The Swiss Federal Supreme Court has published the written motivations to the two Swiss withholding tax refund lead cases with Danish Banks

The Swiss Federal Supreme Court published the written reasons for judgement for the two Swiss withholding tax refund lead cases concerning Danish banks involved in derivative transactions over dividend ex-dates with Swiss equities on 28 October 2015. The two cases were previously discussed in a public hearing at the beginning of May. The Swiss Federal Supreme Court has ruled in favour of the Federal Tax Authority (FTA) in both cases and has overruled the previous decisions taken by the Federal Administrative Court.

The cases under scrutiny

In the first case, a Danish bank entered into several total return swap transactions with counterparties in the EU and the US relating to Swiss equites. To hedge the exposure from the total return swaps, the Danish bank bought the necessary Swiss equities from various parties. Upon the maturity of the total return swaps, the shares were sold to parties other than those from whom the bank had previously sourced the shares. Under the swaps the Danish bank had to pay an amount equivalent to the dividend received to the counterparty.

The second case relates to a Danish subsidiary of a Swedish bank that entered into derivative transactions by selling (OTC) SMI futures through EUREX and a broker, and who had hedged this short position by buying the SMI components from a different platform/broker. Both legs of the transactions were executed on 19 February 2007. Upon the maturity of the SMI futures on 15 March 2007, the derivative position was rolled into further SMI future contracts with an expiry of 15 June 2007. Upon expiry in June, the SMI futures position was closed and the long position in SMI components was also sold.

In both cases, dividends received during the maturity of the trade were subject to 35% Swiss withholding tax for which a full refund was claimed under the former Danish-Swiss double tax treaty (the current amended treaty only provides for a partial refund on portfolio holdings). For both cases, the FTA had denied the refund of Swiss withholding tax and was then overruled in the Federal Administrative Court.

Reasons for judgement of the Swiss Federal Supreme Court

The Swiss Federal Supreme Court analysed whether the notion of beneficial ownership was a requirement for Swiss withholding tax refund under the Danish-Swiss double tax treaty as the Federal Administrative Court did not analyse this notion in its appealed decisions. In application of the Swiss Federal Supreme Court’s practice, the interpretation of double tax treaties has to be based on international law and its inherent practice, in particular on the Vienna Convention on the Law of Treaties and the principle of good faith. In its analysis, the Swiss Federal Supreme Court has ruled that the requirement of beneficial ownership is implicitly demanded for the refund of Swiss withholding tax even if such a definition is not explicitly contained in the wording of the relevant treaty, which is aligned with the domestic interpretation of the two treaty countries in the case at hand.

The Swiss Federal Supreme Court defines beneficial owner as a person who has the power of disposition over the dividend income. This is the case, if and when a person having the beneficial use can utilise the dividend without any legal, contractual or factual obligation leading to a limitation of this right to use. According to the Swiss Federal Supreme Court, an actual limitation of beneficial ownership is a given if the following two conditions are met cumulatively: (i) the achievement of the income is dependent on an obligation to forward such income, and (ii) the obligation to forward the income must depend upon the achievement of that income. The Swiss Federal Supreme court states that such an obligation to forward income may be based on a (direct) legal obligation or on the basis of all the facts and circumstance of the case, i.e. by applying a substance over form approach.

In the swap case and by applying the above definition of beneficial ownership and considering the overall facts and circumstances of the case, the Federal Supreme Court came to the conclusion that the Danish bank had given up its beneficial ownership of the dividend payment when entering into the swap transaction. The main arguments used were:

  • The hedging with Swiss equities was carried out immediately after entering into the derivative liability with a full hedge (of dividends and positive price changes of the underlying components)
  • By entering into the swap transaction the Danish bank was able to fund the transaction with debt
  • The Danish bank did not bear any (meaningful) risks from the transaction and generated only a risk free return amounting to the interest on the swap transaction as the dividends were transferred under the swap agreement to the counterparties.

Against this background the Federal Supreme Court decided that there was a clear interdependence between the purchase of the underlying equities and the derivative, which led to a giving up of beneficial ownership. This ownership was given up at the moment in time where the funds received as dividends were paid out to the counterparty of the swap agreement as there was, in the view of the Swiss Supreme Court, an on-payment obligation under the total return swap agreements entered into by the Danish bank. Further to this obligation, the bank was no longer in a position to freely dispose of the dividend proceeds received and, in addition, entering into the total return swap put the bank in the position of being fully relieved from any risk associated to the underlying long position in Swiss equities.

In the SMI futures case the Federal Supreme Court also argued that beneficial ownership was lacking by relying on the interdependency principle laid out above. However, as the facts and circumstances of the SMI case were clarified in less detail by the FTA, in some instances due to a lack of cooperation from the taxpayer, the judges based their decision on factual indicia as well. Beneficial ownership was denied with the following arguments:

  • The large volume of the single transaction (3.7 billion CHF) being substantially more than the ordinary average daily trading volume at the stock exchanges involved, the use of brokers and the limited number of parties involved and the short term of the transaction were used as indicia that the transaction must have been agreed amongst known counterparties and that hence the transaction must have been of a circular nature
  • Only a small portion of the dividend income (between 0.04% and 0.06% of the overall transactional volume, respectively between 6.6% and 9% of the dividend income) was retained by the Danish bank. The fact that a portion of the dividend income was retained is not sufficient to prove that no harmful transfer on of dividend income occurred in the case at hand.
  • The Swiss Federal Supreme Court challenged the Danish bank’s ability to act independently as the Swedish parent company had fully debt funded the transaction; the court was of the opinion that the interest paid on the funding led to a partial transfer of dividend income to the Swedish parent, which would have benefitted from a less attractive double tax treaty if the latter had held the Swiss equities
  • A harmful transfer of dividends occurred via the purchase and sales price of the underlying SMI components where the relevant prices were bilaterally agreed with the broker involved acting as a principal for the Danish bank. As the purchase and sales prices were not set in standardised and anonymous transactions, but rather in a specific, tailor-made single transaction, the Swiss Federal Supreme Court assumed, on the basis of the indicia of the case, that prices were set in order to transfer the dividend income to the broker. The court also concluded that similar agreements must have been in place between the broker and its counterparties originally providing the SMI components to the broker.
  • The Danish bank’s refusal to disclose the counterparties of the broker was interpreted by the Swiss Federal Supreme Court as a violation of its information-sharing and cooperation duty even if the foreign country’s legal system does prohibit such a sharing of information. Although the court acknowledged that the Danish bank cannot be requested to infringe foreign law, it must face the legal consequence of such a missed disclosure of useful and reasonable information in the specific case. This because the Swiss Federal Tax Administration had various valid reasons to believe that the transaction was structured as a circular-like transaction between related parties. Because of this specific transaction structure, the Danish bank has an increased duty of disclosure and cannot just rely on the professional secrecy of the broker. The Supreme Court also concluded that the only reason for routing the transactions through a broker and for incurring the additional costs was to avoid the disclosure of the identity of the counterparty.

The majority of the judges of the Swiss Federal Supreme Court concluded that there was sufficient evidence to conclude that the bank had given up the beneficial ownership and had to forward the dividend proceeds, which were partially up-front priced in the sold OTC SMI futures.

Appraisal of the decisions

The Swiss Supreme Court has now issued two guiding decisions with regard to the question of beneficial ownership, which will have an important impact on the numerous other cases which are pending with the Swiss courts and the FTA. Both decisions were based on the notion of beneficial ownership in a double tax treaty environment and the Swiss Federal Supreme Court has clarified its view on how beneficial ownership in the double tax treaty with Denmark shall be defined from a Swiss perspective. Whereas the swap decision is substantially based on this beneficial ownership notion, the SMI futures decision does not seem to follow this notion totally as the Swiss Federal Supreme Court based its decision on conclusive indicia that were not fully evidenced by the FTA and that were not rebutted by the Danish bank.
In particular the following points were not addressed in the two decisions and may lead to a different assessment of an individual case:

  • How do “imperfect” hedges, i.e. non delta one, impact the question regarding beneficial ownership?
  • If the party holding Swiss equities as a long position is not the beneficial owner of the dividend, who is entitled to a refund (e.g. the counterpart of the derivative)?
  • If the long position in Swiss equities is not acquired before the dividend ex-date and is not sold after the dividend season, but hedged as a long term investment, would the court come to a different decision?

The two published decisions made it clear, that each case should still be analysed on the basis of its individual facts and circumstances and that the outcome may vary depending on the basis of the underlying facts and circumstances. The currently defined notion of beneficial ownership in a treaty context needs to be considered for those double tax treaties that do not embed a separate definition of beneficial ownership. Pending claims, as well as new derivative transactions that may give rise to a Swiss withholding tax refund claim, should be carefully evaluated on the basis of the recent decisions of the Swiss Federal Supreme Court.

Martin Büeler
Partner, Tax & Legal
+41 58 792 43 92
Luca Poggioli
Director, Tax & Legal
+41 58 792 44 51
Victor Meyer
Partner, Tax & Legal
+41 58 792 43 40
Dieter Wirth
Partner, Tax & Legal
+41 58 792 44 88


Safe Harbor: stormy seas in Europe − impending storm in Switzerland?

On 6 October this year the European Court of Justice declared that the European Commission’s ‘Safe Harbor’ decision (2000/520) of 2000 which found that the United States afforded an adequate level of protection of personal data was invalid.

Safe Harbor Framework

This Safe Harbor Framework was one of a number of legal bases allowing the transmission of personal data from the EU to the United States to the 5,500 or so US entities self-certified under the Safe Harbor scheme. With this legal basis no longer valid, data transfer now has to be put on another basis, as stipulated in Article 26 of EU Directive 95/46/EC.

Declaration of invalidity

One of the reasons for the European Court of Justice’s declaration of invalidity is that personal data are not afforded adequate protection because the Safe Harbor Framework does not sufficiently limit the US government’s ability to infringe on the fundamental rights of individuals for reasons of national security and the public interest, and that it even gives these aims precedence over the safe harbor principles. There are thus not adequate safeguards in place to ensure that personal data will only be accessed if this – in terms of the European interpretation – is necessary and proportionate. As evidence of disproportionate use of personal data by government authorities it points to the PRISM programme exposed by Edward Snowden.

Implications for Switzerland

This European Court of Justice decision does not have any direct consequences for Switzerland for the time being. Switzerland and the United States have their own Safe Harbor arrangement – albeit virtually identical to the US/EU agreement – that currently affords an adequate level of data protection for around 3,900 self-certified US entities. However, it seems likely that the turmoil in Europe will also spill over into Swiss data protection, and that the Swiss Federal Data Protection and Information Commissioner (FDPIC) will also conclude that the Swiss Safe Harbor Framework no longer meets the requirements of Swiss data privacy law. In its initial opinion, the FDPIC indeed expressed the view that the European Court of Justice’s decision also calls the agreement between Switzerland and the United States into question, and that as far as Switzerland is concerned, in the event of renegotiation only an internationally coordinated approach that includes the EU would be appropriate.


On 22 October the FDPIC found that the Safe Harbor Framework between Switzerland and the United States no longer constitutes an adequate legal basis for data transfer to the United States. Swiss companies that transfer data to the United States on the basis of the Safe Harbor Framework must contractually agree guarantees assuring adequate levels of data protection with the US entity by the end of January 2016. While this will not solve the problem of disproportionate interference by the authorities, it will enable the level of data protection to be improved somewhat. In addition, persons affected must be given clear and comprehensive information, especially regarding the possibility that the data could be accessed by the authorities

If you’d like to talk about Safe Harbor, contact our experts:

Release of BEPS deliverable: Making Dispute Resolution Mechanisms More Effective

On 5 October 2015, the Organisation for Economic Co-operation and Development (OECD) released its deliverable on Base Erosion and Profit Shifting (BEPS) Action 14: 2015 Final Report, Making Dispute Resolution Mechanisms More Effective (the “Report”).

According to the Report, countries will commit to develop a minimum standard in the context of treaty-related disputes and will ensure effective and efficient implementation of this standard through the establishment of a peer-based monitoring process.

This minimum standard, which is complemented by a number of recommended best practices, is designed to meet the following objectives:

  • Ensuring that treaty obligations relating to the mutual agreement procedure (MAP) are fully implemented in good faith and that MAP cases are resolved in a timely manner;
  • Ensuring the implementation of administrative processes that promote the prevention and timely resolution of treaty-related disputes; and
  • Ensuring that taxpayers can access MAP when eligible.

Read more.

For more information on the topic discussed above, including what it means in practice or for other tax questions, contact your local PwC engagement team or me.


EUDTG Newsletter 2015 – nr. 005 (July – August 2015)

This EU Tax Newsletter is prepared by members of PwC’s international EU Direct Tax Group (EUDTG). If you would like to receive future editions of this newsletter, or wish to read previous editions, please refer to:

The following topics are covered in this issue of EU Tax News:

CJEU Cases

  • France: CJEU judgment on cross-border dividend case: Groupe Steria SCA     
  • Germany: AG opinion on loss recapture and final losses: Timac Agro
  • United Kingdom: CJEU referral on the claims relating to foreign income dividends from UK resident companies

 National Developments

  • Greece: The 26% withholding tax as an additional condition for the deductibility of expenses abolished
  • Netherlands: Supreme Court rules that Luxembourg SICAV is not entitled to Dutch dividend withholding tax refund
  • United Kingdom: HMRC’s approach to Marks & Spencer claims

 EU Developments

  • EU: Adoption of the European Parliament’s common position on proposed amendments to the existing EU long-term shareholders directive

 Fiscal State Aid

  • France: European Commission orders France to recover € 1.37 billion as incompatible aid granted to EDF
  • Hungary: European Commission opens in-depth investigations into Hungary food chain inspection fee and tobacco sales tax and issues suspension injunctions
  • Italy: CJEU judgment on the calculation of interest due on the recovery of unlawful aid: A2A

Read the full newsletter here.

Should you have any questions, please contact your usual PwC contact or me.



Time to react: Recent developments regarding French cross-border dividend cases

(i) Inbound cross-border dividends

Under French tax law, dividends received by a French parent company from a qualifying subsidiary are basically tax exempt. However, 5% of the received dividends remain taxable, since this amount is deemed to represent tax-deductible expenses incurred for the management of the participation. This is not true with regard to pure domestic cases, i.e. dividend payments between French resident companies who meet the various conditions for the application of the French group tax regime. In these cases, the taxable portion of the dividends is “neutralised” for the computation of the group taxable result, which leads to a “full exemption” of dividend payments between French domiciled companies.

So far, dividend payments from a non-domestic subsidiary to a French parent company could not benefit from a full exemption since the French group tax regime is exclusively available to domestic companies. On 2 September 2015, the Court of Justice of the European Union (CJEU) ruled in the Groupe Steria case (C-386/14) that this unequal treatment between domestic and non-domestic cases is not compatible with the freedom of establishment.

Due to the CJEU’s decision it is likely that the French tax law will be amended so that French parent companies receiving dividends from their non-domestic subsidiaries could also benefit from a full exemption.

PwC observation

In the meantime, i.e. until the law has been adjusted, in cases where the conditions for the application of the French group regime would be met, it is recommended that a full exemption is claimed for dividend payments the French parent company receives from its non-domestic group companies.

(ii) Outbound cross-border dividends

Since 17 August 2012, certain dividend distributions as well as deemed dividend distributions made by companies subject to French CIT and French branches of non-European Union companies are subject to a 3% special tax. However, such tax is not applicable to dividend distributions made within a French tax group or dividend distributions made by small- or medium-sized enterprises as defined in the EU law.

Some French taxpayers have challenged this 3% special tax and claimed that it is not compliant with EU law. In response to these claims, the European Commission has introduced an infringement procedure against France and France may now respond to the objections raised by the Commission. The Commission may also request France to amend the 3% tax legislation and bring it in line with the EU law. In case France fails to comply with such a request, the Commission could refer the case to the CJEU.

PwC observation

However, in any case companies doing business in France should consider filing a “proactive” refund claim before year’s end (for companies closing their FY at 31 December) for any 3% tax they have already paid, this since contributions paid in 2013 will be statute bared.

For more information on the topic discussed above, including what it means in practice or for other tax questions, contact your local PwC engagement team or me.

Automatic exchange of information of advance cross-border tax rulings between Tax Authorities and the EC within the EU from 1 January 2017

On 6 October 2015, the EU Finance Ministers reached political agreement in the Council to amend the existing Directive 2011/16/EU on administrative cooperation in the field of taxation (“the Directive”). The Directive will require the Member States to automatically exchange a basic set of information on advance cross-border tax rulings (“rulings”) and advance pricing arrangements (“APAs”).

The Directive will ensure that when one Member State issues such a ruling or APA, any other affected Member State is in a position to monitor the situation and the possible impact on its tax revenue. Member States receiving the basic set of information will be able to request further information, including the full text of the ruling or APA. The Commission will create a central directory, which is accessible to all Member States and where the exchanged information will be stored.

From 1 January 2017, the Member States have to submit information within three months following the end of the half of the calendar year during which the advance cross-border rulings or APAs have been issued, amended or renewed. For rulings and APAs issued before 1 January 2017, a five-year lookback period will apply.

For further information, read the EUDTG Newsalert – 7 October 2015 (political agreement EU Directive automatic exchange of tax rulings).

The implications of the initiatives are not yet fully assessable but it is clear that in the future tax rulings will be shared cross-border much more easily than today. We can help you develop an approach in this area. So please feel free to contact your local engagement team or me.


New compliance system to be introduced in Spain as from 1 January 2017

As per the draft bill of the Spanish VAT legislation the new VAT compliance system will be mandatory as from January 1st 2017.

The main features of this new VAT compliance system, according to the wording of the existing draft legislation, are as follows:

  • Bookkeeping of the VAT ledgers will be undertaken through the electronic site of the Spanish Tax Authorities –STA- (“Agencia Estatal de Administración Tributaria”);
  • The new system will be compulsory for those taxpayers obliged to submit their VAT returns (i.e. Form 303) on monthly basis because either: (i) they are larger taxpayers, (ii) they are included in the VAT Monthly Refund Register (“REDEME”), (iii) they apply the VAT group regime, or (iv) they opt for applying this new system;
  • The new system will oblige the above taxpayers to keep up to date VAT ledgers electronically through the STA website. Invoice-per-invoice and timely filing (see below) will guarantee immediate and online access to the information by the STA in real time.

Relevant deadlines

The entries of the outgoing invoices VAT ledger should be made within four calendar days (excluding Saturday, Sunday and National bank holidays) as from the invoice date and, in any case, prior to the 16th day of the month following that in which the VAT corresponding to the transaction becomes chargeable,

The entries of the incoming invoices VAT ledger should be made within four calendar days of the accounting record of the invoice and, in any case, prior to the 16th day of the month following the VAT period in which the relevant transactions are included.

The VAT filing deadlines regarding regular VAT returns (i.e. Form 303) will be moved from the 20th to the 30th of the following month.

Consequences of the new compliance system

The new system will replace some relevant existing monthly/annually tax reports, i.e. Form 347 (annual return for transactions with third parties) and Form 340 (VAT ledgers detailed info submitted by electronic means, nowadays compulsory only for taxpayers included in the VAT Monthly Refund Register -“REDEME”-).

Delays in keeping up to date VAT ledgers through the STA website will be fined with a proportional penalty of 0.5% on the amount of the invoice to be recorded, with a quarterly minimum of €300 and maximum of €6,000.

We note that this is still a draft and there might still be changes.

Impact for businesses

Affected businesses should use the time up until 1 January 2017 to determine which steps they need to undertake in order to ensure compliance with the above (i.e. what additional processes should be introduced for the purposes of being able to make the above information available within the deadlines set out above).

Thanks to a combination of tax and IT knowledge, PwC can offer a complex assistance with respect to all activities related to ensuring compliance with the new regulations and relevant compliance processed being accurately introduced.


Know your international VAT specialists



Romania: VAT rates to be reduced from 2016

Romania decided to reduce its standard VAT rate from 24% to 20% with effect from 1 January 2016.

Also, the reduced VAT rate of 9% will be reduced to 5% for the supply of school manuals, books, newspapers and some magazines, as well as for the supply of services consisting in the allowance of access to castles, museums, and cinemas. The reduced rate of 5% VAT will also be applied for access to sportive events.

Further, Romania will introduce a reverse charge mechanism for the supply of mobile phones, devices that use integrated circuits, laptops, PC tablets and game consoles as from 1 of January 2016. This provision will be in force until 31 December 2018. Reverse charge will be also applicable to supplies of buildings, parts of buildings and land.

Recommendation for action

The above required the affected businesses to amend their systems accordingly in order to reflect the above changes. We recommend that the affected businesses undertake a review of their systems in order to ensure that the above changes are implemented correctly and on time in their accounting and invoicing systems.

PwC has a team specialized in the review of the accounting and invoicing systems for the purposes of ensuring compliance and will be happy to assist you.

For further information, please contact your usual PwC advisor.


Know your international VAT specialists


Interest rate risk in the banking book − A regulatory proposal for more standardisation and consistency

In June 2015, the Basel Committee on Banking Supervision (BCBS) published a consultation paper on interest rate risk management in the banking book. In this paper, the BCBS proposes updating the current Pillar II treatment through the application of either a ‘standardised Pillar I approach’ or an ‘enhanced Pillar II approach’. The key change that will have the most impact on banks is the potential introduction of a regulatory minimum capital requirement.


In the last few years, during the fundamental review of the trading book, the BCBS identified similar risks in the current regulatory framework on interest rate risks in the banking book. To facilitate a more consistent view of the risks in a bank’s balance sheet, the BCBS published an updated working paper for managing interest rate risks in the banking book. It is a somewhat complementary approach to the treatment of interest rate risk in the trading book. The second consultative paper on the ‘Fundamental review of the trading book defines a revised boundary between financial instruments in the trading book and in the banking book. To cover the market risks of the instruments in the trading book, banks are subject to a minimum capital requirement calculated on the basis of a Pillar I approach. To reduce incentives for capital arbitrage, the BCBS now also proposes a standardised Pillar I approach for interest rate risk in the banking book – hence requiring banks to hold a minimum capital level to cover such risks. As an alternative option, the BCBS proposes a so-called enhanced Pillar II approach, which requires banks to follow an updated supervisory Pillar II process and to calculate and disclose a standardised capital requirement level.

The Pillar I approach has the benefit of promoting market confidence in banks’ capital adequacy, as well as helping provide greater consistency, transparency and comparability across the banking industry. On the other hand, an enhanced Pillar II approach can better accommodate different market conditions and risk management practices across jurisdictions.

In reviewing the market risk coverage in the trading book, the BCBS assessed the impact on and changes to the banking book, and set out the motivations for the proposed implementation of the new framework as follows:

Implementation Details

For a more detailed overview of the two approaches, read more here.