Current problems of intercantonal and international corporate tax law (2019)

Case 1: Cross-border charging of services between related parties

Facts

A AG, with its registered office and offices in Zurich, provides consulting services in the private equity sector with its highly qualified staff. The only customer is A Ltd, Jersey. A Ltd is the General Partner of A Limited Partnership (A LP), Jersey. The A LP is a closed collective investment scheme (fund) which invests funds in medium-sized companies in Switzerland and Germany on behalf of various investors. A Ltd and A AG are held by the A holding company.

A Ltd will only perform routine functions in connection with fund administration with personnel working in Jersey, the other activities, in particular the acquisition of investors, the identification and evaluation of investment opportunities and the monitoring of investments, will be performed by the personnel of A Ltd in Zurich.

A Ltd receives from A LP an asset management fee of 2.25% of the invested capital and a performance fee of 20% (at a hurdle rate of 8%) for services rendered by A LP and itself for the benefit of the fund.

A AG receives a consulting fee of 1.5% of the invested capital from A Ltd. for its services.

Questions

1. According to which provisions is it to be assessed whether the consultancy fee of 1.5% is appropriate?
2. What is the general two-step approach to transfer pricing?
3. In the present structure, what are the value-driving functions and the corresponding risks?
4. According to which transfer price method are the services rendered to be valued and how could this method be applied here?

Case 2: Loss offsetting in international relations

Situation 1: Loss of the domestic parent company and profit of the foreign permanent establishment

B AG, headquartered in Zurich, provides services in the area of human resources. In addition to its headquarters in Zurich, it maintains a branch office in Berlin.
In 2017 and 2018, it reports the following results (in CHF):

Question

How high is the taxable profit in Switzerland in 2017 and 2018 for direct federal tax and Zurich state and municipal taxes?

Situation 2: Loss on foreign operations and profit on real estate in Switzerland

C is resident in the Bahamas, where he runs a hotel as a self-employed person. In Switzerland, he has a limited tax liability due to real estate property in the city of Zurich. He does not earn any other income. While the hotel operations generated a loss of CHF 100,000 in 2018, the properties in the city of Zurich generated a net income of CHF 150,000.

Question

Can C offset the loss from the foreign hotel business in the case of direct federal tax and Zurich state and municipal taxes against the income from the properties located in Switzerland?

Case 3: Asset managing partnership

Facts

D, resident in Zurich, together with his three siblings, holds an interest in D GmbH & Co KG, a limited partnership under German law.

The four siblings are limited partners (Kommanditäre) of D GmbH & Co KG with 25% each. D GmbH is the general partner with unlimited liability (with a share of 0.0001%).

Funds generated by E GmbH & Co KG (a partnership with a large business operation in Germany) and funds not required for operational purposes are transferred to D GmbH & Co KG.

The funds transferred to D GmbH & Co KG are professionally managed and invested there (in shares, funds, bonds etc.). D GmbH & Co KG does not have its own staff or office premises. The management and administration is carried out by D GmbH, which has its own offices and employs five people.

Questions

1. Under Swiss law, is D's share in the profits of D GmbH & Co KG part of D's taxable income in Switzerland?
2. Under the double taxation agreement with Germany, which state has the right of taxation on D's share of profits in D GmbH & Co KG?
3. Does it matter where D GmbH & Co KG is managed?
4. Are Questions 1 or 2 to be answered differently if D GmbH & Co KG is regarded under German law as a so-called commercial company?

Case 4: Abuse of the Agreement

Facts

TCO is a company incorporated in State T and listed on the stock exchange of State T. TCO is the parent company of a multinational company that carries out a wide range of business activities worldwide (wholesale, retail, manufacturing, investment, finance, etc.).

Issues relating to transport, time differences, the limited availability of foreign-language staff and the foreign locations of business partners make it difficult for the TCO to manage its foreign activities from State T.

TCO is therefore establishing RCO, a subsidiary based in State R (a country with developed international trade and financial markets and a wealth of highly skilled labour), as the basis for the development of foreign business. The RCO conducts various business activities such as wholesale, retail, production, financing and national and international investments. The RCO also has the human and financial resources (in various areas such as legal, financial, accounting, tax, risk management, audit and internal control) necessary to carry out these activities. It is clear that the activities of the RCO represent the active management of a company in State R.

As part of its activities, the RCO also undertakes the development of new production facilities in the State of S. To this end, it establishes the SCO, which it endows with equity and a loan. The RCO receives dividends and interest from the SCO.

Switzerland as source country

Questions

1. Can RCO claim the agreement benefits under the DBA-NL?
2. Can RCO claim the agreement benefits under the DBA-LVA (Latvia)?
3. How would the case be assessed if the DBA-ARG were to be revised in accordance with the BEPS Convention?

Switzerland as a country of residence

Questions

1. Can RCO claim the agreement benefits under the DBA-NL?
2. Can RCO claim the agreement benefits under the DBA-LVA (Latvia)?
3. How would the case be assessed if the DBA-ARG were to be applied in the light of the BEPS Convention?

Case 5: Refund of withholding tax in an EU group relationship

Facts

F-AG, based in Italy (great-grandparent company), is the parent company of the F Group. The F Group also includes, among others, A-AG (parent company), based in Dublin (IRL), which is wholly owned by B-AG (grandparent company), also based in Dublin (IRL). The parent company (A-AG) is responsible for the trademark and patent administration as well as the management of the research and development activities of the F Group. The E-AG (hereinafter referred to as the sister company), with its registered office in the Netherlands, is also part of the F Group and, like the B AG (grandparent company), is held by the F AG (great-grandparent company).

In September 2005, the parent company (A-AG) acquired from the sister company (E-AG) all the intellectual property rights, numerous patents and trademarks, and the accrued research and development costs. The purchase price was financed with funds provided by the grandparent company (B-AG). At the beginning of 2006, the parent company (A-AG) acquired the stake in G-AG (subsidiary), based in Zurich (CH), from the sister company (E-AG) and has been its sole shareholder since then. The parent company (A-AG) financed the purchase price of the investment in G-AG (subsidiary) of around EUR 11.5 million with funds provided by the grandparent company (B-AG) in the form of a loan. The parent company's (A-AG) debts to the grandparent company (B-AG) for the acquisition of the intangible assets and the investment in the subsidiary G-AG totalled around EUR 23 million. In June 2007, the Swiss subsidiary G-AG paid a dividend of CHF 14 million to its shareholder, the Irish parent company (A-AG), which was due at the end of September 2007. The FTA then rejected the application for a refund of the withholding tax of the parent company A-AG based on Art. 15 of the Agreement on the Taxation of Savings Income (ZBStA).

Questions

1. The ZBStA was renamed as of 1 January 2017 (new: Agreement on the automatic exchange of information on financial accounts to promote tax honesty in international situations; hereafter EU-AIA). Are facts that occurred before the EU AIA came into force nevertheless assessed according to the CBA?
2. Who is effectively entitled to use the disputed dividend income?
3. In the present constellation, can the refund of withholding tax be refused on the grounds of treaty abuse?
4. Would the assessment of the case change if the principle purpose test were applied?
5. Can the grandparent company (B-AG) claim a refund of the withholding tax?

Case study 6: Refund of withholding tax

Facts

A, resident in Vienna (AUT), is the indirect founder and sole beneficiary of the Liechtenstein Foundation I. Based on a so-called "letter of wishes", he has full power of disposal over the foundation's assets. According to the foundation charter, the function of the foundation board is exercised by L-AG and Dr. K. Based on the "letter of wishes", the LLC is obliged to implement the wishes or expressions of intent of founder A on his behalf or in a fiduciary capacity. The Foundation I, for its part, is the 100% owner of the Finance Company G with its registered office in Panama. The brother of A, also resident in Austria, has a mirror-inverted structure with the Liechtenstein Foundation H. The Foundation H, for its part, holds a 100% interest in the Finance Company E with its registered office in Panama. The two Liechtenstein Foundations H and I each hold 50% of the intermediate company F with its registered office in Panama, which in turn is 100% owner of the company D with its registered office in Tortola (British Virgin Islands). The foundation's holdings in G and F are held in trust by L-AG and are managed by it on behalf of A. Company D, in turn, is the 100% owner of the Swiss B-AG (hereinafter B) and C-GmbH (hereinafter C). In contrast to D and G, both B and C have their own staff and office space and are therefore engaged in genuine economic or active business activities.

During the years 2009 to 2011, Swiss companies B and C reported several dividend distributions using the appropriate forms, which they initially transferred to D. Within two months, D then forwarded them to G and E in equal parts. In 2012, A submitted an application for a refund of the withholding tax for the years 2009 to 2011. The proposal includes dividend distributions from B and C as well as investment income from dividends on listed Swiss equities and interest income on client deposits held in G's custody account at Bank X. At a later date, the FTA received a corresponding application from A for a refund of the withholding tax for 2012, and the FTA rejected both applications in their entirety.

Questions

1. Under the law of which state is the question of whether a dividend is present and to whom it has accrued?
2. Are D, G or A authorised to use the system? What effect does the tax transparent treatment of I, G and D in Austria have on the allocation of dividend income and interest income?
3. Can the refund of withholding tax be refused on the grounds of abuse of the treaty?