On 5 April 2017, the Swiss Federal Supreme Court issued a new decision concerning the Swiss withholding tax refund right of an Italian bank that was engaged in a combination of buy-sell and derivatives transactions with shares of Swiss issuers around dividend payment dates. To a large extent, the decision of the Court concentrated on the evaluation of taxpayers’ compliance with the concept of beneficial ownership requirements aimed at assessing whether relevant transactions entered into by the taxpayer constituted the mere setup of a dividend stripping. Subsequently, the Court denied Swiss withholding tax refund claims due to the failure of the taxpayer to provide the Federal Tax Authorities (“FTA”) with the required information for the identification of the counterparties to the relevant trades, considering this a failure of the taxpayer to cooperate since such information is, in the view of the Court (and of the FTA), an essential element of proof within beneficial ownership testing.
The judgment represents the further evolution of previous cases delivered by the Federal Supreme Court in similar situations, and in particular, with regard to two Swiss withholding tax refund lead cases dealing with Danish Banks (for further details, please see the following blog posts).
Decision of the Federal Supreme Court of 5 April 2017
A bank incorporated in Italy entered into a number of buy/sell and derivatives transactions (futures) with Swiss shares. The bank acquired these securities shortly before the dividend payment date and sold them shortly after the dividend receipt. Further to the dividend payments, the Italian bank filed several withholding tax refund requests with the FTA regarding dividends distributions arising from securities held on ex-dividend dates. While the claims were under consideration, the FTA requested the bank provide additional information regarding the transactions, and in particular, to disclose information enabling the identification of the counterparties to the transactions with underlying securities prior and post the dividend payment event.
Because the Italian bank was unable to provide this information, the FTA and the Federal Administrative Court rejected its Swiss withholding tax refund claims.
Federal Supreme Court decision highlights:
In its decision, the Swiss Federal Supreme Court reiterated its jurisprudence regarding the concept of beneficial ownership, and provided the following arguments:
- The Federal Supreme Court re-established that Swiss withholding tax refund claim eligibility in the context of the application of a double taxation treaty requires that the claimant be the beneficial owner of the underlying income.
- To qualify as a beneficial owner of income (a dividend in the case in question), the recipient should be free in determining further faith of income received (this means that the taxpayer should not have any contractual or legal obligation to pass on such income to third parties). The notion of beneficial ownership should be considered while taking into account economic circumstances and not just pure tax reasons (such as the attempt of the recipient of the dividend to benefit from a double tax treaty withholding tax reduction). Consequently, the Court mentioned that although the tax savings is effectively not present, this is not relevant for the double tax treaty eligibility analysis, which precluded the line of reasoning that all counterparties involved in the transaction were residing in treaty countries with the same residual Swiss withholding tax rate under the relevant treaty with Switzerland.
- Moreover, the Federal Supreme Court recalled that Swiss Tax Law imposes information-sharing and cooperation duty on taxpayers. This duty should apply both to resident and non-resident taxpayers, even if the double tax treaty does not have a specific provision in this respect. The Court stated that during the procedure, the FTA may request information and documentation enabling it to appropriately review and assess a Swiss WHT refund claim. The rules are that the requested evidence must not be obviously inappropriate to make the required assessment (i.e., it must be reasonable and offer suitable proof) and should not result in disproportionate costs for the claimant. The absence of cooperation cannot create a comparative benefit for the taxpayer, and will have negative consequences if the case cannot be properly reviewed and assessed by the authorities.
- The Federal Supreme Court also stated that brokers used in equity finance transactions will not be recognized as counterparties but only as intermediaries, and that it is the claimant’s duty to provide proof of the effective counterparty behind the broker.
After analysing the facts of the case, the Court found that:
- The taxpayer could not establish its compliance with Swiss beneficial ownership requirements for double tax treaty benefits application purposes just by providing the names of the counterparties effectively involved in the transactions.
- The FTA may request information and documentation to make a proper assessment of the facts and circumstances of the transaction which resulted in a Swiss WHT claim. The claimant must provide reasonable documentation as part of his information and cooperation duties. These duties are limited by the principle of proportionality, which means that the requested information should neither be obviously inappropriate to make the required assessment nor result in disproportionate costs for the claimant. Of course, these principles are open for legal interpretation and subject to scrutiny.
- Moreover, the Court ruled that, by not providing the requested information, the Italian bank deliberately hid essential elements of the facts required for the analysis of its transactions by the authorities, meaning non-cooperation was in fact established. Without the documentation by the claimant, the FTA was put in a position where it was impossible to understand the effective flows and structure, or to analyse the claim against the practice established by the Court. Hence, the claimant was forced to face the consequences of the missing proof of its tax mitigating elements.
Further to the above, the Federal Supreme Court concluded that the withholding tax refund should be denied to the Italian bank (only a non-material claim was sent back to the tax authorities for reassessment due to violation of the formal requirements of the procedure).
What does it mean for you?
The new Court decision clearly shows, in line with previous jurisprudence, an overall trend for assessing compliance with beneficial ownership requirements, and for the detailed review of relevant documentation when withholding tax refund claims are filed within the scope of financial services industry transactions. Market participants using brokers in similar transactions will be required to disclose the effective parties behind the broker, which will in practice make it difficult to establish proof.
The recent jurisprudence makes it clear that all cases should be analysed on the basis of individual facts and circumstances, and that outcomes may vary depending on the analysis of transactions.
We encourage you to review present and previous withholding tax claims filed for similar transactions to determine whether any risks are present, and to develop and implement risk mitigating strategies for the future.
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