Reporting procedure in group relationships and restitution in national relationships - current practice, decisions and innovations

Case 1: Reporting of taxable performance instead of tax payment for dividends in the group relationship

1. facts of the case

Produktions AG (hereinafter also referred to as the Company) is a domestic company domiciled in the Canton of G. The share capital of the Company amounts to CHF 1,000,000.00 and is divided into 10,000 bearer shares with a nominal value of CHF 100.00 each. Originally, the shares of Produktions AG were owned by its management and employees as well as by the pension fund with which the employees of Produktions AG were insured. Over time, various other individuals and legal entities acquired participation rights in Produktions AG.

In the period from 2010 to 2017, Beteiligungen AG continuously acquired participation rights in Produktions AG from various employees of Produktions AG - some of whom have since left the company - as well as from other natural persons and legal entities. As a result, Beteiligungen AG held 97% of the participation rights in Produktions AG as of December 31, 2017 and reported this in its balance sheet. Beteiligungen AG is a domestic company with its registered office in Canton B.

Produktions AG did not distribute a dividend in each of the financial years 2010 to 2016, as business was not particularly good. It was not until the 2017 financial year that the company generated a profit that enabled it to propose a dividend distribution of CHF 100.00 per share to its Annual General Meeting. On April 2, 2018, the Annual General Meeting of Produktions AG approved the profit appropriation proposal of its Board of Directors in accordance with the proposal; a due date for the dividend payment was not set.

On June 15, 2018, the company declared the dividend distribution of a total gross amount of CHF 1,000,000.00 to the Swiss Federal Tax Administration (FTA) using Form 103. On the corresponding Form 103, it stated - as also in Form 106 submitted on the same day (request for notification instead of payment of withholding tax on shareholdings of at least 20% [Art. 26a VStV]) - that the notification procedure was requested to the extent of the 97% shareholding of Beteiligungen AG in Produktions AG. Thus, on July 15, 2018, Produktions AG transferred a withholding tax in the amount of CHF 10,500.00 to the FTA.

As part of the review of the application submitted for the first time for reporting instead of payment of withholding tax, the FTA requested copies of all contracts of Beteiligungen AG regarding its share purchases in the company from Produktions AG. The company provided only incomplete information, since Beteiligungen AG, according to its own statements, concluded the relevant purchases partly orally. It is of the opinion that in the absence of formal requirements for the transfer of bearer shares, it is not obliged to submit written share purchase agreements to the FTA. Moreover, since it had acquired shares in Produktions AG from a wide variety of shareholders over a longer period of time, the acquisition prices also varied and amounted to between CHF 1,500.00 and CHF 4,500.00 per share. Furthermore, Beteiligungen AG is also unable to state completely from whom it acquired how many shares in Produktions AG. However, since it undoubtedly had a 97% shareholding in Produktions AG as shown in its balance sheet at the time the present dividend of Produktions AG was due, since it was a domestic corporation, and since it also met the other relevant requirements for the granting of the reporting procedure pursuant to Art. 26a of the Ordinance of 19 December 1966 on Withholding Tax (Withholding Tax Ordinance, ITA; SR 642.211), its application for the implementation of the reporting procedure to the extent of 97% of the dividend of Produktions AG was to be approved by the FTA.

Question

Can the FTA approve the reporting procedure requested here?

Case 2: Refund of withholding tax (VStG); tax avoidance

1. facts of the case

F AG was founded in 2002 and is domiciled in canton A. Its purpose is to carry out fiduciary and accounting work and to hold and manage participations in companies in the industrial, financial and real estate sectors. Its fully paid-up share capital amounts to CHF 250,000. All participation rights of F AG were held by the domestic A Holding AG in 2005.

At the end of 2004, F AG held all participation rights in three trust companies. Between 2005 and 2010, it also held participation rights in four other trust companies.

C Consulting AG is also a company based in Switzerland. Its corporate purpose includes the performance of fiduciary and accounting services. C Consulting AG has a share capital of CHF 100,000, which is divided into 100 shares with a fully paid-up nominal value of CHF 1,000.

By contract dated March 23, 2005, Mr. C, who is resident in Paraguay, sold to F AG all participation rights in C Consulting AG for a price of CHF 3,100,000. Thus, F AG continues its business strategy to acquire trust companies. As of December 31, 2004, C Consulting AG had, according to its balance sheet, current assets of CHF 900,000.-- in the form of cash and cash equivalents only. The fully operational fixed assets amount to CHF 600,000. On the liabilities side, CHF 632,000.-- was booked as borrowed capital. The equity capital of C Consulting AG amounts to CHF 868,000, which includes the share capital, general reserves of CHF 600,000 and the profit carried forward of CHF 168,000.

The course of business of C Consulting AG in the years 2005 to 2010 did not allow it to generate profits; rather, annual losses of between CHF 1,000 and CHF 5,000 resulted in each case. Therefore, C Consulting AG did not distribute any dividends for the financial years 2005 to 2009.

On 26 July 2011, C Consulting AG declared a gross dividend distribution of CHF 500,000 to the Swiss Federal Tax Administration (FTA) using form 103. This dividend related to the 2010 financial year of the company and was approved by the general meeting of C Consulting AG on 10 July 2011 (without specifying a due date). C Consulting AG transferred an amount of CHF 175,000 to the FTA as at 30 July 2011 (representing 35% of CHF 500,000).

On 12 October 2012, F AG applied to the FTA for a refund of the withholding tax of CHF 175,000 on the dividend of C Consulting AG using form 25.

Question

Will the FTA approve F AG's application for a refund of withholding tax using form 25 in the amount of CHF 175,000?

Case 3: Refund of withholding tax in case of originally undeclared dividend

1. facts of the case

Mr. Reich is subject to unlimited tax liability in Canton B. In the securities list of his 2019 tax return, he declares, among other things, 10,000 registered shares in X AG, domiciled in Zurich. Mr. Reich lists this shareholding in his list of securities with a tax value of CHF 10,000,000, but without listing the gross dividend of 1,100,000 that became due in this tax period. A withholding tax of 35 percent was deducted and passed on on this dividend distribution, resulting in a net dividend of CHF 715,000 for Mr. Reich. Mr. Reich is a member of the board of directors of X AG.

With an assessment ruling dated June 5, 2020, the tax administration of Canton B offset the gross dividend of CHF 1,100,000. In addition, it informed Mr. Reich that the claim for refund of the withholding tax of CHF 385,000 had been forfeited for lack of a proper declaration. Mr. Reich, who was already over 80 years old at the time, objected to this. He argued that the failure to declare the dividend was due to carelessness. In this context, Mr. Reich provided a doctor's certificate to prove that he had suffered from health problems (sleep apnea syndrome) during the period in question. In his view, this proved that he had merely "forgotten" to declare the dividend and had not deliberately omitted to do so.

The Cantonal Tax Administration, on the other hand, is of the opinion, both in the ruling and in the corresponding appeal decision, that according to general life experience, based on the overall circumstances (Mr. Reich's position on the board of X AG; repeated and explicit confrontation by his legal representative with the question of a possible dividend of X AG as well as the extraordinary amount of the dividend in question), it can be assumed with probability bordering on certainty that Mr. Reich had been aware of the incomplete declaration and had at least accepted the resulting tax reduction. Based solely on the medical certificate on file, it cannot be established - even taking into account Mr. Reich's advanced age - that a retroactively negligent declaration of the dividend within the meaning of Art. 23 para. 2 VStG is to be affirmed.

Mr. Reich appeals against the corresponding objection decision of the tax administration of Canton B before the competent cantonal appeal commission.