Tax law challenges of personal companies (2023)

Case 1: Self-employment versus private asset management - 100% debt financing (life insurance)

1. facts of the case

Samuel Korte, 1955, has been running a painting and plastering business for many years, today in the form of Color AG. His wife supports him with office work.

Mr. and Mrs. Korte invested about 50% of their taxable assets in real estate. Over a period of about 30 years (1985 to 2018), they acquired six properties. One of them they built over with an apartment building and one they sold, the others served as family domicile, as headquarters of Color AG or are rented out.

One of the properties was sold in November 2020 at a price of CHF 2,600,000 to the Allegra Pension Fund after the latter, as owner of the neighboring parcel, had planned a neighborhood redevelopment and absolutely wanted to acquire the property from Mr. and Mrs. Korte in order to optimize the intended neighborhood plan. The sold property was to serve as a long-term capital investment and a possible inheritance to the children.

The property sold in 2020 had been purchased by Mr. and Mrs. Korte in 1999. They financed the purchase price of CHF 765,000 with two mortgages in the same amount. To secure the two mortgages, they created the usual real estate lien and also pledged one life insurance policy each to the financing bank, the first one (in the name of Mr. Korte) in the amount of CHF 100,000, the second one (in the name of Mrs. Korte) in the amount of CHF 150,000. The properties - including the one sold - were only used marginally for the purpose of providing work for Color AG (invoicing of painting work in the amount of approximately CHF 15,000).

In their tax return, Mr. and Mrs. Korte declared a taxable income of around CHF 240,000 excluding income from self-employment.

In deviation from the tax return, the cantonal tax administration did not qualify the sale of the property to the Allegra Pension Fund as a private capital gain, but as proceeds realized in the context of a commercial property trade.

The objection and appeal to the Tax Appeals Court were unsuccessful. The Administrative Court, on the other hand, upheld the appeal of Mr. and Mrs. Korte and assumed a private capital gain.

The cantonal tax administration appealed to the Federal Supreme Court and requested that the ruling of the Administrative Court be set aside and that that of the Tax Appeals Court be confirmed.

2. questions

1. Formal: What can be asserted with an appeal in public law matters before the Federal Supreme Court? What cognition does the Federal Supreme Court have with regard to the facts of the case?
2. Substantive: How do you assess the chances of the tax administration having its appeal upheld by the Federal Supreme Court?

Case 2: Commercial real estate trader - acquisition of a property as an advance withdrawal from an inheritance - use as a family home for many years - contribution to a simple partnership

1. facts of the case

In February 1989, Amalia Crameri, resident in Ascona, took over from her father, by way of an advance inheritance, property No. 911 with a total of 2,200 m2 of building land and a residential house in Ascona built on it in 1953. The property, which belonged to the private assets of her father, initially served as the family residence of Amalia Caduff. No major investments were ever made in this residential building.

With a view to a new development, Amalia Crameri brought the property with the existing mortgage into a simple partnership with Immo SA on April 7, 2011. This company not only contributed its expertise, but also provided capital. Without Immo SA, Crameri's income and asset situation would only have allowed her to sell the old property and the surrounding area. Crameri remained registered in the land register as the sole owner.

Under the name "Baugesellschaft Bella Vista", the simple company realized a new development with an apartment building with eight apartments and garage spaces. The two partners commissioned a third party company to manage the project, represent the developer, provide buyer support and act as an intermediary for potential buyers.

On January 16, 2014, the property was divided into eight condominium units. In the same year, Crameri sold six units (total 768/1000 of the condominium) to third parties; the other units were rented out.

Instead of a fixed fee (e.g. according to expenditure), Immo SA participated in the profit.

The Cantonal Tax Administration of Ticino qualified Amalia Crameri as a real estate trader. Accordingly, she subject the profit from the sale of the six condominium units to income tax.

2. questions

1. How do you assess the qualification or the procedure of the Ticino Cantonal Tax Administration?
2. What would the tax consequences be if the property in question were located in the canton of St. Gallen?

Case 3: Self-employment versus hobby - losses

1. facts of the case

The taxpayer Horst Bäumlin is resident in the Canton of Bern and has been working as an independent RA and notary in the Canton of Solothurn since 1987.

In 2009, Bäumlin turned 65 and subsequently received pension benefits (around CHF 98,000 in 2016). However, he remained professionally active. For the years 2010 to 2018, he reported the following business figures, among others:

The BE tax administration (for direct federal tax) had recognized or not questioned the self-employment despite losses since 2011 until the 2015 tax period.

Also in the tax return (for dBSt) for the period 2016, Bäumlin deducted the losses resulting from the professional activity from the taxable income.

The BE tax administration did not allow the declared losses (anymore), as it did not recognize that Bäumlin had been self-employed during this period. It based its assessment on the negative development of sales after 2010 and took into account that Bäumlin had substantial pension and securities income with which he financed his livelihood. Furthermore, it reclassified his declared business assets as private assets. In the objection raised against this, Bäumlin claimed that the drop in revenue from 2010 onwards was due to the time-consuming work on the commentary on the Solothurn inheritance and gift tax. The objection and appeal were unsuccessful.

2. questions

1. Was the Canton of Bern even competent to tax Bäumlin for his income from self-employment for the direct federal tax? The law and notary's office was located in the canton of SO.
2. How do you assess the chances of success of an appeal by Mr. Bäumlin to the Bern Administrative Court?
3. Excursus on the relationship between dBSt and cantonal tax: Assuming that the canton SO had affirmed self-employment for the year 2016. What would this mean for the canton BE?

Case 4: Interpretation of the concept of alienation within the meaning of Art. 18a para. 1 DBG - Pluralism of interpretation

1. facts of the case

Pierre and Anne Ducret, born in 1950 and 1955, respectively, are residents of the canton of VD. Pierre Ducret managed an agricultural property. After reaching retirement age, he leased the farm in 2016 to his wife, who farmed it from then on. The business was discontinued in 2020.

By public deed dated December 2021, Pierre Ducret donated all the land to his three daughters. Two of these plots were located in the construction zone. The Commission rurale of the Canton of VD certified that the transaction was not subject to the rural land law because the donated land did not constitute an agricultural enterprise within the meaning of Art. 7 BGBB.

In 2021, Mr. and Mrs. Ducret informed the VD tax administration that they applied for a tax deferral for the tax year 2020 pursuant to Art. 18a para. 1 DBG. The request was granted for this tax year.

For the tax year 2021, however, the VD tax administration issued an ordinary income and wealth tax assessment. It no longer granted the tax deferral pursuant to Art. 18a (1) DBG. Mr. and Mrs. Ducret lodged an objection against this. In their objection, they claimed that the deferral provision of Art. 18a DBG continued to apply.

Mr. and Mrs. Ducret were unsuccessful in their cantonal appeals.

Before the Federal Supreme Court, Mr. and Mrs. Ducret accuse the lower courts of having wrongly assumed a sale within the meaning of Art. 18a DBG. Correctly, such a sale had not taken place.

2. questions

1. Did the gifts of the properties in question to the three daughters terminate the tax deferral based on Art. 18a DBG? Or put another way: Do gifts constitute a disposal within the meaning of Art. 18a DBG?
2. How should the income from the property and the assets be taxed during the period of tax deferral?
3. How is the increase in the value of the property that occurred after the tax deferral to be taxed - is it (also) subject to income tax or is it a tax-free capital gain from the sale of part of the taxpayer's private assets (Art. 16 (3) DBG)?
4. What is the legal situation with regard to cantonal tax?

Case 5: Simple partnership vs. general partnership  

1. facts of the case

The couple Marugg lives in the canton GR. Ms. Marugg works together with her fellow student Ms. Künzli (place of residence SG) as a psychotherapist in the practice P. in the canton GL, which is entered in the commercial register ("HReg"). She earns an income of CHF 90,000 from the practice in 2022.  

The Canton GR taxes CHF 60,000 of her income from the practice as remuneration for work at her place of residence in GR. The Canton GL claims the right of taxation for the entire income of Ms. Marugg from the practice P. with the argument that it is a simple partnership.

2. questions

1. Which criteria would speak in favor of a simple partnership, as adopted by the canton of GL, and which for a general partnership? What are the tax consequences?
2. How can Ms. Marugg avoid double taxation of her earned income in GR and GL? She takes the position that the assessment ruling of Canton GR is wrong.
3. Where would the income from the practice be taxed if the practice was not in GL but in Vaduz, Liechtenstein?

3. supplementation of facts

The profit of the practice is determined annually on the basis of accounting. No fixed rules are prescribed for the distribution between the two partners, but it is done "amicably", with the understanding that enough remains for both. In 2022, Mrs. Marugg received 55% of the profit and in 2023 it will be 47%. Mrs. Künzli is resident in the canton of SG. The tax administration of the Canton GL, which assumes a simple partnership, takes the position that the profit is to be divided according to heads and that Mrs. Künzli therefore has to pay tax on 50% of the profit in 2022 in GL.

4. question

Is the view of the GL tax administration well-founded?

Case 6: Restructuring of partnership with shareholding

1. facts of the case

Ms. Wehrli operates a dental practice in the legal form of a sole proprietorship. Over time, she has acquired 80% of the shares in Zahnweiss AG ("ZW AG"), which produces specialized natural-based toothpastes. Ms. Wehrli sells Zahnweiss AG's products in her practice, advertises her practice in ZW AG brochures and acquired the interest in ZW AG with funds from her practice. She actively influences the business activities of ZW AG and tries to create synergies between her dental practice and ZW AG.

Mrs. Wehrli would now like to plan her succession and therefore convert the dental practice into a public limited company ("Praxis AG"). She would like to keep the ZW AG privately and sell it later if necessary.

2. questions

1. Does the investment in ZW AG constitute private or business assets of Ms. Wehrli?
2. Assuming business assets are involved, how can Ms. Wehrli transfer her practice to a corporation and avoid a private withdrawal of the ZW AG?

3. supplementation of facts

2 years after the transfer of her practice to Praxis AG, Ms. Wehrli has the opportunity to join forces with 5 other physicians and institutional investors in the "Zahnarztgruppe". For this purpose, Ms. Wehrli is to contribute her shares in Praxis AG to Zahnarztgruppen AG ("Z AG") and in return receive 10% shares in Z AG as part of a capital increase.

4. question

Does the procedure constitute a blocking period violation according to Art. 19 para. 2 DBG?

Case 7: Taxation of an "Influencer

1. facts of the case

Lola L. is 17 years old and wants to earn some money besides school. She has found various sources:

1. On YouTube she provides short videos with beauty tips. Her channel already has 5,500 subscribers. For this, she receives compensation from YouTube from the previously displayed advertising clips. (Income per year: CHF 2'000)
2. After she realizes that her videos are in demand, she activates the option to become a member of her channel. This allows her fans to access additional content as channel members in addition to subscribing to the channel for a monthly membership fee. In order to attract as many members as possible, Lola provides her channel members with videos featuring her very own beauty insider tips (fee per monthly membership CHF 2, average 300 channel members)
3. Finally, she also activates the "shopping" link, where subscribers can directly purchase products presented in the video. Per click Lola receives CHF 0.1 and per order CHF 1 from the store. (Annual revenue CHF 1'000).
4. She also regularly creates content for her Instagram account and now has 30,000 followers. L'Oréal wants her to promote products on her account and sends her monthly cosmetics worth CHF 900, which Lola can keep. For each spot ("reel") with L'Oréal products, L'Oréal pays her CHF 1,000.
5. Lola is also active on Pinterest. There she earns via Stylink by creating links to the products she recommends. Stylink pays her per click (CHF 0.1 / click, from 50'000 followers, CHF 0.5 / click).
6. The Switzerland-wide beauty practice Glow has also taken notice of Lola and offers her free treatments (worth CHF 1,000 / treatment) if she reports about it on Instagram. Lola negotiates a compensation of CHF 500 / post in addition to the free treatment.

In total, Lola will receive revenues of around CHF 24,000 in 2023 and will receive free services and products with a market value of CHF 11,800.

2. questions

1. Does Lola have to pay tax on the income and if so, under what title and in what amount?
2. What are the AHV consequences when Lola turns 18 in 2023?
3. Lola notices at the end of the month that both L'Oréal and YouTube pay out only about 70-75% of the agreed amounts for the payments falling under items 1 and 4 (see facts above). What could be the reason and how can Lola prevent this?
4. During the school vacations, Lola spends 5 weeks on Sylt and pursues her activities from there. Can this have tax consequences in Germany?