Restriction of voluntary VAT registration by decision of the Federal Administrative Court
In its decision of 23 September 2014, the Federal Administrative Court assessed the tax liability of a company that does not provide taxable services, but only non-optional services that are exempt from tax.
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The Court of First Instance02 sets for the voluntary VAT registration or the waiver of the exemption from tax liability03 the achievement of taxable benefits. Holding companies which only generate income from dividends and interest could not be registered voluntarily according to the criteria set out by the Federal Administrative Court, or any registrations already made would not be legal under this interpretation. The decision of the Federal Administrative Court is not yet final and will have to be assessed by the Federal Supreme Court. In the following, the article presents the ruling of the Federal Administrative Court and comments on its considerations regarding tax liability.
A AG, which has its registered office in Switzerland, has been entered in the register of persons subject to value added tax with the FTA since 1 May 2006. It is part of a group of companies that offers customers the opportunity to invest in teak plantations in Costa Rica and Ecuador. The investors conclude a "purchase and service agreement" with A AG. Based on this, the investor acquires a certain number of teak trees and commissions A AG to cultivate, manage, fell, afforest, harvest and sell them itself or through third parties for a certain rotation and duration. A AG commissions the respective national companies of the group of companies for management. After the timber is sold, the net proceeds (less service fees) are passed on to the investor. The investor only has information and inspection rights.
On the occasion of an inspection, the FTA came to the conclusion that A AG only provides tax-exempted turnover (in accordance with Art. 21 para. 2 item 19 letter e VAT Act). The company was subsequently deleted from the register of taxable persons for VAT purposes due to the fact that it did not meet the conditions for obligatory tax liability and due to the fact that the conditions for voluntary submission to tax liability were not met.
Disputed legal issues
The Federal Administrative Court had, on the one hand, to assess the VAT treatment of the services provided by A AG to the investors and, on the other hand, to decide on the tax liability of A AG.
The focus is not on the Federal Administrative Court's in my opinion conclusive remarks on the assessment of the services provided to investors, which is why these are only briefly summarised below. However, the considerations concerning the tax liability of A AG, the effects of which must be analysed, are noteworthy.
Services provided to investors
It was disputed whether the service to the investors constituted a delivery of teak trees pursuant to Art. 3 lit. d no. 1 VAT Act or whether A AG was selling value rights to the investors. Revenues from the sale of book-entry securities are exempt from VAT pursuant to Art. 21 Para. 2 No. 19 lit. e MWSTG.
According to Art. 3 lit. d no. 1 MWSTG, a delivery requires the procurement of the economic power of disposal over an object. The transfer of civil law ownership is not mandatory, but may not be sufficient04.
The Federal Administrative Court assumes in the present case that the economic power of disposal over the teak trees was not transferred to the investors05. There is a lack of the possibility for investors to freely dispose of the teak trees. The possibilities of an investor to directly influence the fate of the trees during the contract period are very limited. It could not affect the substance of the trees or have any other influence. Rather, the investors invested their money in a standardised product of A AG, which was offered to a large number of investors at the same conditions and could be transferred. Therefore, this value right was to be classified for VAT purposes under Article 21(2)(19)(e) of the VAT Act.06
Considerations of the Federal Administrative Court
In the complaint (for the period from 2010), A AG claims that it waived its exemption from subjective tax liability pursuant to Art. 11 of the VAT Act.
The Federal Administrative Court states that the tax exemption can only be waived if taxable services are also provided. This is justified by the fact that Art. 11 (1) MWSTG refers to Art. 10 (2) MWSTG with regard to the conditions for waiving the exemption from subjective tax liability and that letter (a) refers to taxable supplies.07
For example, if, as in the present case, a company only generates revenue from services exempted from tax, the exemption from tax liability cannot be waived. In any event, this applies 'in a constellation such as the present'.
Effects of the decision of the Federal Administrative Court
If a voluntary VAT registration in accordance with Art. 11 MWSTG assumes that taxable services are provided, this means that companies which only receive income from non-remuneration (such as dividends) or (probably limited to non-optional08), who are not able to register voluntarily. Consequently, no input tax can be deducted without registration. This is excluded in any case when used to obtain non-optional exempted benefits, so that voluntary registration, as in the present case, ultimately has no tax consequences. The decision of the Federal Administrative Court thus primarily concerns holding companies which, for example, only generate dividend and interest income. The voluntary VAT registration of these companies would not be legal according to the decision of the Federal Administrative Court. Furthermore, on the basis of this view of the legal system, the question would also have to be asked whether voluntary VAT registration is possible from the outset for start-up companies which do not yet provide taxable services. However, not even the literature cited by the Federal Administrative Court in its reasoning goes that far09.
The decision of the Federal Administrative Court was referred to the Federal Supreme Court with an appeal in public law matters and therefore nothing is yet final.
According to Art. 10 para. 1 MWSTG, taxable persons are those who operate a business, irrespective of its legal form, purpose and profit intention. A business is a company that independently pursues a professional or commercial activity aimed at the sustainable generation of income from services and appears to the outside world under its own name.
Art. 10 para. 2 MWSTG subsequently provides for exemptions from tax liability. Under Art. 10 para. 2 lit. a MWSTG, anyone who generates less than CHF 100,000 turnover from taxable services in Switzerland within one year is exempt. This exemption from tax liability can again be waived voluntarily in accordance with Art. 11 para. 1 MWSTG.
Art. 9 MWSTV states that the acquisition, holding and sale of participations within the meaning of Art. 29 para. 2 and 3 MWSTG constitutes an entrepreneurial activity pursuant to Art. 10 para. 1 MWSTG.
In addition, Art. 8 of the VAT Ordinance requires a certain reference to the domestic market for tax liability. For example, only those who operate a business and provide services in Germany or who have the seat of economic activity or a permanent establishment (or in the absence thereof, the place of residence or activity) in Germany can be taxable.
According to the practice under the old VAT Act of 2.9.1999, which was in force until the end of 2009, a minimum turnover of CHF 40,000 was required for voluntary tax liability from taxable services or services abroad that would have been taxable if they had been provided in Switzerland, as well as optional exempted services in Switzerland10.
The VAT Act in force since 2010 no longer provides for such a limitation. According to Art. 10 para. 1 MWSTG, tax is payable by anyone who carries out a business activity. In addition, only a minimal connection to the domestic market is required. This is explicitly defined by Art. 8 MWSTV. If a company has its place of business in Germany, this reference is given. For companies based abroad without business activities in Germany, registration as a taxable person is not possible.
The Federal Administrative Court bases its decision on an opinion held by a minority in the literature11. This is due to the wording of Art. 10 para. 2 lit. a MWSTG ("turnover from taxable services of less than CHF 100,000") in conjunction with Art. 11 (1) MWSTG assumes that a waiver of the exemption from tax liability is only possible if certain taxable services are also provided.
If the company carries out an entrepreneurial activity with a domestic connection, it is in principle subject to mandatory taxation under the wording of the law. Only on the basis of Art. 10 para. 2 MWSTG can there be an exemption from tax liability. The turnover limit under Art. 10(2)(a) MWSTG (12 Exempt from VAT to the same extent as Art. 10(2)(a) MWSTG, this exemption can again be waived under Art. 11 MWSTG. The Federal Council makes the following comments on this provision in its dispatch: "In principle, every person who is engaged in entrepreneurial activities should have the possibility to waive the exemption from tax liability. In this way it is burdened as little as possible by the taxe occulte and can eliminate competitive disadvantages. For this reason, a minimum turnover limit has been completely waived. ...] The only requirement is that a company carries out independently a professional or commercial activity aimed at generating sustainable income from services and that it appears externally under its own name"13.
It follows from the legal system that anyone who operates a business that is subject to tax under Art. 10 para. 1 MWSTG can in turn waive the exemption from tax liability under Art. 10 para. 2 lit. a MWSTG, regardless of whether income is generated from taxable services14. The sustainable generation of income from services is decisive for entrepreneurial activity. According to the law, this includes not only taxable but also exempt benefits. It does not include non-remuneration. However, the entrepreneurial activities of holding companies - and thus their basic tax liability - are governed by Art. 9 of the VAT Treaty.15 The administrative practice follows this view, in that the FTA states in the MWST-Info 09 that companies which hold participations without generating further income from services can voluntarily subject themselves to tax by waiving the exemption from tax liability in accordance with Art. 11 MWSTG16.
The decision of the Federal Administrative Court creates legal uncertainties with regard to the considerations for waiving the exemption from subjective tax liability, especially for holding companies already registered for VAT, which only generate income from dividends and interest. The opinion of the Federal Administrative Court deviates both from the prevailing doctrine and from administrative practice. The extent to which the Federal Administrative Court's assessment would have to be limited to the present constellation is not further explained in the decision. It is now up to the Federal Court to create clarity and legal certainty. Due to the legal system, the requirement of taxable benefits for voluntary VAT registration should be waived.
01 About the title: First publication: Roger Rohner, Restriction of voluntary VAT registration by the BVGer, ST 2015, 66 ff.
02 A-6537/2013, A-7158/2013 The following quotations refer to this decision, unless otherwise stated.
03 Cf. on the notion of waiver of exemption from tax liability Alois Camenzind/Niklaus Honauer/Klaus A. Vallender, Marcel R. Jung/Simon L. Probst, Handbuch zum Mehrwertsteuergesetz (MWSTG), 3rd A. Bern/Stuttgart/Vienna 2012, N 475. In this article, the term voluntary registration is used accordingly, but not voluntary tax liability.
04 E. 5.1 (A-6537/2013).
05 E. 6.4 (A-6537/2013).
06 E. 6.7 (A-6537/2013).
07 E. 7 (A-6537/2013) whether or not followed by the following
08 Cf. Pascal Mollard/Xavier Oberson/Anne Tissot Benedetto, Traité TVA, 2009 Basel, Annexe 3, N 45, quoted by the Federal Administrative Court.
09 Mollard/Oberson/Tissot Benedetto, Annexe 3, N 51 and N 53; also Federal Council Message of 25.6.2008 on the simplification of value added tax, BBl 2008, 6951.
10 Special brochure no. 02 of the FTA of December 2007, Tax liability for VAT, point 4.2; BVGer, 14.2.2013, A-545/2012, E. 3.4.
11 Mollard/Oberson/Tissot Benedetto, Annexe 3, N 43; for the h.L., see the literature cited under FN 11 and 12
12 BBl 2008, 6948
13 BBl 2008, 6951.
14 Ivo P. Baumgartner/Diego Clavadetscher/Martin Kocher, Vom alten zum neuen Mehrwertsteuergesetz, Langenthal 2010, § 3 margin note 45.
15 Camenzind/Honauer/Vallender/Jung/Probst, N 486; Jana Kokel, Swiss holding companies under the new VAT Act, IFF Forum für Steuerrecht 2010, 201; Andreas Russi/Corinne Scagnet, Vorsteuerabzug bei Holdinggesellschaften, ST 2010, 332; however, the question of entrepreneurial activity was not the subject of the proceedings before the Federal Administrative Court.
16 VAT Info 09 of the FTA of December 2010, input tax deduction and input tax corrections, point 9.2.