Use of foreign legal forms in the cross-border structuring of business activities

Case 1: Participation deduction for foreign investments

Facts

Alerion Capital AG is a company based in Zug, Switzerland. Together with an independent co-investor (BHP LLC), it intends to purchase a 40% stake in 2B International Ltd. The acquisition is to be made through a Limited Partnership (LP), Cayman. Alerion Capital AG and the co-investor each hold a 20% capital interest in 2B International Ltd. (USA). Since the co-investor has only made access to the investment possible in the first place, the partners agree on the following profit distribution with regard to the LP: Co-investor 60%, Alerion Capital AG 40%.

Facts variant 1

Contrary to the basic facts, BHP LLC alone makes all investment and disinvestment decisions within the LP and thus assumes the role of General Partner. BHP LLC makes its decisions based on the investment recommendations of the Advisory Committee. According to the "Management Agreement", the LP should have invested its assets in at least 25 holdings after 3 years. After ten years the LP will be liquidated and the liquidation proceeds distributed to the partners. The distribution of profits among the partners is based on capital. The General Partner also receives a profit share. The share of each target investment attributable to a partner corresponds to at least CHF 1 million in value.

Situation variant 2

In contrast to situation 1, an Irish Ltd. is intermediated and the limited partners subsequently do not invest directly in the LP but in the Irish Ltd. which has the usual functionaries required under company law. There is no right to the return of the company shares.

Facts variant 3

Alerion Capital AG is taxed cantonally as a holding company. Following the sale of some operating investments, the company has a high level of liquidity, but does not meet either the asset or income test. The CFO wants to reinvest the liquidity and has various target companies for sale examined. As due diligences are unsuccessful and no equity investments can be acquired, liquidity is largely invested in passive collective investment schemes (ETFs) on equity indices.

Question on the basic facts

If 2B International Ltd. distributes dividends, is Alerion Capital AG entitled to the investment deduction?

Question on the facts of the case 1

1. What is the procedure for classifying this foreign investment vehicle?
2. Is Alerion Capital AG entitled to the investment deduction to the extent that LP has received dividend income?

Question on the facts of the case 2

Does the participation deduction apply to distributions by Irish Ltd. to Limited Partners?

Question on the facts of the case 3

Can Alerion Capital AG continue to be taxed as a holding company at cantonal level?

Case 2: Foreign investment income

Facts

Symetris Holding AG (cantonal holding status) holds a 100% stake in the Brazilian Corcovado S.A. Corcovado S.A. distributes a profit of 10 million reais to Symetris Holding AG.

Facts variant 1

Brazilian company law provides that corporations can pay their shareholders interest on equity in addition to traditional dividends (juros sobre capital proprio). Under certain conditions, this interest is tax deductible for the Brazilian company making the payment. Corcovado S.A. makes a return on equity of 1 million reais, which (assumption) it may deduct from the Brazilian tax base.

Situation variant 2

On 7 June 2017, Switzerland signed the OECD BEPS Convention in Paris. Once ratified, the agreement indirectly incorporates BEPS minimum standards into the Swiss network of agreements or certain DTAs.

Questions about the basic facts

1. Can Symetris Holding AG claim the participation deduction on the profit distribution of Corcovado S.A.?
2. How is the investment assessed in terms of its holding status?

Questions on the facts of the case 1

1. Can Symetris Holding AG claim the participation deduction on the equity interest received from Corcovado S.A.?
2. How is the return on equity assessed with regard to the holding status?
3. Brazil levies a withholding tax of 15% on the interest on equity. Can Symetris Holding AG claim the lump-sum tax credit for this?
4. How do other countries assess the return on equity with regard to their tax relief for investment income (e.g. intercompany privilege)?

Question on the facts of the case 2

How is the return on equity under BEPS assessed?

Case 3: Unlimited possibilities?

Facts

As tax commissioner you are responsible for the assessment of Grimenta Investment AG. The financial statements show that the Company holds a 50% interest in Synaltech LLC, based in the USA. Synaltech LLC makes a profit distribution of USD 1 million to Grimenta Investment AG. In the tax return of Grimenta Investment AG, the participation deduction is claimed on this. Synaltech LLC has personnel and infrastructure at its headquarters in the USA.

Facts variant 1

Synaltech LLC has so far been treated as non-transparent in Switzerland and the USA. The company is making a "check-the-box election" and will be viewed transparently in the USA in future.

Situation variant 2

Synaltech LLC has so far been treated as non-transparent in Switzerland and the USA. The company is making a "check-the-box" election and will in future be viewed transparently in the USA. It is known that there is no substance at the company headquarters in the USA.

Facts variant 3

Synaltech LLC has so far been viewed transparently in Switzerland and the USA. The company ceases its American business operations and acquires an investment property in California.

Questions about the basic facts

1. Can Grimenta Investment AG claim the participation deduction on the profit distribution of Synaltech LLC?
2. How would the profit distribution be treated for tax purposes if the participation deduction were not applicable?

Question on the facts of the case 1

How will future profit distributions from Synaltech LLC be treated for tax purposes in Switzerland?

Question on the facts of the case 2

How will future profit distributions from Synaltech LLC be treated for tax purposes in Switzerland?

Question on the facts of the case 3

How will future profit distributions from Synaltech LLC be treated for tax purposes in Switzerland?

Case 4: Joint venture in the form of a silent partnership

Facts

von Weissenstein Bank GmbH & Co KG is a private bank in Germany with a long tradition. It does not want to miss important developments in the Fintech sector and therefore wants to participate in the newly founded Fintech company Finventure AG based in Zurich.

In the event of loss, however, it sees its reputation in jeopardy, which is why it only wants to participate quietly. All shares of Finventure AG will therefore remain with Novum Bank AG, whereby von Weissenstein Bank will only receive a purchase right for 49.9% of the shares. It is further agreed that Novum Bank and Weissenstein Bank will each provide Finventure AG with CHF 20 million in capital. If further capital is required due to initial losses, an additional funding obligation of CHF 10 million will be established. von Weissenstein Bank does not receive any interest payments, but only participates in the profits of Finventure AG to the extent of 50%.

Facts variant

Contrary to the basic facts Novum Bank AG does not establish a subsidiary, but organizes the Fintech company as a separate branch of the company in premises in Zurich. All employees are employed by Novum Bank AG.

The von Weissenstein Bank GmbH & Co KG participates in the profits of the Fintech company to the extent of 75%. In addition to information rights, von Weissenstein Bank also has various co-decision rights with regard to major investment and development decisions.

The Fintech business activities generate a significant amount of interest and dividend income subject to withholding tax.

Questions about the basic facts

1. How is the capital injection of von Weissenstein Bank to be assessed from the point of view of issue tax law?
2. After initial losses, Finventure AG achieves substantial profits. What tax consequences arise at the level of Finventure AG?

Questions on the facts of the case

1. What tax consequences result from the silent partnership at Novum Bank AG?
2. How is the profit of the Fintech company taxed?
3. Can a refund of the withholding tax be applied for?