA for the partial orfull refund of the levied withholding tax. In cases of intra-group dividends and hidden dividend distributions, if cer-tain conditions are met, the Swiss company may fulfil itswithholding tax obligation by way of declaring and notifyingthe dividend to the FTA instead of withholding and remit-ting the withholding tax: relief at source is granted by apply-ing the dividend notification procedure.

Based on the Swiss Federal Supreme Court decision ofJanuary 19 2011, the FTA followed a restrictive practiceaccording to which if the Swiss company did not declare andnotify the dividend within 30 days after the due date, itcould not apply the dividend notification procedure and thewithholding tax had to be deducted from the dividend andremitted to the FTA. In addition, the FTA levied interest forlate payments of 5% per annum on the withholding taxowed. While the withholding tax was then partly or fullyrecoverable for the shareholder, the interest for late paymentrepresented a final cost.

According to the revised Swiss Withholding Tax Act,which entered into force on February 15 2017, the restric-tive practice of the FTA is no longer applicable. This meansthat Swiss companies can apply the dividend notificationprocedure even if the dividend is not declared and notifiedwithin the 30-day period, as long as the material conditionsfor this are met. Furthermore, in this case, no interest forlate payment is owed. However, as a consequence of the latefiling, an administrative penalty limited to CHF 5,000($5,000) can be levied.

The new provisions are applicable retroactively fromJanuary 1 2011 and interest for late payments levied sincethis date can be recovered within one year after the amendedlaw came into force, i.e. by February 14 2018, provided thatthe tax liability and the interest for late payments have notpassed the statute of limitations and have not been finallyassessed prior to January 1 2011.

The new legislation is a positive signal for domestic andinternational corporate groups in Switzerland.

Developments at international level in SwitzerlandSpontaneous exchange of information on tax rulingsIn 2013, Switzerland signed the Multilateral Convention onMutual Administrative Assistance in Tax Matters (MAC),which was later ratified in 2016.

Along with Action 5 of the BEPS Report 2015,Switzerland has now introduced into domestic legislationthe mandatory minimum standard for a spontaneousexchange of information on tax rulings. The implementa-tion has taken place by way of a revision of the Federal Acton International Administrative Assistance in Tax Matters,together with a revision of the Federal Ordinance onInternational Administrative Assistance in Tax Matters, andboth entered into force on January 1 2017. The informationexchange begins a year later on January 1 2018 and coverstax rulings that were issued after January 1 2010 and whichwill still be applicable on January 1 2018.

Tax rulings are defined in the revised ordinance as anyinformation, confirmation or assurance of a tax administrationthat is given to the taxpayer, which describes the tax conse-quences of the facts as presented by the taxpayer, and onwhich the taxpayer can rely. In line with the recommendations

David RyserTax Partner AG – TaxandSwitzerland

Tel: +41 44 215 77 [email protected]

David Ryser is an attorney and certified Swiss tax expert.Before turning his interest to tax, he worked as a corporatelawyer with two leading corporate law firms in Zurich. He thenjoined EY, Zurich, where he became a partner in 1994. Davidwas active there as the practice leader in international tax andgained extended experience in the fields of individual and cor-porate national and international taxation. In 1997, David co-founded 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 atselected important tax seminars and has published variousarticles on international and national tax themes. Further activi-ties include the membership on selected boards of directors ofvarious companies in Switzerland as well as membership ofvarious professional organisations.Tax Partner is one of the leading tax firms in Switzerland.

With a team of 38 professionals, the firm advises a range ofmultinational and national corporate clients, as well as individu-als. In 2005, Tax Partner co-founded Taxand – the first globalnetwork, with more than 2,000 tax advisers and more than 400partners from independent member firms in nearly 50 countries.



of the OECD, the revised ordinance entails five categoriesof tax rulings covered by the spontaneous exchange ofinformation:1) Rulings on preferential tax regimes, e.g. rulings on the

taxation of holding companies, domiciliary companies,mixed companies, or principal companies, or rulings onthe reduced taxation of revenues from intellectual prop-erty rights;

2) Unilateral rulings with cross-border implications regard-ing transfer pricing;

3) Rulings with cross-border implications regarding thereduction of taxable profit in Switzerland that is not dis-closed in the financial statements;

4) Rulings regarding the existence or non-existence of per-manent establishments and the respective profit alloca-tion; 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 parentcompany are among the recipient countries. In addition, therecipients include the countries of domicile of those groupcompanies (with at least 25% participation) whose transac-tions with the Swiss taxpayer are covered by the rulingsmentioned above and the countries of domicile of thosegroup companies with a permanent establishment inSwitzerland and vice versa.

The potential consequences of the spontaneous informa-tion exchange on tax rulings have to be assessed individually.If a taxpayer wants to avoid the exchange, existing tax rul-ings should be rescinded by the end of 2017.

Automatic exchange of information on financial accountsIn 2014, the OECD adopted the new global standard forthe automatic exchange of information in tax matters(AEOI) regarding financial accounts.

Under the AEOI, certain financial institutions, likedeposit-taking banks, custodial institutions, certain invest-ment entities and certain insurance companies, have to col-lect financial information on their clients as long as they areresident abroad for tax purposes. These financial institutionsautomatically transmit client details and tax-relevant finan-cial data to the tax authorities in their country, which thenforward this information to the tax authorities in the client’scountry of residence.

By the end of 2016, 101 states had committed them-selves to this global standard. Of these jurisdictions, 54 willstart to exchange information in accordance to the AEOIstandard from 2017, the remaining 47 countries, includingSwitzerland, from 2018.

At international level, the AEOI implementation can pro-ceed based on two models:1) It is either possible to agree to AEOI implementation in

bilateral treaties (AEOI Agreement) (Model 1); or

2) The AEOI can be implemented on the basis of theMultilateral Competent Authority Agreement onAutomatic Exchange of Financial Account Information(MCAA), which must be activated bilaterally betweenthe signatory states by means of notification to the sec-retariat of the coordinating body (AEOI JointDeclaration) (Model 2).At national level, the AEOI is implemented by means of

the Swiss Federal Act on the International AutomaticExchange of Information (AEOI Act) and the Ordinance onthe Automatic International Exchange of Information onTax Matters (AEOI Ordinance). The legal provisions for theintroduction of the AEOI in Switzerland came into force onJanuary 1 2017. In 2017, the reporting financial institutionsin Switzerland and the partner countries will collect financialinformation from their customers for the first time. Thenational tax authorities will then exchange this informationwith each other from 2018.

In 2015, Switzerland signed the AEOI Agreement withthe EU, which applies to all EU member states and replaces

Lisa AiroldiTax Partner AG – TaxandSwitzerland


Lisa Airoldi is a senior adviser at Tax Partner AG, the leadingindependent Swiss firm of tax advisers. Lisa is a Certified SwissTax Expert and holds a master’s degree in banking and financefrom the University of St. Gallen. Her career started in 2006with UBS AG, where she completed the Wealth ManagementGraduate Training Program and worked for the wealth planningdivision. In 2009, Lisa changed to corporate tax consulting andmoved to EY in Zurich, working on national and internationalprojects mainly for banks, asset management and insurancecompanies. In 2013, Lisa joined Tax Partner AG.Lisa’s activities are mainly focused on national and interna-

tional tax planning and reorganisations, as well as on all taxaspects in the area of banking, asset management and finan-cial 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 ofmultinational and national corporate clients, as well as individu-als. In 2005, Tax Partner co-founded Taxand – the first globalnetwork, with more than 2,000 tax advisers and more than 400partners from independent member firms in nearly 50 countries.



the taxation of savings agreement between Switzerland andthe EU that had been in force since 2005. The AEOI agree-ment entered into force on January 1 2017 and Switzerlandand the EU will collect data from 2017 and mutuallyexchange these data from 2018. This new agreement withthe EU replaces also the withholding tax agreements withAustria respectively with the UK, which concerned the reg-ularisation of assets held in Switzerland by Austrian respec-tively UK taxpayers and the taxation of income generated bythese assets; these withholding tax agreements were termi-nated on January 1 2017. The AEOI with the UK has beenintroduced by virtue of the agreement with the EU despitethe Brexit vote and will remain in effect until the UK’s exithas actually taken effect.

Switzerland also activated the MCAA with effect fromJanuary 1 2017 with Australia, Iceland, Norway, Guernsey,Jersey, Isle of Man, Japan, Canada and South Korea. Datacollected from 2017 will presumably be mutually exchangedfrom 2018.

In order to continue to ensure the integrity, credibility,attractiveness and stability of its financial centre and positionas a business location, Switzerland intends to further expandits AEOI network. To date, the Swiss Federal Departmentof Finance has already initiated the consultation on intro-ducing the AEOI with an approximate additional 40 statesand territories. The implementation of the AEOI is plannedfor January 1 2018 so that the first exchange of informationwill take place in 2019.

Finally, since 2015 Switzerland has been negotiating theimplementation of FATCA Model 1 with the US, accordingto which data would be exchanged automatically betweenthe competent authorities on a reciprocal basis. At present,FATCA is implemented in Switzerland based on Model 2,which means that Swiss financial institutions discloseaccount details directly to the US tax authorities with theconsent of the US clients concerned.

Automatic exchange of information on country-by-countryreportsOn January 27 2016, 31 countries, including Switzerland,signed the Multilateral Competent Authority Agreement onthe Exchange of Country-by-Country Reports (CbCMCAA), which is based on the MAC ratified by Switzerlandin 2016 that entered into force this year. In order to createthe legal basis for the implementation of the automaticexchange of country-by-country reports in Switzerland, atthe end of November 2016 the Swiss Federal Council sub-mitted the CbC MCAA and the respective Federal Act onthe International Automatic Exchange of Country-by-Country Reports of Multinationals for approval to parlia-ment. If parliament approves the proposal and noreferendum is held, the CbC MCAA and the Federal Actcould enter into force at the end of 2017.

In Switzerland, multinationals in scope of the CbCMCAA would be obliged for the first time to file with theSwiss Federal Tax Administration a CbC report with respectto the fiscal year beginning on or after January 1 2018 with-in 12 months after their fiscal year ends. It is expected thatthe first exchange of CbC reports between Switzerland andits partner states would take place during the first half of2020. In the meantime, however, CbC filings for sub-sidiaries of Swiss groups in other participating countries, willhave to be made as early as the 2017 business year, whichinvolves special planning and organisation.

Multilateral instrument to modify double tax treatiesThe OECD announced on November 24 2016 that, alongwith Action 15 of the BEPS Report 2015, more than 100jurisdictions, including Switzerland, have concluded negoti-ations on a multilateral instrument (MLI), which will trans-pose results from the OECD/G20 BEPS Project intoexisting double tax treaties worldwide.

The MLI has been ready for signing since the end ofDecember 2016. A first high-level signing ceremony willtake place in the week beginning June 5 2017, with theexpected participation of a significant group of countries.

The Swiss Federal Council has not yet decided whetherSwitzerland will sign the MLI. If Switzerland does sign theMLI, the Federal Council will submit a provisional list set-ting out the countries and territories in respect of which theMLI should apply for Switzerland as well as the double taxtreaty provisions that Switzerland is considering to amend.Once the MLI has been signed, the Federal Council willhold a consultation process and then submit its dispatch toparliament.

Double tax treatiesSwitzerland has more than 100 double tax treaties in placeand is continuously expanding its network of treaties. By theend of 2016, Switzerland had signed 54 double tax treatiesin accordance with the international standard on exchangeof information upon request as entailed in Article 26 of theOECD Model Tax Convention on income and capital, ofwhich 50 were in force.

In 2016, new double tax treaties entered into force withLiechtenstein and Oman. Furthermore, protocols for theamendment of the double tax treaties with France, Italy,Norway and Albania entered into force. With this amend-ment, these treaties became standard-compliant with respectto administrative assistance.

Additional double tax treaties or protocols for theamendment of existing double tax treaties should be signedby Switzerland in order to further increase the number ofdouble tax treaties with the provision on the exchange ofinformation upon request as per the OECD internationalstandard.



Tax information exchange agreementsBesides double tax treaties, Switzerland also has agreementswith other states and territories on tax informationexchange, which only cover the exchange of informationupon request and do not serve to avoid double taxation.

By the end of 2016, Switzerland had signed 10 tax infor-mation exchange agreements, of which nine were in force.The agreements with Belize and Grenada came into force in2016, while the one with Brazil was approved by the Swissparliament in December 2016 but is not in force yet.

G R O U P F I N A N C I N G


Group financing is gettingbetter in Switzerland

The Swiss financialcentre offers theexpertise and access tothe financial marketsrequired for financingactivities and is theheadquarters for manyinternational groups.Rolf Wüthrich andNoëmi Kunz-Schenkof burckhardt discussthe proposed changesbeing made to thelegal framework thatwill further strengthenthe financing activitiesof groups inSwitzerland.

A lthough Switzerland is a very attractive financial centre for interna-tional groups, financing activities including cash-pooling are oftencarried out outside of Switzerland. While the know-how and facil-

ities for financing activities are readily available in Switzerland, the taxenvironment is not fostering group financing. Specifically, the Swisswithholding tax of 35% levied on bank interest, as well as interest pay-ments on bonds issued by a Swiss resident company or the Swiss regis-tered branch of a foreign resident company, is a big disadvantage andmakes investments in Swiss bonds unattractive for many foreigninvestors. In 2010, an amendment to the Swiss Withholding TaxOrdinance (WTO) brought the first relief for foreign groups. InSeptember 2016, the Federal Council initiated the consultation proce-dure to amend the WTO that will now further strengthen the financingactivities of groups in Switzerland.

“Bonds” within the meaning of the Withholding Tax Act (WTA)For withholding tax purposes, the term “bonds” is broader than undersecurities law and includes debenture certificates and other debt instru-ments 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”, datedApril 1999; hereafter the “guidelines”). Under the guidelines, “bonds”are defined as written recognitions of debt made out in fixed amountsand that are issued in several numbers for the purpose of collective fundraising, 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 and20 rule): • Loan debentures (Anleihensobligationen), which exists where a Swissresident person raises money from more than 10 creditors (wherebyqualifying Swiss and foreign banks are not taken into consideration)against the issuance of recognition of debts at identical conditions, andthe aggregate loan principal is at least CHF 500,000 ($493,000). Theidentical conditions test is met if the debt instruments are linkedtogether through uniform terms of interest, term and repayment con-ditions or other circumstances (in particular the reference to the aggre-gate loan amount), under which they appear to form part of one wholedebenture (i.e. also in cases of a syndication of a loan). However, theexistence of a loan debenture subject to withholding taxes does not



depend on the amount of loan principal granted by eachrelevant creditor, i.e. the tax liability cannot be avoided byissuing debt instruments with differing face amounts.

• Cash debentures (Kassenobligationen), which existwhere a Swiss resident person raises money from morethan 20 creditors (whereby qualifying Swiss and for-eign banks are not taken into consideration) againstissuance of recognition of debts on a continuous basisat differing terms, and the aggregate loan principal is atleast CHF 500,000. Contrary to the loan debenture, acash debenture does not require that the debt instru-ments are issued at identical conditions. Hence, a cashdebenture exists even though the terms of interest andthe term and repayment conditions differ from oneinstrument to another, provided that all the otherabove listed conditions are met.

“Bank” within the meaning of the WTAThe term “bank” for withholding tax purposes is muchbroader than commonly used and may also apply to groupinternal financing companies. A debtor is qualified as a bankfor Swiss withholding tax purposes if:• The aggregate number of non-bank lenders to that Swissentity under all of its interest bearing liabilities exceeds100; and

• The total of the company’s interest bearing liabilitiesreaches at least CHF 5 million.

Earlier legislative measures to facilitate group financingactivitiesIn order to facilitate financing and treasury functions inSwitzerland, a new Article 14a was introduced to the WTOwith effect as from August 1 2010. According to this provi-sion, loans or deposits between companies that are fully con-solidated in the consolidated financial statements of a groupin accordance with an internationally accepted accountingstandard do not qualify as bonds or bank deposits within themeaning of the WTA, irrespective of the currency, interestrate applied or duration of such borrowing. The consolida-tion criterion basically requires a participation representingmore than 50% of the voting rights in a company. The ben-efit of the exception of intragroup loans and deposits fromthe definition of bonds or bank deposits is twofold. On theone hand, there is no withholding tax on interest paymentson such instruments even if the Swiss resident borrower hasissued bonds within the meaning of the WTA. On the otherhand, such intragroup liabilities do also not have to be takeninto account when applying the above outlined 10, 20 or100 creditor thresholds. However, this rule does not apply in cases where a Swiss

parent company guarantees a foreign bond issued by one ofits subsidiaries. The reason for this exemption for Swissgroups is that it would allow them to issue foreign bonds

through one of its subsidiaries and to repatriate the funds toSwitzerland via intragroup loans or deposits without havingto pay Swiss withholding tax on the interest payments.

Reform of the withholding tax systemIn order to sustainably resolve the problems of financingactivities out of Switzerland, the Federal Council proposeda profound reform of the WTA and a switchover to the pay-ing agent principle for interest payments. The paying agent principle would – for interest withhold-

ing tax purposes – no longer differentiate between Swiss andforeign debtors, but rather between Swiss and foreign recip-ients, irrespective of the residence of the debtor of the inter-est. The project was sent for consultation to all interestedparties in December 2014. However, the reform has beensuspended because the Federal Council is awaiting the out-come of the vote on the popular initiative “Yes to protectingprivacy”. The subsequent timetable is unknown and will certainly

take some more years.

Proposal by the Federal Council to strengthen financingactivities of Swiss groupsAgainst the background of the still uncertain timeline of apotential profound reform of the Swiss withholding tax sys-tem (switchover to paying agent principle) and in the lightof the global trends such as the OECD’s BEPS Project, theFederal Council is proposing a new amendment to theWTO to enhance the appeal of Switzerland as a businesslocation. The Federal Council fears that some structures used by

Swiss groups for group internal treasury functions, groupfinancing and cash pools lack adequate substance and func-tions and could therefore be challenged by foreign taxadministrations based on substance requirements, transferpricing rules or more generally based on informationreceived through the country-by-country reports. The proposed regulation would allow Swiss groups to

locate group financing and cash pooling functions inSwitzerland together with other main group functions.Structures designated for group financing and cash poolingactivities should no longer be necessary and consequently,the risk of inclusion of profit from financing activities by for-eign tax administrations should be reduced.Groups established in Switzerland often carry out tar-

geted financing activities abroad. In this way, they avoidwithholding tax, which would be due in certain situationswere they to conduct the financing via group companiesestablished in Switzerland (e.g. when issuing a bondthrough a foreign group company with a guarantee by theSwiss parent company and at the same time, funds raisedthrough the bond are used in Switzerland). The Swisseconomy thereby misses out on some of the added value in


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the financing sector. The Federal Council aims to retainthis added value in Switzerland. The proposed amendment concerns those groups in

which a Swiss group company provides a guarantee for abond issued by a foreign group company belonging to thesame group. Under the existing legal framework, the inter-est payments on the bond issued by the foreign group com-pany are not subject to Swiss withholding tax, provided thefunds raised through the bond are not used in Switzerland.According to the proposed amendment by the FederalCouncil, forwarding funds from the foreign issuer to agroup company established in Switzerland will be possibleup to the maximum amount of the equity capital of theissuer without triggering Swiss withholding tax on the inter-est payments of the bond. The burden of proof that theamount of funds forwarded from the foreign issuer to aSwiss group company is less or equal to the equity of the for-eign issuer lies with the Swiss guarantor of the foreign bond.The proposed amendment of the WTO which, in princi-

ple, aims to facilitate group financing activities inSwitzerland for Swiss groups contains a further change thatwill be beneficial for group financing activities in general.According to the legal framework, only loans or depositsbetween companies that are fully consolidated in the consol-idated financial statements of a group qualify for the intra-group exemption and, therefore, related interest payments

are not subject to Swiss withholding tax. According to theproposal of the Federal Council, the exemption will bebroadened to include not only loans and deposits betweengroup companies that are fully consolidated, but alsobetween group companies that are partially consolidated.

Appraisal of the proposal by the Federal CouncilThe Federal Council’s proposal should be welcomed as itintends to facilitate group financing activities in Switzerland.As identified by the Federal Council, structures (solely) set-up for tax planning reasons will face more and more chal-lenges at an international level. Various actions under theOECD’s BEPS Project intend to combat low substancestructures and potentially questionable risk allocations. Atthe same time, the global financial crisis has led to tremen-dous state debt and a search by tax administrations for newand/or broadened sources of income. Multinational initiatives, as well as unilateral measures,

intend to tackle tax evasion and at the same time exploit newrevenue streams. New reporting obligations, such as coun-try-by-country reporting, provide for more informationbeing available to tax administrations. The risk of tax dis-putes and double taxation is on the rise. Against this back-ground, the aim of the Federal Council to foster thecombination of intragroup financing activities with otherheadquarter functions should be welcomed. However, the

Rolf Wüthrichburckhardt Ltd.

Mühlenberg 74010 Basel, SwitzerlandTel: +41 61 204 01 [email protected]

Rolf Wüthrich is an international tax lawyer, focusing his expert-ise on domestic and international tax planning, inbound andoutbound transactions, especially between the US andSwitzerland, corporate restructuring and acquisitions, as well asgeneral corporate secretarial services.

Noëmi Kunz-Schenkburckhardt Ltd.

Mühlenberg 74010 Basel, SwitzerlandTel: +41 61 204 01 [email protected]

Noëmi Kunz-Schenk’s areas of expertise are domestic andinternational tax issues and tax planning, particularly in corpo-rate reorganisations, restructurings, structured finance, financialproducts, acquisitions and divestments, as well as high-netwealth individuals.

burckhardt Ltd. provides its clients and their businesses withcomprehensive, tailored advice on national and internationaltax planning issues and structuring, offers corporate secretarialand notary service, supports clients with professional expertiseand broad international experience on restructurings, mergersand acquisitions, joint ventures and corporate financing. It alsoadvises on inbound and outbound investments and in all mat-ters related to employment, trade and transport law and privateclients.



question remains over whether the proposed new rules willhave the desired effect.Given the uncertain timeline for the also uncertain

switchover to the paying agent principle for interest pay-ments, an interim solution based on the existing legalframework makes sense. While the broadened definition ofloans and deposits, which fall under the exception of Article14a of the WTO (i.e. loans and deposits between compa-nies that are fully or partially consolidated in the consoli-dated financial statements of a group), will theoreticallyfacilitate group financing activities in Switzerland, it isquestionable whether the threshold of funds stemmingfrom a foreign bond that may be used in Switzerland underthe proposed new rules will be sufficient to repatriate groupfinancing functions to Switzerland. The forwarding offunds from the foreign issuer to a group company estab-lished in Switzerland will be possible up to the maximumamount of the equity capital of the issuer. However, inpractice the foreign issuers do not tend to be heavily capi-talised. 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 for-eign bond. Consequently, the administrative burden toadequately document any financial streams and closelymonitor the threshold is likely to be significant. As thefinancial consequences of breaching Article 14a by forward-ing funds in excess of the maximum amount that may beforwarded to Swiss group companies are significant, theoption of a foreign group financing and cash-pooling activ-ity might still be more appealing to many Swiss groups. Overall, the proposed rules are a step in the right direc-

tion but cannot entirely solve the Swiss withholding taxissue related to group financing activities. It remains to beseen what will be the outcome of the consultation processand, more importantly, the potential changes that might beintroduced by the Swiss parliament. However, in order toprovide for a really attractive withholding tax environmentfor group financing activities in Switzerland, the WTArequires some profound reforms such as the switchover tothe paying agent principle.

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

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

Change of status fromprivileged to ordinary taxation

The change of statusfrom privileged toordinary taxation canalready be envisagedbefore a revised versionof the Corporate TaxReform III (CTR III)enters into force.Fabian Duss and MarcDietschi of ADBAltorfer Duss &Beilstein explore thispossibility and outlinewhy it could provebeneficial forbusinesses.

Switzerland’s corporate tax law recently faced substantial pressurefrom the EU, the OECD and G20 member states. As a conse-quence, the CTR III was initiated a few years ago. The CTR III was

subject to a referendum on February 12 2017 but was not supported bya majority of the Swiss voting population. Irrespective of this result, it isto be expected that the cantonal preferential tax regimes available inSwitzerland (e.g. holding companies, mixed companies and domiciliarycompanies) will be abolished over the coming years due to internationalpressure. In any case, it is anticipated that a revised bill, including severalmeasures already foreseen by the CTR III, will be published shortly. Thisarticle focuses on the possibility of a change of status from privileged toordinary taxation before a revised version of the tax reform enters intoforce.

BackgroundSwitzerland has a long-standing track record as one of the most attractivelocations when it comes to corporate income taxation in Europe. Thecorporate income tax rates, although varying quite considerably betweendifferent cantons and municipalities, are generally moderate (between12% and 24%, likely even subject to further reductions). Moreover, thereare numerous possibilities to defer corporate income taxation by meansof accelerated depreciation schemes, lump-sum valuation allowances onassets and accounting for provisions.In addition, Switzerland’s corporate tax law includes several preferen-

tial tax regimes, leading to an even more attractive taxation of incomefrom certain mobile functions such as group financing, exploitation ofintellectual property and international trading activities. Faced with pres-sure from the EU, the OECD and G20 member states, the preferentialtax regimes were reviewed in recent years. The analysis led to the conclu-sion that the preferential regimes are no longer in line with internationalbest 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 lat-est developments in international taxation, in particular the OECD’sBEPS reports, were taken into consideration. The government intendedto abolish the preferential tax regimes and to replace them with counter-measures that are fully compliant with the BEPS reports as part of theCTR III. However, the reform was not supported by a majority of theSwiss voting population on February 12 2017. As a result, the tax legis-



lation remains unchanged. It is now expected that a revisedbill with adapted content will be prepared but it is ratherunclear how long it will take until the new reform proposalwill be available. Due to the concessions made to the EUand the OECD, it is expected that the preferential taxregimes will be abolished irrespective of further develop-ments in connection with the tax reform in the comingyears.

Change of statusThe change of status from privileged to ordinary taxation isan immediate consequence of the abolishment of preferen-tial tax regimes, one of the measures foreseen as part of theCTR III. However, a change of status from privileged toordinary taxation is already possible today, i.e. a privilegedtax status can be abandoned voluntarily before a preferentialregime is abolished. The question is how hidden reservesthat have been built during a preferential regime will betreated upon transition into ordinary taxation. The CTR IIIcontained specific rules for this exercise and this measure ofthe tax reform was undisputed. It needs to be considered that the question of the realisa-

tion of hidden reserves does not only crop up in the contextof changes from privileged taxation to ordinary taxation, butalso for companies moving to and from Switzerland.According to the rules foreseen by the tax reform, hiddenreserves can also be released tax neutrally in case of reloca-tions to Switzerland or transfer of functions intoSwitzerland.

Applicable law From a tax planning perspective, it is interesting to notethat, in certain cases, a voluntary change of status beforepreferential tax regimes are abolished can be advantageous.The change of status will become mandatory for all compa-nies benefitting from tax privileges once the revised taxreform enters into effect, at the latest.

Functionality In case of a change of status, the tax treatment of hiddenreserves depends upon the respective cantonal tax law andpractice. The change from privileged taxation as a holding,mixed or domiciliary company to ordinary taxation onlyaffects cantonal taxes. Some cantons have issued respectiveregulations. However, the practice of the cantons is not con-sistent. In principle, two models are applied, as outlinedbelow:• Step-up in basis of assets comprising hidden reserves gen-erated during the time of a tax privilege (so-called “step-up” model): The hidden reserves are realised for taxpurposes by way of a tax-neutral step-up in basis at thetime of the change of status. The assets concerned arethen amortised over a specified period of time. The step-

up and corresponding amortisation will only be repre-sented in the tax balance sheet, i.e. no commercialaccounting takes place. Amortisation of the realised hid-den reserves leads to a reduction in the taxable profit oncantonal level. However, thought should also be given tothe fact that the step-up does result in an increased capitaltax basis. Further, companies applying accounting stan-dards that are in line with the “true and fair view” prin-ciple (e.g. IFRS, US GAAP) are subject to a one-timeeffect in the form of deferred tax income as a result of thestep-up; and

• Determination of hidden reserves generated during thetime of a tax privilege (so-called “pro memoria” model):The amount of hidden reserves is determined at the timeof the change of status. When realised at a later point intime, the hidden reserves are not, or only partly, subjectto ordinary taxation, as they were generated during thetime of a tax privilege. A “pro memoria” model was alsoforeseen under the CTR III.

Arising questionsThe specific features of these two models differ according tothe practices of the individual cantons. However, the follow-ing key questions arise in either model:• Which valuation method will be used to quantify the hid-den 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 ofstatus?

• How long will the transitional effect (e.g. amortisationperiod) 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 thechange of status and, in particular, the step-up and releaseof hidden reserves generated during the time of a cantonaltax 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 identicalfor both models. In any case, a recognised valuation methodshould be applied (e.g. so-called “Praktikermethode” as pub-lished in a circular letter of the Swiss Tax Conference or adiscounted cash flow approach).

Practice of the canton of ZurichThe canton of Zurich has taken up the questions above andissued an official note on September 22 2016 regarding thechange of status from privileged to ordinary taxation by wayof a step-up. The note stipulates the following:• A company can release its hidden reserves (to the extentof a prior tax exemption) at the time of a change of status



without tax consequences and amortise the hiddenreserves going forward. The hidden reserves released aresubject to capital taxes at cantonal level (provided theyhave not been amortised in prior years). Capital taxes willno longer be calculated using privileged tax rates. Thevoluntary release of hidden reserves is possible up to thelast tax year before the (revised) tax reform enters intoforce;

• In general, hidden reserves can only be released tax neu-trally to the extent that they have been created under atax privilege. As a consequence, hidden reserves on realestate of holding, domiciliary or mixed companies cannotbe released tax neutrally (since income from real estate issubject to ordinary taxation under all tax regimes).Hidden reserves on assets of domiciliary or mixed com-panies can only be released tax neutrally to the extent ofthe applicable (i.e. tax exempt) quota of foreign income.In relation to qualifying participations of holding, domi-ciliary or mixed companies, only the difference betweeninitial acquisition costs and corporate income tax values isaffected by a change of status. The reason behind this isthat the participation exemption applies for the differ-ence between initial acquisition costs and sales proceeds(i.e. this difference is tax free).

• For cantonal tax purposes, losses incurred under the taxprivilege of holding companies can no longer be offsetafter a change of status. Losses incurred under the taxprivileges of mixed or domiciliary companies can only beoffset with future profits to the extent of the previoustaxable quota (note: ordinary taxation applies at federallevel under the cantonal tax regimes mentioned); and

• The hidden reserves released as part of a change of statusmust be amortised within 10 years. The amortisation issubject to the maximum relief of the cantonal tax base of80% as foreseen by the CTR III (note: this rule wasmandatory 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 taxruling regarding the amount of the step-up, the allocationof hidden reserves to the assets as well as the amortisationperiod should be obtained.

New law The CTR III did foresee a uniform regulation for all cantonsfor the treatment of hidden reserves in case of a change ofstatus to ordinary taxation. This regulation will likely notchange in principle under a revised corporate tax reform.

Fabian DussADB Altorfer Duss & Beilstein AG


Fabian Duss is one of seven partners at ADB Altorfer Duss &Beilstein in Zurich and has a broad experience in both domes-tic and cross-border tax matters.

He works mainly in the area of national and internationalcorporate tax, with a particular focus on effective supply chainmanagement, transfer pricing, restructuring and corporatetakeovers. He also advises clients in relation to capital markettransactions and collective investments and industry-specificissues regarding banks, insurance companies and asset man-agers. In addition, Fabian advises family offices and executives.

Fabian achieved a master’s degree in business administra-tion in 2004 and has since been specialising in tax law. He isa Certified Tax Expert, holds an LLM in international tax lawfrom the University of Zurich and acts as lecturer for corporatetax law at the academy of the Swiss Institute of CertifiedAccountants and Tax Consultants.

Marc Dietschi ADB Altorfer Duss & Beilstein AG


Marc Dietschi works predominantly in the area of internationalcorporate tax with a particular focus on transfer pricing, interna-tional tax planning and tax effective supply chain manage-ment. He also advises private clients on tax and social securityissues.

He achieved a MA in accounting and finance in 2007 andhas since been specialising in transfer pricing and tax law. Heis a Certified Tax Expert.



According to the legislation of the CTR III, it is intendedthat the amount of hidden reserves will be determined at thetime of the change of status (pro memoria model). This willbe done by means of an assessment. Companies will receivea questionnaire on the existing hidden reserves. Oncereturned, the amount of hidden reserves will be examinedand determined by way of assessment. It is thereby explicitlystated that hidden reserves also include self-generated good-will. Insofar as the determined hidden reserves are realisedwithin five years following the change of status, they will besubject to a special, lower tax rate. The level of the applica-ble tax rate for the five-year period is to be determined byeach canton individually.

Companies should undertake analysisAs described above, there might be significant differencesbetween existing regulations and practices of the cantons andthe legislative text foreseen by the CTR III when it comes tothe change of status from privileged to ordinary taxation. Asthe approach in a revised tax reform is likely to be similar tothe version of the CTR III it is worthwhile for companies tocompare the scenario of an early voluntary change of statusfrom privileged to ordinary taxation based on actual andbudget figures. Depending on the actual facts and circum-stances, the step-up model appears to be more advantageoussince all hidden reserves can be used for subsequent amortisa-tion (at least in case there will be no limitation of the amorti-

sation period based on cantonal regulations or based on thetax reform). In the model, according to the CTR III, the par-ticular question arises as to if and to what extent the hiddenreserves can be realised within the timeframe of five years.The abolishment of the tax privileges is in any case nec-

essary in order to avoid further pressure from both the EUand the OECD. Therefore, a potential change of status forcompanies benefitting from a cantonal tax privilege shouldbe analysed now as part of the tax planning process.

Revised tax reform being preparedThe opponents of the CTR III only disagreed with certainmeasures of the reform, namely the notional interest deduc-tion and the insufficient increase of the taxation of dividendsat the level of individual shareholders. As such, the reformand the other measures of the CTR III were not disputed. This particularly applies for the abolishment of the pref-

erential tax regimes. Therefore, it is expected that a reviseddraft with adapted content will be prepared soon. If thesetwo aspects mentioned above will be amended, it may bepossible to get the revised bill passed shortly, but only timewill tell when those changes can effectively be implemented.The Swiss Federal Council announced that the key elementsof the revised reform will be communicated by the end ofJune 2017. However, it is unlikely that the reform will beready by the beginning of 2019. Instead, a delay betweenone to three years has to be anticipated.

S U B S T A N C E - B A S E D A N A L Y S I S


The substance-basedapproach in Swiss income taxlawThe term “substance”in the tax practice canhave very differentmeanings. PeterBrülisauer of Deloittediscusses how it is offundamentalimportance for thepurposes of asubstance-basedanalysis.

T here is no definition of the term “substance” in Swiss private law ortax law. In economic terms, the issue of substance is above all asso-ciated with the concepts of value added, processes, functions, peo-

ple, assets, risks, etc. For tax purposes, the concept of substance is mostoften brought up in connection with the terms operationally justified,caused by operations, domicile, right of use, misuse, etc. These lists showthat the concept of substance has many different interpretations and is,therefore, to be understood in a relative sense. This means that the con-cept of substance takes on a different meaning and content depending onwhether it is being used in reference to the real, financial or digital econ-omy. As such, industry-specific considerations are of fundamental impor-tance 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 asso-ciated with significant potential for conflict. At an international level,classification conflicts are more or less inevitable because at least two dif-ferent tax jurisdictions are involved that can/will represent different per-spectives on legislation and the application of the law. One specificexample of this are the diverging perspectives of the industrialised andemerging economies – especially the BRIC countries (Brazil, Russia,India and China). While the industrialised economies prioritise educationand, therefore, intangible assets, the emerging economies pay moreattention to the factor of practical labour and, therefore, tangible assets.These differing viewpoints can become particularly relevant in con-

nection with contract research and development (R&D). BRIC countriesoften call into question whether local functions and risks are actuallybeing controlled from other countries, or whether local R&D companiescan be classified as risk-free, routine service providers. In practice, thiscan lead to the BRIC countries either demanding very high mark-ups forthe purpose of profit allocation, or seeking to deny the recognition ofintangible substance in other countries. That being said, it is certainlyunderstandable that the physically locatable factors, such as number oflocal persons, local turnover and local taxes paid, will also be necessary toreport in the future as part of country-by-country reporting (CbCR).These CbCR reports will be used as a starting point for the purposes ofa plausibility test. Finally, another important consideration in this respectis that Article 21 (1) of the OECD Model Tax Convention specifies acomprehensive residence-based principle, while Article 21 (3) of the UNModel Tax Convention contains a comprehensive source-based principle



that, in practice, is often linked with a limited force of attrac-tion of the permanent establishment.

Principle of separation v the fiscal look-throughapproachThe principle of separation, i.e. separate taxation of cor-poration and owner, constitutes one of the fundamentalstructural principles in Swiss tax law. The principle of sep-aration has a veiling effect in that the profit generated bythe 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 – incontrast to VAT law – does not contain provisions on thetaxation of groups. Moreover, Swiss tax law does not pre-scribe any explicit rules for controlled foreign corpora-tions 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 havebeen developed in connection with the interpretation oftax law concepts linked to economic fact patterns in orderto enable the assessment of cross-border cases by refer-

ence to substance-based criteria. Table 1 presents anoverview of the main correction mechanisms applied inpractice.To conclude, it should be noted that the fiscal look-

through mechanism can be applied irrespectively of whetherSwitzerland is the state of residence (outbound case), or thesource state (inbound case). The doctrines of tax avoidanceand abuse of law are outlined hereafter. These institutionsare increasingly understood in legislative and judicial prac-tice as the interpretation process integral to the substance-based approach.

Tax avoidance v abuse of lawAccording to the opinion of the Swiss Federal SupremeCourt, tax avoidance is committed if:i) The legal structure chosen by the parties is unusual (inso-lite), improper or outlandish and, in any case, appearsentirely inappropriate for the economic circumstances;

ii) It can be assumed that the chosen legal structure wasabusively elected for the sole purpose of saving taxes thatwould have been owed in normal circumstances; and

Table 1: Overview of fiscal look-through and defensive mechanisms in Swiss tax law

Action Abuse of law Tax avoidance Management inSwitzerland

Permanentestablishment inSwitzerland

Transfer price (TP)adjustment

No relief ondividends

Legal basispractice

• Article 8 and 9of the FederalConstitution

• Economicinterpretation

• Interpretation• Economicinterpretation

• Article 20 of theFederal Law ontheHarmonisation ofDirect Taxation ofCantons andMunicipalities(StHG)

• Article 50 of theFederal Act onDirect FederalTaxation (DBG)and Article 9 ofthe Federal Lawon WithholdingTax (VStG)

• Article 21 of theStHG

• Article 51 of theDBG

• Article 24 of theStHG

• Article 58 of theDBG

• Article 21 of theVStG

• Article 70 of theDBG and circularNo. 27 of theFederal TaxAdministration

Taxconsequences

Adjustment ofapplicable law orrefusal to applyapplicable law

Adjustment offormal toeconomic factpattern andrespectivetaxation

Fiscal link ongrounds ofunlimited taxliability inSwitzerland

Fiscal link ongrounds of limitedtax liability inSwitzerland

TP adjustment byclassifyingtransaction ashidden profitdistribution orequity contribution

Refusal to grantrelief on dividendsfor tax-deductibletransactions abroad

Interpretation process in substance-based approach



iii) The chosen procedure would in fact result in a substantialtax 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 avoidancein extreme exceptional cases. The avoidance correctiveserves as an emergency mechanism that should only be trig-gered if a qualified unjust interpretation occurs that the leg-islator could not have possibly intended. However, it shouldbe noted that with the advancement of the teleologicalinterpretation, tax avoidance has largely lost its previouslygreat practical significance and is increasingly replaced inpractice by a regulatory correction in response to a breachof 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 inconsis-tent with reality;

ii) Grossly infringes on a rule or an undisputed legal doc-trine; or

iii)Compliant application of law objectionably runs counterto a sense of justice.In contrast to tax avoidance, which takes the fact pattern

as its starting point (instead of the legally realised fact pat-tern), a fictitious (objectively justifiable) fact pattern is sup-posed and tax is levied thereon. Application of theprohibition on abuse of law and arbitrary action preventsgross infringements of the equal-treatment principle byimposing a replacement regulation, with ultimately the sameconsequence (as a rule). It is, therefore, of no consequencewhether one modifies applicable legislation, so that it fits thefact pattern, or one modifies the fact pattern that it can besubsumed under applicable legislation.Finally, it must be stressed that a correction of the fact

pattern or a regulatory correction in the context of taxavoidance or abuse of law cannot be entirely replaced by anextensive teleological interpretation to the taxpayer’s detri-ment. Semantic boundaries have to be imposed on the eco-nomic perspective and the process of interpretation cannotbe permitted to become a game without limits. This meansthat laws cannot be ignored and they must be interpreted.Indeed, there are regulations under tax law, which for goodreason – especially on account of legal certainty considera-tions – are open to avoidance or abuse of law. Furthermore,taxpayers could likewise conceivably appeal to an extensiveinterpretation as to the teleological intent of a regulation.This can be illustrated by examining the topic of reductionsof tax at source. Both in accordance with Article 21 (2) ofthe Swiss Withholding Tax Act and by virtue of Article 10(1) and (2) of the OECD Model Tax Convention that statethat reductions of tax at source are denied in the event ofmisuse. If this issue was not (or no longer) instigated by themisuse leading to the denial of a reduction of tax at source,but rather by the profit allocation among the actual benefi-

cial owners, the beneficial owner could also in other casesappeal in his favour on the grounds of the deviation of theeconomic assessment of the transaction flows from thestructure under private law, which can constitute aninfringement of the good faith requirement of the prohibi-tion on contradictory behaviour.

Substance test v tax rate testThe substance test can be understood as an extension ofthe institution of operational business rationale within themeaning of Article 58 (1) b of the Direct Federal Tax Act,when read in conjunction with Article 59. An expense isgenerally considered operationally justified if it has opera-tional causes or is entrepreneurially motivated.Consequently, only expenses that serve a business purposequalify as tax-deductible, i.e. if there is a factual relation-ship between the expense and the business operations ofthe company performing the transaction. There is no dis-pute in Switzerland that the concept of “operationally jus-tified”, which was further specified in practice inconnection with hidden profit distributions, has assumedthe function of an arm’s length comparison. Against thisbackground – and more recently in light of BEPS – it canbe expected that the assessment of operational justifica-tion will no longer be conducted from the perspective ofthe entity performing the transaction. Instead, an aggre-gate perspective will increasingly be taken in future andsubstance-based considerations with regard to the recipi-

Peter BrülisauerPartner, International TaxDeloitte

Tel: +41 58 279 [email protected]

Peter Brülisauer is tax partner at Deloitte in Switzerland. He hasextensive experience in advising multinational companies ontax matters. This includes corporate restructuring, acquisition,finance restructuring, IP and R&D planning, cross-border taxplanning, tax effective supply chain management, as well asfunction and risk allocation within multinational groups. He alsospecialises in permanent establishment (PE) planning and profitattribution between PEs.Peter is lecturer in national and international taxation at the

University of St. Gallen and a frequent speaker at tax confer-ences. He has a PhD in law from the University of St. Gallenand is a Swiss Certified Tax Expert.



ent of the transaction will be factored into the assessment.This means that if the source state is of the opinion that asufficient amount of substance is not allocable to therecipient state, the source state can argue that the opera-tional justification requirement is not satisfied – and thusdeny tax-deductibility – for the expenses charged to therecipient state. In addition, the source state – to theextent that it levies tax at source on the expenses charged– can deny the recipient use of the otherwise applicabledouble tax treaties (DTAs).Owing to the fact that the verification of substance in the

recipient state by the source state can entail considerableeffort, many countries in practice (e.g. France and Austria)increasingly conduct a tax rate test. Thus, if the statutory taxrate in the recipient state falls short of a certain threshold(e.g. 10%), or if the tax rate gap between the source andrecipient states exceeds a certain amount, the source statecan deny the tax-deductibility of expenses even if they areoperationally justified. An even more severe legislation hasbeen introduced in France, where a higher rate of tax atsource is levied on expenses charged to non-cooperatingcountries, especially those that do not take part in informa-tion exchange arrangements. Even if such procedures are

defensible on the grounds of practicability and proceduralefficiency, taxpaying companies – particularly also in light ofBEPS – must be granted the opportunity to demonstratethat a relevant amount of substance is allocable to the recip-ient state. Such proof of substance can be simplified, forinstance, by working with catalogues, so that the activitiesunder review (in the source and/or recipient state) areeither listed in an “active or positive catalogue” that is notharmful or not listed in a “passive or negative catalogue”that is harmful.From a tax system perspective, refusal to grant tax-

deductibility in the source state and the taxation of the sametransaction in the recipient state constitutes economic dou-ble taxation. Further, the undifferentiated refusal to granttax-deductibility of expenses that are operationally justified– by reference to the fact that profit determination fallsexclusively within the scope of unilateral law – or the undif-ferentiated levy of tax at source can infringe on the funda-mental principles of international tax law, particularly giventhat such procedures ultimately annul the scope of applica-tion of the otherwise applicable DTA without a qualifiedsubstance-based justification or can result in a breach ofanti-discrimination rules.

V A T


Playing with fire – Switzerlanddeviates from internationalstandards The FederalAdministrative Courtrecently rendered itsjudgment in a case thatmight cause substantialheadaches tocompanies supplyinggoods to Switzerland.Laurent Lattmann andDésirée Högger of TaxPartner AG – TaxandSwitzerland explainthe relevant aspects ofthis case and thepotential fallout if thisjudgment is upheld bythe Federal SupremeCourt.

What happened?At first glance, nothing spectacular. The Swiss VAT authority carried outan audit of a foreign trading company (TradingCo) registered for VAT inSwitzerland that sourced goods from abroad, and sold them on to aSwiss-based distributor (DistributionCo). TradingCo ordered the goodsfrom various foreign third party suppliers and was partly responsible forthe transport to Switzerland. TradingCo was registered for Swiss VATpurposes ever since, filed its VAT returns and paid its taxes on time. TheVAT audit did not uncover any mistakes and no re-assessment noticeswere issued by the Swiss VAT authority. However, the responsible VATagent informed Swiss Customs that he suspected fraudulent behaviourbecause the import values used for the customs clearance of the goodswere 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 7,000pages of documents. Besides its fraud investigations, Swiss Customs alsoinitiated a penal investigation against staff members of DistributionCo,who filed the import declarations on behalf of TradingCo. Last, but notleast, Swiss Customs requested administrative assistance from the coun-try in which TradingCo is established in order to conduct an interroga-tion of the person in charge of the in-house tax department ofTradingCo. This case shows how quickly a company can be facing seriousallegations, even if completely unsubstantiated.Swiss Customs accused TradingCo of having committed import VAT

fraud of approximately CHF 100 million ($99.2 million) by havingunder-declared the value of the goods. TradingCo cleared the goodsthrough Customs using the purchase price paid to its various foreignthird party suppliers, and was clearly of the opinion that this is in linewith the import rules, not only in Switzerland but also worldwide.TradingCo did use its purchase price for the import clearance, as anyother Swiss or foreign entrepreneur would have done, and claimed theimport VAT paid in full. Which other value should TradingCo have usedfor the import clearance, given the fact that the goods were imported inthe 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 forthe coverage of local costs (e.g. warehousing, distribution, etc.). It isworthwhile to mention that TradingCo is fully entitled to claim back the

V A T


import VAT and that no advantage whatsoever resulted forthe company. Moreover, since Switzerland levies importduties based on the weight and not ad valorem, the allega-tions on the import VAT fraud was limited to the importVAT that could be fully claimed by TradingCo.

Federal Administrative CourtSurprisingly, the Federal Administrative Court (FAC) sup-ported the position taken by Swiss Customs, but with differ-ent arguments. The court held, in essence, that the prices charged by the

foreign suppliers were not to be taken into account forimport clearance purposes because TradingCo was partiallyorganising the transport of the goods from abroad to itsown warehouse in Switzerland. The FAC concluded thatsince the transport was partially conducted by TradingCo,the company had already received the power to dispose thegoods outside of Switzerland and that, therefore, the pricepaid to the foreign suppliers was no longer relevant for theimport of the goods. In other words, the sale of the goodsfrom the foreign supplier to TradingCo could no longer beconsidered relevant as this transaction was overruled just bythe fact that TradingCo carried out a part of the transportto Switzerland. The FAC, therefore, ruled that the involvement of

TradingCo in the transportation of the goods changed thevalue to be used for the import into Switzerland. Eventhough the FAC did not expressly say so in its judgment, thevalue to be used for the customs clearance formalities wouldhave been different if the foreign suppliers had arranged theentire transport to Switzerland.Contrary to Swiss Customs, the court correctly conclud-

ed that the import value could not be the subsequent salesprice from TradingCo to DistributionCo minus a discountof 10% for the coverage of local costs. The subsequent salestransactions were only carried out after the goods werestored in the Swiss warehouse of TradingCo and could,therefore, not be taken into account in order to determinethe value of the goods at the time of import. The FACestablished that the sale transactions carried out between theforeign suppliers and TradingCo were irrelevant due to thetransport arrangements between the parties, and also thatthe sales price between TradingCo and DistributionCocould not be taken into account since the sales transactionshappened after the goods were cleared by Customs inSwitzerland. As a result, the court correctly came to the con-clusion that in such a case, where the purchase transaction isto be disregarded and no sales transaction is leading to theimport of the goods, that the value must be the marketvalue. However, this is where it gets really odd: The court first

followed the Swiss VAT Act by the word and the internationalrules of the General Agreement on Tariffs and Trade (GATT)

and concluded correctly that the market value is to be under-stood 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 theSwiss import clearance, but the purchase price thatDistributionCo would have paid to third-party suppliers inthe country of origin in order to receive the identical goods.This is despite the fact that the court held TradingCo as theright importer of records and that the sales transaction toDistributionCo 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 ware-house was to be disregarded, it considered that the value tobe used is the price that the Swiss distributor would havebeen paid in the country of origin of the goods, eventhough the court confirmed that TradingCo was the correctimporter of records. Moreover, because the court pretended that it could not

be established what DistributionCo would have paid in thecountry of origin in order to purchase similar goods, theyconcluded that Swiss Customs was entitled to make an edu-cated guess and that therefore the 10% discount on the pur-chase price payable by DistributionCo was to be confirmed.So, even though the court held that the arguments broughtforward 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 ofDistributionCo for filing incorrect customs declarations,closed the file without any further actions against the staff. Onthe one hand, Swiss Customs claimed that TradingCo com-mitted tax fraud of approximately CHF 100 million, but onthe other hand they closed the penal investigations withoutcoming to a conclusion on who committed, or was at leastinvolved, in the CHF 100 million tax fraud. It goes withoutsaying that this result is grotesque and that the decision of theFAC lacks courage to make Swiss Customs see reason.

The final sayTradingCo appealed against the decision of the FAC and theFederal Supreme Court will have the final say on the ques-tion over which value must be used for the import shouldthe power to dispose over the goods be transferred as aresult 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 thisfundamental case is yet uncertain. However, it would bemore than questionable should the decision be confirmed,and Switzerland would certainly have to explain to foreignparties in the World Trade Organisation how a detail like asplit transport responsibility can result in a different valuefor import purposes and why the local sales price is to betaken into account to estimate a market value in the country

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of origin, especially if the goods come from developingcountries where such prices would never be charged.

Potential fallout for companies supplying goods fromabroadThis decision – should it be confirmed by the FederalSupreme Court despite being not only technically wrongbut also clearly against Swiss law and international agree-ments that Switzerland committed to observe – could havesevere impacts on companies selling goods into Switzerlandand operating central warehouses in Switzerland from wherethe 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 partiallyinvolved in the transportation of the goods to their ownwarehouse and used the purchase price paid to their foreignsuppliers as relevant value for the import clearance process. According to our understanding, this would potentially

hit all companies who are involved in the transportation ofgoods to Switzerland irrespectively whether they organisethe transport in full or just partially. A closer look of the decision rendered by the FAC indi-

cates that the reason for using a different import value is thatthe power to dispose over the goods has already been trans-ferred from the foreign supplier to its client. If the power todispose over the goods becomes decisive for the definitionof which import value is to be used, this could also impact

the import value of goods supplied to Switzerland usingconsignment or call-off stocks agreements. For now, Swiss Customs accept that the value agreed

upon between the foreign consignor and the Swiss con-signee is the value to be used for the import declaration, butif the court decision is confirmed by the Federal SupremeCourt and the power to dispose becomes relevant, SwissCustoms might as well claim that the Swiss consigneeshould have used the price that he would have paid in thecountry of origin of the goods. Moreover, due to the lack ofinformation, Swiss Customs could estimate the value to bethe sales value in Switzerland, less the 10% discount for thecoverage of Swiss-based costs of the consignee. Should themargin of the Swiss consignee be higher than 10% of thesales 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 pur-poses, it could also be that the agreed Incoterms maybecome relevant to assess which import value should be usedfor the import clearance. Unless the foreign supplier pays forthe entire transportation of the goods up to the Swiss border,the purchase price of the goods could in principle be reject-ed, should the decision of the FAC be confirmed.

Outlook and recommendationsThe worst-case scenario for Switzerland has not yet beenconfirmed and trading entities operating either through

Laurent LattmannTax Partner AG – TaxandSwitzerland


Laurent Lattmann is a VAT partner of Tax Partner AG. Beforejoining the firm, Laurent worked for several years with two Big4 firms, specialising in Swiss and international VAT. He hasmore than 20 years’ experience in advising Swiss and multina-tional clients in numerous industries, including the financialservices, 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 ofmultinational and national corporate clients, as well asindividuals. In 2005, Tax Partner co-founded Taxand – the firstglobal network, with more than 2,000 tax advisers and morethan 400 partners from independent member firms in nearly50 countries.

Désirée HöggerTax Partner AG – TaxandSwitzerland


Désirée Högger is a Certified Swiss Tax Expert. She started hercareer in 2012 with an international tax consulting firm. In2014, she joined Tax Partner AG as an adviser and focuses onSwiss 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 ofmultinational and national corporate clients, as well as individ-uals. In 2005, Tax Partner co-founded Taxand – the first globalnetwork, with more than 2,000 tax advisers and more than400 partners from independent member firms in nearly 50countries.

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their own warehouses in Switzerland, or using Swiss con-signment or call-off stocks or even Incoterms where the pur-chaser is partially responsible for the transportation of thegoods, do not need to take immediate action. However, should the Federal Supreme Court confirm the

judgment of the FAC, traders sourcing goods from foreignsuppliers should review their import procedures and adaptaccordingly.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 ofrecords, or alternatively the market value to be paid by theimporter of records in the country of origin of the goods,must be used. Anyone importing goods into Switzerlandthat uses these two values is entirely in line with the Swisslegislation and should not in anticipatory obedience changethe value being used when clearing goods. Since hope always dies last, it is hoped that the Federal

Supreme Court makes Swiss Customs withdraw from itswrong position.

W I T H H O L D I N G T A X


Swiss federal withholding tax:correction of malpractice

Swiss taxpayers willgain some welcome taxrepayments from thegovernment afteramendments to theFederal WithholdingTax Act (WHTA)entered into force.Olivier Eichenberger ofKPMG Switzerlanddiscusses the changes.

M any Swiss taxpayers, who were charged heavy amounts of lateinterest as a result of their belated filing of the notificationregarding dividend payments, will benefit from an amendment

to the WHTA that entered into force on February 15 2017. The SwissConfederation will have to repay CHF 600 million ($596 million).

Background Distributions of the profits of corporations are subject to withholding taxat 35%. In the normal case envisaged in the Act, the company pays 35%to the Federal Tax Administration (FTA) and only 65% to the sharehold-ers. In the case of domestic dividends (Swiss company to Swiss share-holder), the shareholders have to apply for the tax refund by, or inaddition to, declaring the distribution as income and they then receivethe refund as a separate repayment or as a deduction from their personalincome tax liability. The intention is to ensure that the shareholders doin fact declare the receipt of the dividend to the tax authorities responsi-ble for them. Thus, in the Swiss national context, withholding tax has thepurpose of safeguarding taxation. In an international context (dividendfrom a Swiss company to a foreign shareholder) the shareholders may beable to reclaim the withholding tax, in whole or in part, according to theapplicable international tax agreement (double tax treaty or EU savingstax agreement). In an international context, therefore, withholding taxprimarily has a purpose of charging tax. Where dividends are distributed within a group of companies, the tax-

payer can be permitted to perform its withholding tax obligations bymaking a notification to the FTA where the payment of the tax wouldlead to unnecessary trouble or to obvious hardship. Provided that thetaxpayer fulfils the substantive conditions for being allowed to use thenotification procedure, he must declare the taxable payment (the divi-dend) within 30 days after the date when the claim to tax arose and notifythe FTA of it (in an international context, generally if a permit giving per-mission in principle to use the notification procedure has been granted inadvance), or apply for the notification procedure to be used (in a nationalcontext). As a consequence of the notification, the obligation to pay thewithholding tax ceases to apply. The notification procedure was firstintroduced in a national context, with the idea of avoiding administrativetrouble and the unjustified outflow of liquid funds. The notification pro-cedure thus offers an advantage in cash flow terms, since the shareholderreceives 100% of the dividend immediately and, in addition, there is no



time-consuming refund procedure. The notification proce-dure is, therefore, used for internal dividends within thegroup in the majority of all cases. This statutory exceptionhas thus become the general practice. In an internationalcontext, there has also been a change from the refund pro-cedure 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 share-holders approves the annual accounts and decides to pay thedividend. Should the general meeting decide on a specific(later) due date for payment of the dividend, the time limitstarts on that due date. If the notification or the correspon-ding application is not made within the 30-day time limit,formerly (before 2011) the notification procedure was gen-erally allowed if the other conditions were fulfilled, i.e. thewithholding tax did not actually have to be paid, despite thebelated filing of the notification, and no late interest wascharged. In 2011, in a case concerning the application of the noti-

fication procedure for withholding tax and the conse-quences of a belated notification, the Federal SupremeCourt held that the time limit of 30 days mentioned in theOrdinances was to be interpreted as a strict time limit andthat the notification procedure could, therefore, not beapplied if the notification procedure form was not filed intime. Based on this decision, the FTA considered it legiti-mate to apply a very inflexible procedure on the notificationprocedure regarding withholding tax on dividends, withouttaking into consideration whether the company fulfilled allthe substantive conditions for the application of the notifi-cation procedure or not. Before 2011, however, belated notifications of dividends

were generally accepted without reservation by the taxadministration. After 2011, the tax administration refusedto approve the application of the notification procedure fordividends in the case of belated notifications (without mak-ing a prior announcement of this change of practice, andwithout any transition period) and demanded that the taxshould in effect be paid. This affected both large groups ofcompanies and SMEs equally. Invoices regarding late interest at 5%, allegedly due for

the period from the expiry of the above-mentioned timelimit until the actual payment of the withholding tax, werethen issued by the FTA. However, no tax was actually duebecause in these cases the substantive conditions for theapplication of the notification procedure and/or the entitle-ment to a tax refund were not disputed. Significant claimsfor late interest arose as a result, varying according to thetime that elapsed between the due date of the dividend untilthe FTA’s demand for payment of the withholding taxand/or the actual payment, which were out of all propor-tion to the taxpayer’s erroneous behaviour (belated filing ofa form, when all other requirements were fulfilled). The late

interest of 5% thus took on the character of a frequentlyunreasonably high fine and was not compensated for – as isusual where late interest is due – by the (here non-existent)advantage gained by the taxpayers of not actually having topay the withholding tax. Moreover, the charged interest rateof 5% differed considerably from the market interest rate andwas incidentally also higher than the maximum rate of inter-est allowed by the FTA on loans by a shareholder to thecompany. This led to the FTA demanding a total late inter-est of CHF 600 million from taxpayers for what are in effectfictitious taxes. For this reason, many taxpayers started legalproceedings 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 with-holding tax to the FTA in order to stop the late interestgrowing and so that they could then apply for the refund ofthis withholding tax on the following day. Such a procedurenot only took a disproportionate amount of effort by the tax-payers affected, but in some cases it even led to an existentialcrisis because, for example, an SME was not in a position toraise the corresponding cash amounts. Furthermore, the pro-cedure was clearly in contradiction to the arguments used

Olivier EichenbergerCertified Tax Expert, Senior ManagerInternational Corporate TaxKPMG Switzerland


Olivier Eichenberger is a senior manager with KPMG’s interna-tional corporate tax group based in Zurich. He has a Doctoral (PhD) and master’s degree in business

administration (accounting, controlling, finance) and is a certi-fied 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 theUniversity of St. Gallen. Olivier provides tax planning, tax accounting, tax consulting

and tax compliance services to various international and Swisscorporates in different sectors, including international restructur-ing projects and financing. Olivier’s areas of work include inter-national and national corporate tax, stamp duties andwithholding tax. He also has broad experience in inboundinvestments into Switzerland and is leading KPMG’s workinggroup for the Swiss corporate tax reform where he is closelyinvolved in developments of the Swiss corporate tax legislation.He regularly publishes articles in leading tax publications.



with a view to dividends in the Swiss national context whenthe notification procedure within a group of companies wasintroduced in 2001, namely that its purpose was to avoidunnecessary trouble and/or unnecessary administrative workfor the taxpayer and the tax administration.

Political solutionThis procedure by the FTA caused a considerable loss ofconfidence and irritation on the part of Swiss and foreigntaxpayers and investors, and led to the rule of law beingcalled into question, which alarmed politicians. After exhaustive discussions during the past few years, the

Upper Chamber of Parliament, in agreement with theLower Chamber, passed a retroactive amendment to theWithholding Tax Act in September 2016. The result of thiswas that a belated notification regarding dividends and/or abelated application for the use of the notification procedureshould not result in a denial of the notification procedureand thus not lead to late interest, but to a fine (provided thatthe substantive conditions for the notification procedure aremet). Therefore, the change of practice made by the FTAhas been reversed. The time limit for starting a referendumon this legal amendment expired on January 19 2017 with-out being used and the Federal Council put the provisionsinto force on February 15 2017.

Retroactive application of the new provisionsThe new provisions apply retroactively to situations thatoccurred before the amendment of the law came into effect,unless the claim for tax or late interest was already statute-barred or finally assessed before January 1 2011. Due to this retroactive application of the new provisions,

the cases affected by the unannounced tightening of thepractice can, in principle, be corrected. Where a taxpayer haspaid late interest from 2011 onwards, although the substan-tive conditions for the application of the notification proce-dure were fulfilled, this late interest will now be repaid onapplication without interest. The application must be filedby February 14 2018.

Welcome changeThe inflexible procedure by the FTA was contrary to thespirit and purpose of the notification procedure and there isno objective justification for the situation where large with-holding tax amounts are paid to the tax administrationmerely due to the late filing of a form, and then have to bereclaimed in a time-consuming process, when it is clear thatin the end no withholding tax will remain with the taxauthority. It is also difficult to understand from an economicpoint of view why high late interest claims should arisewhere no tax will actually remain with the tax authority andthe tax authority does not suffer any loss. The strict proce-dure of the FTA is grossly disproportionate to the taxpayer’s

misdemeanour (meaning the belated filing of a form). Anappropriate fine because of the late declaration or notifica-tion accords much better with such misdemeanours. Therefore, it should be noted that this amendment to the

Act continues to support the purpose of safeguarding taxa-tion and it does not in any way protect cases where there isno claim to apply the notification procedure or obtain a taxrefund. The relief given here will only apply if “the substan-tive conditions for performing the tax obligations by way ofthe notification procedure are fulfilled”. It is undisputedthat, if the requirements for the permit in an internationalcontext are not met, the notification procedure cannot beapplied and late interest is due. In a national context, theFTA also has the possibility to later verify the withholdingtax (with interest) being subsequently levied if the notifica-tion procedure has been wrongly used.Further, the amendment of the Act is in line with statu-

tory provisions concerning other kinds of tax. In this con-nection, the provision of the VAT Act (Article 87, paragraph2) should be noted, which states that no late interest is dueif it is the result of an error which, had it been correctlyprocessed, would not have led to loss of tax for the govern-ment. Thus, according to the VAT Act (Article 27, para-graph 2 (b)), the FTA would have to waive the levy of VATthat was wrongly shown on an invoice if the taxpayer provesthat the government has not suffered a loss of tax as a result.

Need for actionCompanies for which the notification procedure on divi-dend distributions was not granted during the past few yearsbecause of the belated filing of the corresponding forms,and which have consequently paid late interest, should nowapply for repayment of the interest by filing form 1 RVZ –Application for Repayment of Late Interest Already Paidwith the FTA. It is advisable to file the application by regis-tered post, since the burden of proof that the time limit hasbeen met is with the company. Details about the companythat paid the interest (including details of its bank account)and about the late interest payment itself (including theattachment of a copy of the late interest statement or thecorresponding decision) must be given in the application.No repayment of late interest will be made without an appli-cation having to be made. Companies for which the notification procedure on div-

idend distributions was not granted during the past fewyears because of the belated filing of the correspondingforms, and which consequently were sent an invoice forlate interest, but have not paid any late interest (e.g. inconnection with a pending/suspended appeal procedure),should ensure that the invoices are not paid but are can-celled by the FTA. According to the FTA’s media release,such late interest invoices should be cancelled without arequest having to be made. As soon as the cancellation has



taken place, a written confirmation should be sent to thecompanies. In order to obtain clarification in these cases, itis nevertheless advisable to make a request to the FTAusing Form 1 RVZ and asking for a confirmation that thelate interest is no longer due.

For the futureLooking ahead, it will still be necessary to ensure that thetime limit of 30 days for filing the corresponding forms ismet, even if the notification procedure is granted and no lateinterest is due (provided that the substantive conditions arefulfilled), since the belated filing of the notification proce-dure will otherwise be punished by a fine up to a maximumof CHF 5,000.

When calculating the time limit, weekends are also includ-ed. The time limit starts to run either from the date of thegeneral meeting of shareholders, or from the due date fixedat the general meeting. The office responsible for filing thenotification procedure must be informed about the events ofthe general meeting in order to be able to file the forms with-in the time limit. It is advisable to send the forms to the FTAby registered post so that in case of a dispute it is possible toprove that the notification was made within the time limit. Inan international context, with regard to applications for apermit giving permission in principle (forms 823 B / 823 C),it remains advisable to file these in advance of the due date ofthe dividends and to have the permit extended regularly(before its three-year validity has expired).

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Tax Partner AG – Taxand Switzerland Switzerland · financing activities and is the headquarters for many international groups. Rolf Wüthrich and ... Marc Dietschiof ADB Altorfer