Refund of withholding tax under the new Art. 23(2) VStG - an interpretative regulation
The reimbursement of withholding tax to domestic recipients of services requires, among other things, that the income subject to withholding tax and the assets on which it is based are declared "in an orderly manner".
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Forfeiture of the refund of withholding tax due to the (misunderstood) violation of the declaration requirements of Art. 23 VStG01 To this day, income from equity securities is often subject to double taxation with income tax and withholding tax. This applies in particular to undeclared dividends and non-cash benefits. This tax "punitive effect" will hopefully disappear in many cases in the future due to an amendment of the declaration clause of Art. 23 VStG, so that the penal character of Art. 23 VStG will be defused.
The new Art. 23 VStG came into force on 1 January 2019; many questions are still open. For this reason, a first, non-exhaustive set of interpretative rules focusing on the question of "motivation" for this new regulation is given below.
1. collection of withholding tax
The Confederation, on the basis of Art. 132 para. 2 of the Federal Constitution, raises the following02 the withholding tax, among other things, on the income from movable capital assets, including income from equity securities. Taxable income from equity securities is taxable according to Art. 4 (1) (b) VStG or Art. 20 (1) VStV03 any payment in money's worth made by a domestic company to the holders of company participation rights or to third parties related to them, which is not a repayment of the shares in the paid-up share capital or nominal capital or of tax-recognised capital investment reserves within the meaning of Art. 5 (1bis) VStG existing at the time of the payment.
Based on the so-called debtor principle, the debtor of the taxable performance is liable to tax.04 In the case of investment income, the tax claim arises at the time when the taxable benefit becomes due. The withholding tax itself is due 30 days after the tax claim arises.05 The withholding tax liability is generally met by tax delivery with legally prescribed tax rollover06 and consequently the downstream refund procedure.07 In the case of investments in securities by private individuals as part of their private assets, including investments in their own company - which are of interest in the present case - fulfilment is regularly effected by payment of tax.
2. withholding tax refund
2.1 General conditions
Natural persons as domestic recipients of a service subject to withholding tax may deduct the withholding tax charged to them on the basis of Art. 21 et seq. VStG if they fulfil the following conditions:
- Tax affiliation of the beneficiary at the time the taxable benefit is due on the basis of domicile or residence in Switzerland and thus the existence of an unlimited tax liability for direct taxes.08
- The recipient must have the right to use the income subject to withholding tax or the asset generating this income at the time the taxable benefit becomes due.09
- Natural persons must have properly declared the income and assets for the purposes of income and wealth tax.10,11
- The claim for reimbursement must be made within three calendar years after the year in which the taxable benefit became due.12
- Reimbursement must not lead to tax avoidance.13
2.2 Declaration clause of Art. 23 VStG - Legal situation and practice until 31 December 2018
Until 31 December 2018, the declaration clause of Art. 23 VStG read as follows:
Any person who, contrary to statutory provisions, fails to declare to the competent tax authority income subject to withholding tax or assets from which such income flows, forfeits the right to a refund of the withholding tax deducted from such income.
According to practice and case law, the declaration had to be "proper", which basically means the declaration in due form and time for general income and wealth taxes. The taxpayer had to declare the income subject to withholding tax and the assets from which it flows in the ordinary procedure in order to avoid forfeiting his claim for restitution. The FTA has concretised its practice on the declaration clause of Art. 23 VStG or its understanding of a "proper declaration" within the meaning of Art. 23 VStG as follows:14
Proper declaration within the meaning of Art. 23 VStG:15
- The income subject to withholding tax and the assets from which such income flows are considered properly declared if the taxpayer declares them in the first tax return (income and wealth tax return), which must be submitted to the competent tax authority after the taxable benefit becomes due.
- In addition, income subject to withholding tax that is spontaneously declared by the taxpayer after submission of the relevant tax return, but no later than the date on which the regular assessment becomes legally binding, is also still considered to be duly declared within the meaning of Article 23 VStG.
- However, this rule does not apply if the taxpayer has deliberately or with the intention of evasion failed to declare income or assets to the tax authority and this circumstance has been discovered by the tax authority.
Accordingly, they are not a proper declaration within the meaning of Art. 23 VStG:16
- According to the FTA, a declaration that does not comply with the above rules for a proper declaration is considered improper with the consequence of a refusal to refund the withholding tax. This includes in particular the following cases: (1) The declaration of income subject to withholding tax shall be made after the ordinary assessment has become legally binding. (2) The declaration of income subject to withholding tax shall be made on the basis of a request, order or other intervention by a tax authority in connection with the income. Purely arithmetical corrections of already declared income by the tax authorities (typing errors, declaration of net income, adjustment of private expense shares of the investment holders not justified by business, valuation differences, etc.) do not yet lead to forfeiture of the right to reimbursement on the offset partial amount.
- The declaration of the income subject to withholding tax by the taxpayer or by his heirs is made within the framework of a spontaneous self-declaration in accordance with Art. 153a, Art. 175 para. 3 and 4 DBG17 and Art. 53a and Art. 56 para. 1bis and 1ter StHG18. Neither the conduct of an after-tax procedure nor the waiver of the opening of criminal proceedings in the field of direct taxation will revive the claim for reimbursement of the withholding tax.
2.3 Declaration clause of Art. 23 VStG - New legal situation from 1 January 2019
2.3.1 New Art. 23 VStG
The existing Art. 23 VStG is unchanged to Art. 23 paragraph 1 VStG and is supplemented by Art. 23 paragraph 2 VStG as follows:
The forfeiture does not occur if the income or assets were negligently not declared in the tax return and in assessment, revision or post-tax proceedings that have not yet been legally concluded: (a) subsequently disclosed; or (b) added to income or assets by the taxation authority on its own initiative.
Consequently, according to the new legal regulation, the following cases constitute a proper declaration within the meaning of Art. 23 VStG:22
- With a correct declaration in the tax return;
- In case of a mathematical correction;
- In the case of a set-off of undeclared income or assets by the tax authority on its own assessment;
- In the event of a subsequent declaration by the recipient of the service subject to withholding tax (spontaneously or following an intervention by the tax authorities) before the direct tax assessment orders or the subsequent tax orders have become legally effective and thus, in our opinion, including a subsequent declaration within the scope of a voluntary declaration without penalty.23
2.3.2 Content of the new provision of Art. 23 VStG
The new provision clarifies the requirement of a "proper" declaration set out in Art. 23 (2) VStG under two aspects:24
- On the one hand, the date of the subsequent declaration is decisive. The subsequent declaration should be possible until the date on which the relevant direct tax assessment decision of the recipient of the service subject to withholding tax takes legal effect, including audit and post-tax procedures.
- On the other hand, the motivation of the omitted declaration plays a central role: A refund is only granted in the case of negligent omission of a declaration in the event of a spontaneous subsequent declaration or offsetting by the tax authorities. However, this does not apply in cases where the original non-declaration in the tax return was made intentionally - including contingent intention - and therefore constitutes attempted tax evasion. The motivation for non-declaration thus remains central and, in the event of attempted deliberate tax evasion, the refund of the withholding tax is still forfeited.
2.3.3 Temporal dimension of the new regulation of Art. 23 VStG
In terms of time, the Parliament has decided the following (Art. 70d VStG):
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.
The refund claim arises at the same time as the tax claim.25 In the case of income from participation rights, this in turn generally arises at the time when the taxable benefit falls due under civil law.26 It follows that refund claims which have not yet become legally valid and which have arisen on a taxable benefit due after 31 December 2013 fall under the new provision of Art. 23 (2) VStG. On the one hand, the claim for restitution has not yet been legally decided, if no decision has been made in this regard or if such a decision has not yet become legally binding due to appeal proceedings.
Art. 23 (2) VStG explicitly states that the forfeiture of the withholding tax refund does not occur if the income or assets were negligently not declared in the tax return and in assessment, audit or post-tax proceedings that have not yet been legally concluded:
- be indicated subsequently; or
- are added to the income or assets by the tax authorities on their own initiative.
2.4 Exclusion of intentionally attempted tax evasion
2.4.1 Concept of negligence
In accordance with the newly formulated Art. 23 VStG, the refund is only granted if the non-declaration was made negligently.
The term "negligence" is a legal term which has its meaning primarily in criminal and liability law. In principle, this includes disregarding the care that can generally be expected of the person acting in the respective situation. A negligently committed act is therefore not committed consciously, but due to the omission of a certain care, which may be expected from the respective offender.
Within negligence, a distinction is again made between conscious, gross, slight and unconscious negligence.27
In the case of deliberate negligence, the offender is aware of the occurrence of the damaging event. He thus knows that the damaging event could occur, but trusts that it will not happen.
In the case of gross negligence, the offender behaves so clumsily that basic precautionary measures are omitted or disregarded, the observance of which the offender could have been expected to observe.
Slight negligence exists if the offender can be accused of not fulfilling the requirements of gross negligence but nevertheless could have been expected by a reasonable person in the same situation to have prevented the damaging event.
Finally - as the lightest form - there is unconscious negligence. Here the perpetrator does not foresee the damaging result, but could have recognized it if she had taken the appropriate care expected of her.
This above definition of negligence is consistent across all areas of law: negligence is defined as behaviour which, through a certain degree of carelessness, produces a result which the offender does not wish to achieve. In addition to criminal law, the concept of negligence is particularly central in liability law. Art. 41 OR28 reads: "Whoever unlawfully causes damage to another person, whether intentionally or through negligence, shall be liable to compensate him". Here, too, an objectified concept of negligence is taken as a yardstick in teaching. According to this, it is equally negligent to disregard the care that "a reasonable and orderly person would consider necessary in the circumstances". The guiding principle is therefore not what the injuring person is actually able to do subjectively, but what is given to him by the figure of the reasonable and orderly person.29
In the field of direct taxation, it is also a general rule that negligence refers to behaviour contrary to duty, which does not relate to the consequences of that behaviour with knowledge and intent.30
It is not acceptable that the FTA tries to apply a new, "extended" concept of negligence for the purposes of withholding tax, especially with regard to the conditions for refund, which leaves out the subjective element of the offence.
2.4.2 Intent versus negligence
The application of Art. 23 of the VAT Act requires that there is no deliberate attempt at tax evasion in respect of undeclared income.
Criminal tax proceedings for attempted tax evasion must be opened if there is reason to believe that a taxable person deliberately contributed to the incorrect or omitted self-declaration for the purpose of tax reduction and this behaviour was actually also suitable for an incomplete assessment or complete omission (if the irregularity had not been discovered). The attempt is only intentional.
Intention according to the DBG presupposes, analogous to general criminal law, knowledge and will on the part of the perpetrator, which refers not only to the incorrectness of the information provided to the tax administration, but also to the consequences of an incorrect tax assessment. The intention of the taxable person must be to reduce the tax by breaching a procedural obligation. For reasons of practicability alone, the attempted evasion requires intent, otherwise any inadequate declaration that could lead to a tax reduction would be a tax offence. Contingency intent is present if the success of the offender's own behaviour has imposed itself on him or herself as so probable that this behaviour can reasonably be interpreted only as acceptance of success. This results in a natural presumption that can be refuted. In contrast, in contrast to intent, negligence is considered to be behaviour contrary to duty, which is not committed with knowledge and will, but with regard to the consequences of the action.
The affirmation of negligence thus requires the negation of intent. Contingency intention and deliberate negligence, which must be distinguished from each other, coincide on the knowledge side. In both cases the perpetrator is aware of the possibility of success. The difference is on the will side: Those who carelessly trust in the non-occurrence of even a success that is considered probable do not act with contingency intent. Here it remains with deliberate negligence. On the other hand, those who seriously accept the occurrence of success are obviously prepared to accept the fulfilment of the facts for the sake of the objective pursued. In this case, there is contingent intent.31
2.4.3 No criminal proceedings
It is our understanding that forfeiture of the right to restitution on the basis of Art. 23 (2) VStG due to the existence of intentional or deliberately attempted evasion actually requires the conduct of criminal proceedings and a final conviction. The decisive factor for the motivation which is decisive for the application of Art. 23 (2) VStG is that tax evasion has been deliberately completed or attempted. This is an allegation of criminal law relevance, which may not be assumed or suspected, but must be legally established in the legal proceedings provided for this purpose, i.e. criminal tax proceedings in accordance with the applicable provisions of the DBG and in particular in compliance with the procedural guarantees of criminal law. To take a different view would mean that conduct relevant under criminal law would be accused and would have significant legal consequences (namely the loss of the right to restitution due to forfeiture), without this conduct relevant under criminal law having been established in the procedure provided for this purpose.32
It is therefore unacceptable for the authorities to require the taxable person to prove negligence of his actions or the exclusion of intent. Whether intentional or negligent action is involved differs - as already explained - in the will of the perpetrator. It is a cornerstone of criminal law (including criminal tax law) that in principle the presumption of innocence applies. It is up to the competent law enforcement authorities to prove guilt and culpability, i.e. whether an offence was committed negligently or intentionally. Under no circumstances does a person have to blame himself. The principle of "nemo tenetur se ipsum accusare" also applies in criminal tax law.33 A mere administrative ruling (tax assessment) is not suitable for determining conduct that is relevant under criminal law.
However, since the criminal intent is to be proven exclusively by the competent prosecution authorities in the proceedings provided for this purpose, e contrario cannot require an accused person in the assessment proceedings to prove his negligence or "non-intention". Such a procedure consequently leads to a reversal of the burden of proof. As set out in section 2.4.2, intent excludes negligence. The same applies vice versa, of course.
The requirement to prove negligence in the assessment procedure or to prove that there was no intent would therefore have to prove that there was no intent, which is contrary to all the principles of criminal procedure.
3. reimbursement within the framework of a voluntary declaration without penalty
The DBG and all cantonal tax laws allow a taxpayer to make a one-off declaration of assets and income that were not previously recorded for tax purposes, in the context of a voluntary declaration without penalty. With such an unpunished voluntary declaration, factors can be subsequently declared, even if a definitive assessment has already been made by the tax authorities. It is irrelevant for the exemption from punishment whether the taxpayer had not declared the factors intentionally or negligently.
The following conditions must be met in order to accept a voluntary disclosure without penalty:
- No authority is aware of the evasion, i.e. the taxable person acts on his own initiative;
- the taxpayer assists the tax authority unconditionally in determining the after-tax amount, i.e. he submits all necessary documents and is available to the authorities for information; and
- the taxable person makes a serious effort to pay the tax due.
After such a self-denunciation has been filed, the authority initiates follow-up and penalty tax proceedings. In the case of a first voluntary disclosure, however, this is exempt from punishment. Impunity refers not only to the evaded tax, but also to any other offences committed in connection with the tax evasion, such as document fraud. Not only the taxpayer himself, but also possible assistants, such as trust offices, banks, etc. benefit from the exemption from punishment.
Until the revision of Art. 23 VStG, it was the practice - based on the Federal Court's case law and the implementation according to KS No. 40 (cf. 2.2) - that in the context of a self-disclosure, any withholding taxes could not be reclaimed due to lack of a proper declaration.
Within the scope of a self-disclosure, assessments can be opened up to ten years back in order to re-assess the taxpayer with the correct factors. The opening of the after-tax procedure allows, in accordance with the new Art. 23 para. 2 VStG, that the proper declaration, which entitles to a refund of the withholding tax, is again possible. Since the voluntary declaration means that all offences in connection with the once successful tax evasion will not be prosecuted under criminal law, no criminal conviction will take place. Although tax evasion has been carried out, it loses its criminal law relevance due to the voluntary declaration.
As discussed in point 2.4.1 above, intent, or rather the non negligence, of the original non-declaration would have to be proven by the authorities in the context of criminal proceedings. In the case of a self-denunciation without punishment, however, criminal proceedings are waived and even the punishability of all offences committed with the evasion is lifted. As there are no criminal proceedings, there is no conviction and therefore it can be assumed that the non-declaration was negligent. As a rule, a subsequent declaration in accordance with Art. 23 (2) VStG is thus possible in the context of a voluntary disclosure without penalty and reimbursement must be granted on this basis. However, due to the absolute forfeiture period of Art. 32 (1) VStG, the refund can be claimed for a maximum of three years.
4. entitlement to a refund within the framework of simplified subsequent taxation in the event of inheritance
If heirs discover that the deceased had untaxed assets and/or income, they can report this to the tax authorities in a privileged procedure. Instead of the ten years, only three years are subject to additional taxation. In order for heirs to benefit from this scheme, the following conditions must be met:
- The evasion is not known to any tax authority;
- the heirs provide unreserved support to the tax authorities in determining the evaded assets and income elements
- the heirs make a serious effort to pay the back taxes due; and
- the inheritance is neither officially liquidated nor subject to bankruptcy proceedings
Following notification by the heirs, the testator's assessments of the last three years are reopened so that the assessments with corrected factors can be issued. As soon as the procedure is opened, the correct declaration in accordance with Art. 23 Para. 2 VStG is possible again with regard to the corresponding years: we are in an open after-tax procedure. If the subsequent declaration is made correctly, the withholding tax can be refunded in principle, provided that the original non-declaration was made negligently or not intentionally.
Although all rights and obligations are transferred to the heirs by universal succession, i.e. all assets but also debts or other liabilities are transferred. However, the motivation of the testator at the time with regard to the failure to declare the factors to be subsequently taxed cannot be transferred. They cannot be credited for any intent. For the heirs, the evaded taxes are merely a fact. Why or whether the testator intentionally or negligently failed to make a declaration is irrelevant to them.
As explained above, in order for a refund of withholding tax to be refused on the basis of a deliberate failure to make a declaration, the taxpayer must have been convicted under an ordinary procedure in which all procedural requirements have been respected. However, in the event of inheritance, the testator who failed to make the declaration is no longer liable. A conviction - and thus the condition for refusing restitution - is simply no longer possible. It is impossible for the heirs to be prosecuted for motivating the testator, as criminal proceedings are highly personal. A "debt", including the relevant motivation under Art. 23 (2) VStG, cannot be inherited.
The situation would be different if the tax authorities had discovered tax evasion before the death and had imposed a fine on the testator based on this. This would of course have to be paid by the heirs like any other obligation.
Thus, any withholding tax claims are to be allowed for refund in any case within the scope of a subsequent declaration by the heirs.
5. other open questions
The procedural clarification of the motivation seems to us to be the most central question. In addition, there are other questions that are still open:
- We are of the opinion that with the amendment of Art. 23 VStG, more cases based on Art. 24 (1) (a) VStV could be settled by notification. This applies in particular to withholding tax claims based on an audit. Up to now, the FTA has exercised a restrictive practice in this regard and - protected by the Federal Supreme Court - has in particular stated that the entitlement to restitution, which must be confirmed in advance for the application of the notification procedure, only has to be examined summarily and, in case of doubt, the notification procedure must be rejected. We are of the opinion that Art. 23 VStG in its new form also requires a rethinking of this practice.
- Especially in cases of post-tax proceedings, considerable procedural questions arise: What is the relationship between the application for the granting of the notification procedure and the timely submission of a refund application in those cases in which the cantonal withholding tax office is responsible for the refund, while the FTA decides on the notification application? When and in what form must the application for refund be submitted in the case of post-tax proceedings? How is the relationship between payment of the withholding tax and the application for a refund within 60 days to be assessed (in particular in the case of after-tax proceedings) on the basis of Article 32(2) of the VStG?
It is apparent that not only the issue of "determining the motivation" is open, but also various questions which may have a considerable influence on whether the refund is granted on the basis of Art. 23 (2) VStG (generous) or not.
The revision of Art. 23 of the VAT Act is a step in the right direction. The withholding tax thus again fulfils its original purpose of a security tax.
Withholding tax is therefore intended to ensure that income and assets are correctly declared. In recent years, however, reimbursement has been increasingly restrictive. Triggered by two federal court rulings from 2011 and 201334 the FTA had recorded the stricter practice in circular letter No. 40 of 11 March 2014.
Finally, the policy was actively corrected and the important Art. 23 VStG was corrected in such a way that restitution must be granted more frequently again.
The development is primarily encouraging. However, it must now be ensured that the FTA does not again restrict the relief desired by politicians by means of a restrictive interpretation.
In particular, it must be ensured that the FTA does not construe a reversal of the burden of proof through its own interpretation of the concept of negligence, which would make it significantly more difficult for the taxpayer to recover withholding tax on income that was inadvertently undeclared. It should be noted that simplification applies only in procedures that are still open in terms of direct taxation. The subsequent declaration of income subject to withholding tax is therefore in many cases already excluded on the basis of a definitive assessment. However, it is important that post-tax and audit procedures also qualify as open procedures within the meaning of Art. 23 (2) VStG.
Tax periods that have already been definitively assessed are reopened within the framework of a voluntary disclosure. As a result, the refund of withholding tax must also be possible again. However, due to the absolute statute of limitations of the claim for reimbursement, this is also limited to three past years.
Finally, in the case of simplified subsequent taxation of inheritances, any intention on the part of the heirs must be excluded. In these cases, the refund of the withholding tax must therefore be granted without further clarification.
06 Art. 14 (1) VStG. If no transfer takes place, the effective output is considered as net output and is offset against the invoice "Effective output / 65 * 100" = assessment basis, of which 35 percent withholding tax is due, so-called one hundred percent. In this case, the withholding tax is 53.8 percent of the effective benefit.
10 Art. 23 VStG, this is the so-called declaration clause.
11 Cf. the following section 2.2.
14 Circular Letter No. 40 of 11 March 2014 "Forfeiture of the right of natural persons to claim a refund of withholding tax pursuant to Article 23 of the Income Tax Act"; hereinafter referred to as "STS No. 40".
15 Cf. KS no. 40, clause 3.1.
16 Cf. KS no. 40, clause 3.2.
19 Motion 16.3797, filed on 29 September 2016, www.parlament.ch/de/ratsbetrieb/suche-curia-vista/geschaeft?AffairId=20163797.
20 BBl 2018 6047.
21 Cf. Daniel Holenstein / Julia von Ah, Kreisschreiben ESTV No. 40 - Klappe die Zweite, ASA 86 (2017/2018).
22 See Thomas Jaussi/Andreas Nachbur, WEKA, Finance and Accounting, Newsletter 10/November 2018, p. 2.
23 Cf. following item 3.
24 Cf. Jaussi/Nachbur, op. cit.
25 Maja Bauer Balmelli, Der Sicherungszweck der Verrechnungssteuer, p. 109.
26 Art. 12(1) VStG.
27 Peter Metzger, Swiss Legal Dictionary, 2005.
29 Peter Gauch in Recht 1996, p. 225 ff; point V. 2.
30 Andreas Howald in Der Schweizer Treuhänder (ST), 2007/3, point 3.1.
31 Andreas Howald (ret.)
32 Cf. Daniel Holenstein / Julia von Ah, Kreisschreiben ESTV Nr. 40 - after opening Pandora's box there is only hope, ASA 85 (2016/2017), with the well-founded and excellent explanations, according to which the withholding tax has a punitive character.
33 Prof. Dr. Andreas Donatsch in ASA 81 no. 1/2 2012/2013, item 2.3.
34 BGE 2C_95/2011 of 11 October 2011 and 2C_80/2012 of 16 January 2013.