Private individuals - International tax law 2017 - Switzerland/Germany

Case 1: Dual residence - divorce

Facts

Beate and Uwe Richter are married and live in their own house in Cologne.

Uwe Richter, born in 1956, is self-employed and partner in a successful management consultancy firm. His wife Beate (born 1965) worked as an auditor until mid 2011 with a workload of 50% in an employment relationship. Their two children Dirk (born in 1995) and Ulrike (born in 1993), who obtained their Matura at the High Alpine Institute Zuoz, will begin their studies in Switzerland at the University of Zurich in 2013 and 2015 respectively. Uwe Richter will leave the firm in mid-2017 and will in future work on individual mandates as a freelancer.

Through a friendly couple, the Richter spouses become aware of a property in Oberwil/Lieli Canton Aargau, which is in need of fundamental renovation. In order to enable the two children to complete their studies in Switzerland and in view of the imminent retirement of Uwe Richter from the firm, the Richter couple decided to purchase this property at the beginning of February 2012 and to renovate it extensively for their purposes. The purchase price is CHF 2 million and the renovation costs will be incurred in 2012 (CHF 800,000) and 2013 (CHF 800,000) with a value-preserving portion of 25%. To finance this renovation, the spouses receive dividends from Richter Holding AG, Baar. Both spouses hold 50% each of the shares of Richter Holding AG, Baar.

The renovation of the property will be personally supervised by Beate Richter. For this reason, she will give up her part-time job in Cologne at the end of 2011 and has since then regularly visited Switzerland in person. Since the property in Oberwil is not habitable until the end of 2012 due to renovation, Beate Richter stays either with her friends or in nearby hotels.

The rapid progress of the renovation allows Beate Richter and her daughter Ulrike to move into the house in Oberwil on 1 February 2013, initially on a provisional basis. However, she will return regularly to her residence in Cologne.

In the spring of 2013 Beate Richter discovers that her spouse has entered into an external relationship completely unexpectedly, but apparently already in autumn 2012. For this reason, in the autumn of 2013, it becomes clear that she seriously intends to stay in Switzerland at least until her children have completed their studies. In September 2013, she will take up gainful employment, initially at a rate of 20%. The workload will be reduced from 1 March

increased to 60% in 2014. After all attempts to save the marriage have failed, the couple separates in March 2014 with a separation agreement. On 3 March 2015 the marriage will be legally divorced.

The income and financial circumstances of the Richter spouses as of 31.12.2013 are as follows (all values converted into CHF)

Assumption for simplification: same assets as at 31.12.2012 and 31.12.2014.

Since 2007, the securities assets of the Richter couple have been pooled in Richter Holding AG, Baar. Both spouses are 50% shareholders.

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The spouse's maintenance contributions for Beate Richter, which were promised in the separation agreement for 2014, were never paid. In contrast, Uwe Richter will pay monthly maintenance contributions of EUR 8,000 for Beate Richter from the time the divorce takes legal effect in 2015 and will pay the children's study costs.

Distribution of assets after divorce:

In the course of the matrimonial property rights dispute, the spouses and judges agree on the following division of property, which is recognized by the court:

The holiday home in Bever is transferred to the two children. The mortgages go along with the properties.

Question

The tax authorities of the Canton of Aargau are of the opinion that there will be unlimited tax liability in the canton from 2012. They also doubt that Beate Richter is not in gainful employment in Switzerland and threaten to use discretionary income tax rates for Beate Richter.

How do you assess this case for the tax years 2012, 2013 and 2014 with regard to

• Establishment of a tax liability
• Scope of tax liability
• Refund of Swiss withholding tax

in Switzerland and Germany.

Rely on the DBG for the assessment under internal Swiss law.