1. scope of application of Art. 23 (2) VStG in conjunction with Art. 70d VStG
The new Art. 23 VStG on the forfeiture of the refund of withholding tax and the related transitional right, Art. 70d VStG, have been in force since 1 January 2019. Under Article 23(2) of the VAT Act, forfeiture does not occur if the income or assets were negligently not declared in the tax return and are subsequently declared in an assessment, audit or post-taxation procedure that has not yet been legally concluded or are added to the income or assets by the tax authority on its own assessment.
Art. 23 para. 2 VStG applies to claims that have arisen since 1 January 2014, provided that the claim for reimbursement of the withholding tax has not yet been finally decided. This follows on from the previous practice of the Federal Supreme Court before the introduction of Circular Letter EStV No. 40, which had been in force since 1 January 2014. 01 According to this previous practice, a tax office could offset an accidentally undeclared dividend in the assessment procedure and grant the taxpayer a refund of the withholding tax.
Since 1 January 2019, a taxable person may now use Art. 23(2) in conjunction with Art. 70d VStG and does not forfeit the refund if they pay a dividend02 of a Swiss corporation was inadvertently not declared in the list of securities for the year of maturity (from 2014) and the cantonal tax authorities offset this because they discovered the mistake.
If the cantonal withholding tax office has been accommodating in recent years and applied the former practice described above, the taxpayer was legally assessed for income tax and received the withholding tax amount back. Evaluated by the EStV in the review of the accounting of the respective canton03 the case differently, it ordered a reduction of the canton's claim.04 Such a reduction must be ordered by the EStV within three years of the end of the calendar year in which the decision of the withholding tax office on the refund became final.05 For its part, the canton could (or may) demand that the taxpayer pay back the withholding tax.06 If this was done for dividends due after 1 January 2014, the question arises for the taxpayer: can he also apply the transitional provision so that he does not have to refund the withholding tax retroactively? If it could not do so, a taxpayer would have to reimburse to the canton the withholding tax refunded by the assessing canton using the previous practice, noting that the legislator wanted to return to the canton with the new legal provision. This taxable person would be worse off than a person for whom the refund procedure has not yet progressed to that stage.
The wording of Art. 23 (2) VStG in conjunction Article 70d of the VStG does not obviously answer this question.
2. judgment of the Federal Supreme Court of 12 September 2019
The Federal Supreme Court has now answered the above-mentioned question in its judgment of 12 September 201907 in interpretation of the wording in a Thurgau case. And affirmative.
The lower court, the Tax Appeal Commission of the Canton of Thurgau, had answered the same question in the negative in its ruling of 8 April 2019.
What is at issue? The couple, A. and B., were the owners of all shares in X AG, headquartered in the canton of Thurgau. The company was deleted from the Commercial Register of the Canton of Thurgau on 7 June 2016. The liquidation of the Company resulted in a liquidation dividend of CHF 142'526, which was correctly declared by the Company on Form 102 and the withholding tax was deducted. In the list of securities and credit balances in the 2016 tax return, the couple declared "X AG, share; date of disposal, number of shares held on disposal, share return (direct partial liquidation)" with a tax value of CHF zero. It did not include the liquidation dividend of CHF 142,526 in the designated field "Operating income 2016".
In the assessment procedure, the municipal tax office of the municipality of residence noted the incomplete declaration, requested additional documents from the couple and included the liquidation dividend of CHF 142,526 in the definitive assessments for state and municipal taxes in 2016 and for direct federal tax on 24 November 2017. The withholding tax of CHF 49,884.10 was refunded to the couple on 1 December 2017.
With a reduction order dated 1 May 2018, the FTA informed the tax administration of the Canton of Thurgau after a review that, based on Art. 58 para. 1 VStG, the couple could be required to pay back the withholding tax in the amount of CHF 49,884.10.
In a restitution decision dated 7 June 2018, the tax administration of the Canton of Thurgau requested the couple to repay the withholding tax.
The couple filed an appeal against the restitution decision within the deadline and requested that the restitution decision be revoked or suspended until the amended VStG had entered into force.
On 8 April 2019, the Tax Appeal Commission of the Canton of Thurgau dismissed the appeal essentially on the grounds that the decision on the restitution claim associated with the assessment order had remained unchallenged and had become final. Thus, the claim for reimbursement of the withholding tax had been legally decided. Based on Article 70d VStG, Article 23(2) VStG, which has since entered into force, is therefore not applicable from the outset.
The couple did not accept the decision of the Thurgau Tax Appeal Commission and filed an appeal with the Federal Supreme Court in the sense of Art. 58 Para. 2 VStG in conjunction with Art. 56 VStG. It argued that the amendment to the law as of 1 January 2019 did not contain a transitional provision analogous to Art. 70d VStG for cases of Art. 57(3) VStG (reduction of a canton's withholding tax claim) and Art. 58 VStG (request for refund). This had already been pointed out in the consultation procedure.08 This has created a genuine loophole which leads to unequal treatment of taxable persons and is not intended by the legislature. The difference in treatment is justified below:
Taxpayers who have negligently failed to declare income subject to withholding tax, but for whom the competent tax authority has offset the income in the assessment procedure, may claim a refund of withholding tax on the basis of Art. 23(2)(b) VStG in conjunction with Art. 70d VStG, insofar as the claim for restitution arose after 31 December 2013 and has not yet been finally decided.
If, however, a cantonal tax authority has negligently set off undeclared income of a taxpayer using the practice applied until the end of December 2013 and has refunded the withholding tax on the basis of a legally binding assessment, this taxpayer should now be refused a refund of the withholding tax if, following an inspection, the EStV has reduced the withholding tax claim of the canton concerned and the taxpayer has been requested by the canton to repay the withholding tax.
The couple had not appealed against their assessment decree of 24 November 2017 and had not had to do so, as their income had been correctly assessed and the refund of the withholding tax had been granted. Only later, on 12 January 2018, i.e. after expiry of the period for appeal, did the Income Tax Treaty examine the assessment ruling and issued a reduction order on 1 May 2018. At the time of the tax assessment order, the couple could therefore not even know that the granted restitution would one day be revoked.
Due to the fact that no transitional provision with reference to Art. 57 and 58 VStG was introduced when the withholding tax law was amended, the married couple was no longer able to benefit from the provisions of Art. 23 (2) lit. b VStG in conjunction with Art. Art. 70d VStG, are not only treated unequally, but are worse off than the latter.
However, the Federal Supreme Court did not want to see the real legal loophole claimed, namely the non-existence of a transitional law provision to be filled by the court.
Instead, the Federal Supreme Court tied in with the concept of the legal force of the decision on the claim for a refund of the withholding tax in Art. 70d VStG.
The Federal Supreme Court initially dealt with the genesis of Art. 70d VStG and stated: "With the transitional provision, the legislator primarily wanted to prevent negative dispositions for the taxpayer that had become formally effective before 1 January 2019 from being reassessed. On the other hand, the taxpayer has no reason to appeal against a positive decision. If the tax authority subsequently reverts ex officio to a - in its opinion - materially incorrect decision and revokes it, the taxpayer is entitled to appeal against it in accordance with the general principles of administrative law and the express provision in Article 58(2) of the VAT Act. Consequently, a period for appeal begins to run again. At the same time, this demonstrates that the (re-)assessed (disputed) claim has not yet been formally decided in a legally binding manner within the meaning of Art. 70d VStG to the extent of the ordered revocation.09
According to the Federal Supreme Court in Art. 70d VStG, the legislator is to be understood in such a way that it does not wish to treat a taxpayer who only brings an appeal on the basis of the revocation of a positive decision in his favour differently from a taxpayer who already brings an appeal on the basis of a negative decision.
Therefore, according to the Federal Court, "for the applicability of the transitional provision of Art. 70d VStG, it should not matter whether the claim for restitution has already been formally decided in a legally binding manner in a positive disposition for the taxpayer (restitution granted). As long as the taxpayer is able to defend himself within the ordinary time limits for appeal against the new negative assessment of the claim by the tax authority (reimbursement of the refund granted), this has not yet been legally decided. This understanding is in line with the will of the legislator, who, when enacting the transitional provision, was primarily concerned with a factual situation with a negative decision that has not yet been legally assessed. Article 23(2) VStG is therefore also applicable in this case on a transitional basis.10.
3. final remarks
A story with a happy ending. It remains to be hoped that other taxpayers who had been requested to withhold the refunded withholding tax again due to a reduction order of the EStV will have taken legal action in time and will now be able to assert the interpretation of Art. 70d VStG by the Federal Court.
You, as a reader, should not be deprived of this: The Federal Supreme Court referred the present case back to the Tax Appeal Commission for reassessment, in particular to clarify whether the liquidation dividend had been negligently undeclared.11
