Current questions on withholding tax and stamp duties, including international issues (2017)

Subject 1: Withholding tax and stamp duties in the case of quasi-mergers

Initial situation

The Alpha Group, a globally active industrial group, has the following structure:

Both Alpha Holding AG and Alpha Trading AG are securities dealers within the meaning of Art. 13 para. 3 lit. d StG.

There is a double taxation agreement between Switzerland and the country in which Alpha Industry has its headquarters. For dividends to the Parent Company, both Alpha Holding AG and Alpha Trading AG have a valid license until 31 July 2019 for the settlement of withholding tax by means of the reporting procedure (Form. 823B), the base tax rate is 5%.

Situation 1

Alpha Industry contributes the participation rights in Alpha Holding AG (100%) to Alpha Trading AG at a fair value of approximately CHF 65 million. In return, Alpha Industry will receive newly created shares with a nominal value of CHF 28 million and the treasury shares on the books of Alpha Trading AG with a nominal value of CHF 2.0 million as consideration.

The entry is booked on the asset side as participation rights in the amount of CHF 65 million, and on the liabilities side

• by increasing the share capital by CHF 28.0 million (= new share capital) and
• by offsetting the negative position in equity for treasury shares at a recognition value of CHF 6 million (= fair value = book value)
• by booking the difference of CHF 31 million as other reserves (not KER).

Situation 2

One year after the quasifusion described in Fact 1, Alpha Trading AG absorbs Alpha Holding AG.

Situation 3

Alpha Industry brings the participation rights to Alpha International Ltd. (100%) into Alpha Trading AG at a fair value of approximately CHF 7 million against the issue of new shares. The share capital is increased by CHF 7 million.

As a result of the contribution in kind, Alpha Industry records a capital gain of CHF 5 million, which is fully subject to income tax in the country of domicile.

Question:

How do you assess the transactions in each case from the perspective of withholding tax, emissions tax and turnover tax?

Subject 2: Withholding tax on interest payments on bonds

Facts

Bank A has its registered office in Switzerland and is supervised by the Swiss Financial Market Supervisory Authority (FINMA). It issues various bonds (issue and repayment at par):

• Bond for CHF 50,000,000 with a term from 1 January 2016 to 31 December 2025 and a periodic interest rate of 1.5 % p.a. (Bond 1). This bond is subscribed by a total of 13 domestic and foreign creditors.
• Mandatory convertible bond of CHF 60,000,000 with a term from 1 January 2017 to 31 December 2026 and a periodic interest rate of 2.5 % p.a. (Bond 2). It is foreseen that this bond will be automatically converted into Bank A's file capital if its capital ratio falls below 7% of risk-weighted assets. The terms of issue for this bond were also approved by FINMA, allowing Bank A to count the corresponding capital against the required equity capital.
• Bond of CHF 70,000,000 with a term from 1 January 2017 to 31 December 2026 and a periodic interest rate of 2.25 % p.a. (Bond 3). The relevant issue documents state that the bond is a bond which, in the event of imminent insolvency, can be converted into equity capital at the request of FINMA in the context of restructuring proceedings pursuant to Articles 28-32 of the Federal Act of 8 November 1934 on Banks and Savings Banks (Banking Act, BankA; SR 952.0). FINMA has again approved the corresponding terms and conditions of issue for this bond.

Questions:

• What are the consequences under withholding tax law of distributing interest on Bonds 1 to 3?
• What are the consequences under stamp duty law of a conversion from borrowed capital to equity of bonds 2 and 3?

Topic 3: Withholding tax and stamp duties in the restructuring of pension funds

Facts

The BETA PK independent collective foundation (BETA) holds 66% of the participation rights in Aurora AG (Aurora), the remaining shares are held by 16 other employee benefit plans.

Aurora has equity of approximately CHF 89 million as of 31.12.2015. The assets consist primarily of financial assets (approximately CHF 69 million), liquidity (approximately CHF 12 million) and significant participations (just over CHF 10 million) of more than 20% each.

As pension funds, Aurora's shareholders are exempt from taxes on profits and capital. The same will apply to the newly established Investment Foundation (AS) (see below).

Aurora itself is subject to profit and capital tax.

Furthermore, Aurora is a securities dealer within the meaning of Art. 13 Para. 3 lit. d StG in conjunction with Art. 18 para. 2 StV, because it shows taxable documents (in particular shares, bonds) with a book value of more than CHF 10 million in the balance sheet

BETA is also a securities dealer within the meaning of Art. 13 para. 3 lit. d StG.

BETA and possibly other shareholders of Aurora want to establish a new investment foundation (AS) within the meaning of Art. 53g of the Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans (BVG; SR 831.40) and

Variant 1

will contribute its shares in Aurora to the Foundation's assets for this purpose. BETA and possibly other shareholders (altogether more than 50% of the voting rights and capital shares, but not all of them) contribute their Aurora shares to AS as a contribution in kind to the fixed assets and in return receive claims to the foundation's assets. The aurora remains as such. AS ultimately holds more than 50% of the Aurora shares.

or

variant 2

Alternatively, provided that all shareholders of Aurora participate in the AS, Aurora should be liquidated and only its assets and liabilities should be taken over by the AS as special assets.

For this purpose, a transfer of assets pursuant to Art. 69 et seq. FusG with subsequent liquidation of Aurora. All assets and liabilities are transferred to the AS.

Question:

How are the two options to be assessed with regard to withholding tax and stamp duties?

Theme 4: Withholding tax; notification procedure

Basic facts

D AG was founded in 2000 and has since then had its statutory seat and actual management in Canton A. The share capital of D AG is CHF 100,000, divided into 100 bearer shares with a nominal value of CHF 1,000 each. All shares in D AG are held by Mr. Dumont, who is resident in Canada. The purpose of D AG is the organisation, mediation and implementation of trips. From the 2001 financial year onwards, D AG always generated profits. These were not distributed but retained.

By contract dated 1 October 2010, Mr Dumont sold his 100 shares in D AG to D Holding AG, which was in the process of being founded at the time, at a price of CHF 10,500 per share, totalling CHF 1,050,000. D Holding AG also has its registered office and its actual administration in Switzerland. The parties agreed to pay the purchase price by bank transfer and to complete this transaction within 30 days of signing the corresponding contract. They also determined that D Holding AG is already entitled to the profit of D AG for the 2010 financial year.

On 6 April 2011, the Annual General Meeting of D AG decided to distribute a dividend of CHF 800,000 for the 2010 financial year with an annual profit of CHF 50,000, payable on 20 May 2011. With Form 103 of 5 June 2011, D AG declared to the FTA the distribution of dividends using Form 103 and at the same time submitted a request for notification instead of payment of withholding tax for cash dividends in the group relationship (Form 106).

Clarifications by the FTA in the context of the application to carry out the notification procedure resulted in the following, among other things: D Holding AG paid Mr. Dumont a price for the shares of D AG that was higher than the nominal value and thus bought into the reserves of D AG. Furthermore, there are indications that D AG had distributable reserves not required for operations in the amount of at least CHF 850,000 as at 1 October 2010. The financial resources already available at the time of the above-mentioned sale were then promptly distributed to D Holding AG in the form of a dividend, which suggests that they were transferred to the seller of the participation rights - i.e. Mr Dumont - in the form of the purchase price. This issue needs to be further clarified. This review goes beyond the scope of the present notification procedure.

Furthermore, in connection with the financing of the purchase price by D Holding AG, the FTA found indications of possible tax avoidance, as D Holding AG financed the purchase price of the shares through a loan of CHF 1,000,000 from Dumont Corporation, Ottawa (Canada), which was concluded on 1 September 2010. All the equity securities of this company are owned by Mr. Dumont.

Question:

Can the application to carry out the notification procedure be approved in this case?

Facts variant 1

In contrast to the basic situation, D AG distributes its profits to its shareholder from the outset within the quota permitted under commercial law. D Holding AG also financed the purchase price for the acquisition of the stake in D AG partly with its own funds and partly with funds from a loan granted by the independent Bank B. On 15 April 2014, the Annual General Meeting of D AG will resolve to distribute the profit of CHF 500,000 generated in the 2013 financial year. In addition, the dividend will be payable on April 20, 2014. With Form 103 dated 5 May 2014, D AG declared to the FTA the distribution of dividends using Form 103 and at the same time applied for notification instead of payment of withholding tax for cash dividends in the group relationship (Form 106).

Question:

Can the application to carry out the notification procedure be approved in this case?

Situation variant 2

Does anything change in factual variant 1 if D AG only submitted forms 103 and 106 to the FTA on 1 September 2015?

Topic 5: Withholding tax; refund based on the DTA Switzerland-Denmark

Facts

Bank K is a company incorporated in Denmark. Its purpose is to trade in both listed and unlisted securities. Bank K belongs to the K-Group and is wholly owned by K-Holding A/S Aktiengesellschaft, which is also based in Denmark. The K-Group also includes K-Management Ltd. with its registered office and actual administration in London, UK.

On 15 September 2007, Bank K applied to the FTA with Form 89 for a refund of withholding tax for due dates 2006 in the amount of CHF 1,000,000 (hereinafter referred to as Application 1). The FTA granted this request in full on 30 October 2007.

On 5 May 2008, Bank K submitted another application to the FTA on Form 89 for a refund of withholding tax for 2007 due dates in the amount of CHF 5,000,000 (hereinafter referred to as Application 2). In a letter dated 2 October 2008, the FTA requested various information from Bank K regarding the securities positions on applications 1 and 2 and the economic background to the individual transactions.

By letter dated 5 January 2009, Bank K sent various documents to the FTA, stating in particular that the requests for reimbursement for maturities 2006 and 2007 would relate to similar situations. In accordance with its Articles of Association, Bank K engages in equity derivatives trading and issues so-called total return equity swaps on, inter alia, Swiss listed securities. This is an exchange of the entire income from an equity portfolio for a fixed cash flow, whereby, among other things, 93 percent of the dividends paid on the underlying securities during the term of the swap are passed on to the investor in the swap. In return, Bank K will receive an interest compensation of 2.5 % of the equity notional amount as well as full compensation for any impairment of the underlying securities.

The counterparty to these swaps was exclusively K-Management Ltd. Bank K had hedged the derivatives by purchasing the corresponding underlying assets. Moreover, Bank K had not entered into any formal obligation to pass on the dividends received. Not least for this reason, the applicant claims that the withholding tax should be reimbursed in full.

On the basis of these statements by the applicant and on the file, the FTA refused in its letter of 30 June 2009 to Bank K to reimburse the withholding tax in full with regard to application 2. In connection with application 1, the FTA claimed back what it considered to be an unjustified reimbursement, together with default interest from the date of the subsequent unjustified reimbursement by the FTA until the date of reimbursement. The FTA based its argumentation on the lack of the right to use Bank K.

Questions

• How is the application for reimbursement of Bank K's withholding tax to be assessed in this case, particularly from the point of view of beneficial ownership?
• What consequences does this assessment have for applications 1 and 2?