Tax challenges of partnerships

Case 1: Participant in a simple construction company - self-employment?

Facts

By purchase agreement dated 22 November 2013, A. AG (transport and excavation company) acquired from the Bürgergemeinde B. the plot of land No. 69 located in the municipality of B. at a price of CHF 295,120. The A. AG undertook to pay an additional compensation of CHF 280/m2 to the Bürgergemeinde B. if the land was sold to a third party within 20 years of the conclusion of the purchase contract. At the time the purchase agreement was concluded, C. held a 51% share in A. Ltd. and his brother D. held a 49% share. C. was simultaneously Chairman of the Board of Directors and CEO of A. AG with sole signing authority.

On 20 May 2014, the A. AG and C. and his wife E. (housewife) signed a partnership agreement for the foundation of the construction company U. (simple partnership). The purpose of the company was to build on the property in question with seven apartments, a parking garage and garages, to subsequently transform these apartments into StWE and to sell the condominium ownership units. The shareholders of the company were A. AG as well as C. and E. each held a 50% interest in the company. Furthermore, the articles of association stipulated that C., as managing director of U., would be responsible for supervising the sale of the condominium units.

While the A. AG had to contribute capital to the construction company in addition to the property No. 69 to be built over, C. and E. undertook to make financial and personnel contributions.

The cost of building on the property amounted to approximately CHF 2.4 million. AG, in addition to the land, contributed equity of CHF 200,000 and C. own funds of CHF 400'000. The remaining amount of about CHF 1.8 million was financed by a mortgage loan.

With the Illation Agreement of 21 December 2015, A. AG contributed the meanwhile built over property No. 69 to the building company U. at the book value (acquisition price) of CHF 295,000. On the same day, the same STWE was founded. C. and E. were allocated five condominium ownership units at book value, each with half of the property being co-owned. The market value of the five condominium units corresponded to half the market value of the entire superstructure. The remaining two condominium units were allocated to A. AG at book values. All seven condominium units were derecognised in the accounts of Baugesellschaft U. using the accounting principle "Capital account of the respective shareholder in the property".

On 23 January 2018, the investment authority issued the 2015 investment rulings, in which C. and E. were compensated for income of CHF 539,000 from participations in a simple partnership following the transfer of the five condominium ownership units. On 14 February 2018, C. and E. objected to this on the grounds that it did not constitute self-employment, but rather a private asset management for old-age provision and that the five STWE were therefore held as private assets. For this reason, the allocation of the five STWE to their respective half joint ownership did not result in a transfer of real estate from business assets to private assets. In an email dated 23 February 2018, C. and E., represented by a lawyer and qualified tax expert, asserted as a contingency request that, if their objection of 14 February 2018 was rejected, the requirements for the privileged liquidation profit taxation according to the definitive cessation of self-employment would be fulfilled.

On 9 July 2018, the assessment authority issued the following decision on objection:

• Self-employment (commercial real estate trading) and the transfer of business assets to the private assets of C. and E. were approved and the objection was rejected.
• With regard to the contingency request for privileged taxation of liquidation gains, the assessment authority did not respond to the objection because the requirement of written form within the meaning of Art. 132 (1) DBG was not met when the request was submitted by e-mail.

Questions

The following questions are raised in relation to the appeal decision of 9 July 2018:

1. Have C. and E. been self-employed?
2. If there was self-employment and thus business assets, was there a transfer to private assets?
3. Was the assessment authority right not to object with regard to the contingency request for privileged liquidation profit taxation?

Case 2: Commercial real estate trader with an investment in a Baumanagement AG - exit scenarios

Facts

X., resident in the city of Zurich, is 64 years old and married. X. is a shareholder of Z. together with Y., resident in the city of Zurich. AG, domiciled in the March (Kt. Schwyz). Y. is an architect with his own architectural office, Y. AG, in B. (Kt. Zurich).

The purpose of Z. AG is to plan, design and execute new buildings, conversions and renovations, to take on construction management tasks, construction and project management mandates, as well as to manage real estate and provide other services in the construction industry. X. and Y. have been holding since the establishment of Z. AG in 2012, X. and Y. hold 48% and 52% of the shares respectively. Together they form its Board of Directors and both also receive a salary. In addition, X. and Y. each own 50% of three properties (located in the canton of Zurich). With the Z. AG to build over these properties (construction 2018-2019).

The income from the development and subsequent sale of the properties was qualified by the tax office of the Canton of Zurich at X. as income from self-employment. X. also pays social security contributions on it. Business assets consist not only of the land but also of his share in Z. AG.

X. declared his participation in Z. AG at the proportional nominal value (48 shares at CHF 1'000 = CHF 48'000). He was also invested at this value. The last property tax value (as of 31 December 2017) of a share in Z. AG calculated in accordance with circular no. 28 was set at CHF 60,000 (48 shares: CHF 2,880,000).

X. plans to withdraw from active construction activity. He is currently unable to sell his stake in the "heavy" Z. AG. He would like to draw funds from it and sell his stake in Z. AG from business to private assets.

Questions

1. Is X., as a commercial real estate dealer, entitled to claim privileged taxation within the meaning of Article 37b DBG or § 37b StG ZH?
2. In addition to privileged taxation, may X. claim partial taxation pursuant to Art. 18b DBG or § 18b StG ZH (version valid as of 1 January 2020)?
3. Should X. pay dividends in advance and then withdraw the shares privately or vice versa? There is no possibility of making additional purchases into the occupational pension plan he has set up, as he has already fully exhausted it. In 2020, X. will still achieve a property disposal gain of CHF 300,000.

Case 3: Dentist AG without cantonal institute authorisation - qualification

Facts

X. and his wife Y. will be resident in 2012 and 2013 in the canton of Schaffhausen. Y. was self-employed in Canton Zurich. In 2010, X. founded an AG in Schaffhausen with the purpose of "managing and operating a dental practice (Zahnarzt AG)", which he holds 100%. He then moved the registered office of this Zahnarzt AG to the canton of Zurich (HR entry in the Commercial Register of the canton of Zurich as of 8.7.2011). Before that, X. had been self-employed as a dentist (sole proprietorship). At that time, X. was taxed on his income from self-employment in Canton Zurich. After the establishment of Zahnarzt AG, X. declared his income from this as employment income, taxable in Canton Schaffhausen.

Due to this change, the tax office of the Canton of Zurich conducted an audit for the financial years 2011 and 2012. The auditor found that Zahnarzt AG could not be recognised for tax purposes, since only X., but not Zahnarzt AG, had a licence to operate a dental practice. As a result, the assessments 2011 and 2012 of Zahnarzt AG were corrected. X. wrote to the tax office that he did not agree with the assessment, but waived his objection, as the net profit was CHF 0 and he was not complained.

Concerning the years 2012 and 2013, the tax commissioner X. requested to submit proper accounting records for his sole proprietorship. X. replied that he was no longer self-employed and therefore the requirement could not be answered.

With decisions of the tax office of the Canton of Zurich dated 3 January 2017, X. Income from self-employment was offset against his limited tax liability in the Canton of Zurich. This was estimated at CHF 650,000 (2012) and CHF 1,750,000 (2013), respectively. The declared salary of X. from Zahnarzt AG of around CHF 200,000 and the related professional expenses p.a. were eliminated. Reason: Zahnarzt AG does not have a cantonal institute licence under health law.

The AHV authority did not question the employment of X. in 2012 and 2013.

Question

X. asks us whether it is permissible for a legally established public limited company to be "ignored" by the tax authorities or not to be recognised for tax purposes, so that X. continues to be subject to limited tax liability for self-employment at the place of practice?

Case 4: Out-of-cantonal general practitioner activity - self-employment?

Facts

A. has his place of residence in Freienbach, SZ. He is a specialist in orthopaedic surgery. In addition to his private practice at the Klinik X. AG in Pfäffikon, SZ, he also works as a surgeon at the Y. Clinic in ZH. In this clinic, he is provided with an operating room for a certain period of time as an attending physician. Canton ZH learned of this activity in Clinic Y. through a notification from the cantonal tax administration SZ dated 5 April 2017. In a notification dated 15 March 2019, the tax office of the city of ZH informed the cantonal tax administration SZ that it considered A. to have a limited tax liability in Canton ZH from 1 January 2015. With a declaratory ruling of 26 May 2019, the Cantonal Tax Office ZH, A. recognised that he was self-employed due to his work at Klinik Y. in Canton ZH and therefore had a limited tax liability (cantonal and communal taxes) in Canton ZH from the 2015 tax year. An objection raised against this was rejected. The cantonal appeals also remained unsuccessful.

The cantonal tax administration SZ had already legally assessed A. for the income from clinic Y for the years 2015 and 2016.

In an appeal to the Federal Supreme Court in matters of public law, A. requested that it be established that he did not incur any tax liability in the Canton of ZH on the basis of economic affiliation (permanent establishment/place of business). If the appeal is dismissed and the tax sovereignty of Canton ZH is confirmed from the 2015 tax period onwards, the assessment decrees 2015 and 2016 of the Cantonal Tax Administration SZ (cantonal and communal taxes) are to be revoked.

The cantonal tax administration SZ raises the plea of forfeiture and requests that the appeal be upheld.

Questions

1. What is the subject matter of the dispute?
2. The appeal is also directed against the canton SZ in the event that the main request (no limited tax liability in the canton ZH) is not granted. Is this admissible?
3. How do you assess the objection of the canton SZ that the canton ZH forfeited its tax claim?
4. Assuming that the canton of ZH has not forfeited its tax claim: under what circumstances has A. created a tax liability in the canton of ZH?
5. How does the federal court decide?

Digression: What procedure is available if two cantons claim fiscal sovereignty for direct federal tax?

Case 5: Sale of pictures from an art collection: self-employment?

Facts

H. lives in St. Moritz and has been collecting pictures privately since 1973. He financed these from his clothing boutique (sole proprietorship). His collection comprises a total of about 70 pictures.

In 1985 H. founded the general partnership H. & Co. (KollG). This company bought an antique shop and an affiliated gallery from V. and continued to run these two areas. Partners were H. and his wife; she was also the managing director of H. & Co. H. herself was not active in the KollG.

In the course of the years the antique shop was given up. In contrast, the gallery continued to operate with annually changing exhibitions of paintings (the purchase of which was financed by the KollG). It served to increase the attractiveness of the boutique. In 2014 the H & Co. was liquidated.

The private collection of H. was built up according to the principle "to buy what is personally pleasing and affordable within the framework of private assets". No outside capital was and is used.

The gallery is managed according to a different concept: Every year 3-4 artists are invited to create a special exhibition. The exhibited paintings remain in principle the property of the artists. The gallery sells the exhibited paintings on a commission basis. What is not sold is returned to the artist at the end of the exhibition. Occasionally KollG also buys art objects in the context of these exhibitions. The criterion for purchase is resalability. The prices of these objects range between CHF 1,000 and CHF 10,000. H. & Co. owns 30 paintings with a total value of CHF 120,000.

In the course of the gallery's 30th anniversary in 2013, the gallery designed an anniversary exhibition. For this exhibition, H. provided the gallery with 15 paintings from his private collection; 13 paintings with a total value of CHF 45'400 were sold during the exhibition. The corresponding profits were not taxed at H. The gallery was credited and H. debited commissions for the sales. H. had acquired the 13 paintings over the last 40 years. The holding period for all of them was more than 10 years. Apart from this retrospective, H. did not sell any pictures of private property through the KollG.

On 16 October 2014, H. sold a painting by Jean-Michel Basquiat from his private collection at the Christie's auction house in London at a gross sales price of CHF 6.5 million. He had acquired the painting in June 1988 for CHF 47,000. The artist died in August 1988 at the age of 28. The proceeds from this painting were used, among other things, to finance the extensive property renovation (around CHF 1.9 million; owned by H.) and to cover private living expenses.

H. declared his picture collection under "Other assets" in his 2008-2010 tax returns with a value of CHF 2,000,000, in his 2011-2013 tax returns with a value of CHF 1,900,000 and in his 2014-2018 tax returns with a value of CHF 1,700,000. The reduction of CHF 200,000 in 2014 took into account the sale of the Basquiat picture.

In the years 2015-2017, H. privately bought 6 pictures for a total price of about CHF 600'000, and in 2018 and 2019 he did not buy any more pictures. Since 16 October 2014, H. has not sold any pictures.

Questions

1. Does H. qualify as a professional art dealer?
2. In the affirmative: When did H. become a professional art dealer and how is the profit to be determined?

Variant

In addition to the basic property, H. sold the following pictures in 2016, 2018 and 2019:

• October 2, 2016: Picture by Nara Yoshitomo at a gross sales price of CHF 1.2 million (auction house), which he had acquired in 2004 for CHF 28,000.
• June 2018: Painting by Gerhard Richter at a gross sales price of CHF 1.3 million (auction house), which he bought in 1999 for around CHF 200,000.
• In August 2019: Painting by Andy Warhol at a gross sales price of CHF 880,000 (auction house), which he had bought in 1980 for CHF 220,000.

Questions

1. Does H. qualify as a professional art dealer?
2. In the affirmative: When did H. become a professional art dealer and how is the profit to be determined?

Case 6: Sole proprietor with hotel and transformation into a joint stock company: qualification of the hotel joint stock company

Facts

X. is a hotelier in Kt. Graubünden. He is the owner of Hotel Z. and has been running it in the second generation in the legal form of a sole proprietorship. In 2015, X. brought the assets and liabilities into the hotel in the context of a transfer of assets and liabilities in accordance with Art. 69 ff. FusG as a contribution in kind to the newly founded X. Hotel AG.

A short time later X. suffered a heart attack. His doctors strongly advised him to take it easy. X or X. Hotel AG leased the hotel, including the hotel furniture, to an independent third party in the first year after the restructuring.

Questions

1. Does the lease shortly after the transfer of assets violate a condition of tax-neutral restructuring?
2. X. is now planning to acquire the hotel or the 100% stake in X. Hotel AG to a third party. In the event of a share deal, the question arises with regard to real estate profit tax whether X. Hotel AG is an operating company with a business property or a real estate company.

Case 7: Distribution of profits from a cooperative without share capital: partial taxation in the general meeting?

Facts

X. is a self-employed farmer and lives with his wife Y. in Kt. Aargau. Together with six other cooperative members, X. holds a 14.29% stake in a milk cooperative based in Canton Aargau.

The milk cooperative aims to protect and promote the interests of its members by making the best possible use of the transport milk delivered by them.

The milk cooperative has no share capital and there are no share certificates. On 24 December 2015 the milk cooperative made a payment, known as a dividend, to its members of CHF 20,000 each. The payment was made possible because the milk cooperative was able to sell its cheese dairy building.

With its decision of 13 December 2016, the Tax Commission of the municipality of residence X. and Y. assessed taxable income of CHF 71,400 for the 2015 tax period. The payment of CHF 20,000 by the dairy cooperative was taxed as income from self-employment for the married couple. In an objection decision dated 3 July 2017, the Tax Commission rejected the couple's application to have the payment of CHF 20,000 taxed at 40 % of the tariff as investment income (§45a StG AG).

§Section 45a StG AG (in the version applicable until 31 December 2019) reads

"Income from participations in corporations and cooperatives is taxed at 40 % of the rate of total taxable income if the taxpayer holds at least 10 % of the share, registered or common capital".

Question

The amount distributed has already been taxed at the level of the milk cooperative. X. holds a stake of more than 10%. Is the opinion of the Tax Commission correct? Or may X. claim partial taxation (partial rate procedure) for the purposes of state and municipal taxes in the Kt.