Voluntary VAT registration: Federal Supreme Court relativises decision of the Federal Administrative Court

Waiver of exemption from tax liability for holding companies still possible

In its decision of 28 May 2015, the Federal Supreme Court (BGer)02 assessed a case, which was commented on in the same place at the beginning of the year03 Decision of the Federal Administrative Court (BVGer) of 23 September 201404 ...was underlying this.

The tax liability of a company which does not provide taxable services but only non-optional services exempted from tax had to be assessed. The BVGer set for the voluntary VAT registration or the waiver of the exemption from tax liability05 the achievement of taxable benefits. This would have meant that holding companies which only generate income from dividends and interest could no longer be registered voluntarily. This prerequisite, which the author considers to be wrong from the point of view of the legal system, is now dropped by the Federal Court, not explicitly, but sufficiently clearly from the considerations.

However, some further discussions of the BGer, which are also commented on below, are less conducive to systematic clarity.

Facts

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. This contract is transferable to third parties (so-called contract transfer). 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 during a certain rotation and term. 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. Although the investor receives a "tree ownership certificate", he only has information and inspection rights.

Services provided to investors

Like the BVG, the BG assumes that the economic control of the teak trees was not transferred to the investors06. This excludes a supply within the meaning of Art. 3 lit. d MWSTG and there is a service within the meaning of Art. 3 lit. e MWSTG.

The SNB assessed the benefits as exempt sales of book-entry securities pursuant to Art. 21 para. 2 no. 19 lit. e MWSTG, since a standardised investment product was available which was offered to a large number of investors on the same terms and conditions and was transferable07.

The Federal Court of Justice, however, denies that there is a value right according to Art. 973c OR. According to Art. 973c para. 2 OR, the debtor must keep a record of the book-entry securities issued. Since the amount and existence of the investors' claims depend on the price of the wood and the harvest and cannot be determined from the outset, it is not clear how A AG could be in a position to keep a book-entry account of the book-entry rights in the present case. Furthermore, it was also not apparent to what extent the investors' holdings could be 'mobilised' in a book-entry right, especially as AGB did not 'favour' the takeover of the contract.08 Nor does the investment provide the investor with a share in a fund as in the case of investment in a collective investment scheme or in other derivatives09. Rather, it is a direct investment in a project with a specific purpose, which is most likely to be characterised as a loan or credit with non-guaranteed interest and repayment of capital. If a fee is granted for this, this would constitute an exempt turnover under Art. 21(2)(19)(a) VAT Act.10

The facts on which the BGer's assessment is based appear unclear. While the decision of the BVGer does not provide any clear information in this respect, the BGer states that although the investors acquire a standardised product on the basis of a form contract, A AG 'allegedly' calculates the result for each investor separately on the basis of the yield from the trees allocated to him11. If this is indeed the case, and if one follows the doctrine favoured by the Federal Supreme Court that only fungible uncertificated securities can be issued as uncertificated securities within the meaning of Art. 973c of the Swiss Code of Obligations12contrary to the assumption of the BVGer, there is no turnover of book-entry securities pursuant to Art. 21 para. 2 no. 19 lit. e MWSTG.

However, it seems questionable whether the qualification of the BGer of the investment as loan or credit is correct. In accordance with Art. 312 of the Swiss Code of Obligations, the borrower undertakes to transfer ownership of a sum of money or other fungible goods in the case of a loan, and the borrower undertakes to return goods of the same kind in the same quantity and quality in return. Although the borrower bears the insolvency risk of the borrower, he has an obligatory right to reimbursement in any case, even in the case of a participating loan13. Such a claim for reimbursement was not agreed in the present case. According to the BGer, the investor provided funds so that A AG was able to work on an individualised project. It would have had to be examined whether these funds had been made available under a contractual relationship between the investor and A AG. In this case, only the invoiced service fees would have been regarded as remuneration or turnover for A AG. As mentioned above, however, the facts of the case, which are apparent from the published decisions, are too illiquid for a final assessment and would require a more in-depth analysis.

Tax liability

The BGer clearly states that, in contrast to the VAT law in force before 2010, a minimum turnover is no longer a prerequisite for subjective tax liability. Rather, the central criterion is entrepreneurial status, which exists if a professional or commercial activity aimed at the sustainable generation of income from services is carried out independently.14 This statement by the BGer is to be welcomed. Voluntary registration of pure holding companies is thus still possible, as the acquisition, holding and sale of participations within the meaning of Art. 29 para. 2 and 3 VAT Act expressly constitutes an entrepreneurial activity under Art. 10 para. 1 VAT Act in accordance with Art. 9 VAT Ordinance.

However, the BGer's further comments on the concept of performance are difficult to understand. Pursuant to Art. 3 lit. c MWSTG, a supply is deemed to exist if it is made in anticipation of a payment. According to the BGer, no remuneration within the meaning of VAT arises from services which are exempt from tax and for which taxation is not or cannot be opted for. It follows that the generation of exclusively tax-exempted services, for which no option can be exercised, does not constitute an entrepreneurial activity within the meaning of Article 10 of the VAT Act. If a person only provides services exempted from tax without any option, he is not subjectively taxable either.15

The BGer's requirement of option or option capability (the recital is not clear in this respect) of exempted turnover for the existence of a remuneration and thus a service is not fulfilled. With the option for taxation, an exempt supply is taxed only by open reporting of the tax (Art. 22 para. 1 MWSTG). However, the value added tax itself is not the basis of assessment of the remuneration (Art. 24 para. 6 lit. a MWSTG). The connection is only the other way round: if the granting of a consumable economic value to a third party is provided free of charge, an option for taxation is also not possible due to the lack of performance.

The wording of the law is clear: Art. 21 MWSTG bears the heading "Services exempted from tax". It is also incomprehensible from an economic point of view, e.g. to describe the activity of an insurance agent, for which the agent receives commission, as an unpaid activity. It is to be hoped that the BGer will be given the opportunity as soon as possible to correct this misconception.