Julia von Ah
Reimbursement in international circumstances - current practice and problem areas
Workshop on the occasion of the ISIS) seminar on 21 September 2020 entitled "Practical cases on withholding tax and outlook on current developments".
Case 1: Moving away from Switzerland - old reserves practice ?!
A, born in 1968, and his wife B, born in 1969, are both Swiss citizens and have lived in Switzerland since birth and are subject to unlimited tax liability here due to their place of residence.
For years, as founders, the couple have owned all the shares in AB-AG with its registered office and actual administration and AB-AG therefore has unlimited tax liability in Switzerland. The purpose of the AB-AG is as follows: Holding of participations in financial, trade and industrial companies of all kinds as well as the provision of consulting services in this context.
The shares in the AB-AG as well as the regular dividend distributions have always been declared by the couple for direct tax purposes since the foundation of the company and the refund of the withholding tax deducted on the dividends was based on Art. 21 et seq. VStG.
As of December 31, 2019 and December 31, 2018, AB-AG reports the following equity:
A and B moved their residence and thus their tax domicile from Switzerland to Cyprus at the end of 2019 / beginning of 2020. Based on the transfer of their residence in Switzerland as of 31 December 2019 and their domicile in Cyprus, their unlimited tax liability in Switzerland will end as of 31 December 2019. Based on the transfer of their residence in Cyprus, A and B will become subject to unlimited tax liability there under Cypriot tax law, whereby they will have the so-called "non dom tax resident" status. The corresponding permit will be applied for in December 2019 and granted in March 2020.
In Cyprus, it is planned to establish a Cypriot company, the shares of which will be held by A and B (hereinafter referred to as "Newco"), immediately after A and B take up residence in Cyprus or after the granting of a residence permit in Cyprus. The shares in AB-AG, which are currently held directly by A and B, are to be transferred in full to this Cypriot company against equity. The contribution value of the shares of the AB-AG in Newco shall correspond to the substance of the AB-AG as reported under commercial law at the time of contribution. The closing of this transaction is only possible after A and B have received the Cypriot residence permit.
This Cypriot company should be active: A and B have already evaluated various projects which are to be carried out through this Cypriot company with A and B and other employees. These are, on the one hand, the acquisition of olive plantations and their conversion to organic production and, on the other hand, projects in the field of sustainable tourism. According to current knowledge, A and B are planning to invest around CHF 3,000,000 in Cyprus over the next five years. It is not yet clear whether these projects will be carried out directly in Newco or through its Cypriot subsidiaries, which have yet to be established.
Thus, the initial situation or current structure and the planned structure are as follows:
Case 2: Reimbursement: FL Foundation as asset management vehicle
The FL Foundation was established by the mother as the founder with the entry in the commercial register on 18 December 1975. The founder was domiciled in Vaduz, FL, from the time the Foundation was established in 1975 until her death in 1996. The beneficiaries of the FL foundation are the descendants of the founder, all of whom are tax residents in Germany and have unlimited tax liability.
The FL Foundation is, among other things, the owner of a 5 percent share in Schweiz AG. The FL Foundation has received the following dividends on these shares for the years 2017 and 2018:
The refund application of CHF 1,400,000, divided into CHF 600,000 per 2017 and CHF 800,000 per 2018, based on Art. 10 para. 2 DBA-FL, was submitted by the FL Foundation to the FTA in summer 2018 using Form 78.
The DBA-FL was put into force with effect from 1 January 2017. Until then, the FL Foundation, as a Liechtenstein foundation, therefore had no independent claim to restitution. Up to and including due dates in 2016, the refund of dividends on the shares in Switzerland AG held by the FL Foundation was claimed and also granted on the basis of Art. 10 para. 2 letter c of the double taxation agreement between Switzerland and Germany ("DTA-D") on Form 85, i.e. 20 per cent of the gross dividend was refunded to each of the beneficiaries of the FL Foundation (transfer to the bank accounts of the FL Foundation, which was listed as the payee on Form 85). The FTA granted this refund in full knowledge of the payments to the FL Foundation; both the FTA and the competent German tax office, which issued the certificate of residence on the respective forms 85, qualified the FL Foundation as a transparent family foundation in this period.
As of the 2017 tax period, the FL Foundation in FL has applied for ordinary taxation.
The FTA rejects the claimed reimbursement for the due dates 2017 and 2018. The FTA gives the following reasons for the rejection of the reimbursement requests:
- In the case of foreign foundations, it is examined on the basis of the specific circumstances to whom foundation assets and income are to be allocated for tax purposes.
- For the tax attribution of the assets and income of the foundation, it is of decisive importance who, on the basis of the circumstances of the individual case, can actually dispose of the assets and income of the foundation.
- In the present case, the founder (first beneficiary) or, as the case may be, her descendants today could actually dispose of the foundation assets and income.
- The foundation assets and income were therefore to be attributed for tax purposes to the descendants of the founder as economic beneficiaries.
- Accordingly, the descendants of the founder must apply to the FTA for a refund of the withholding tax on foundation income by means of Form 85 (DBA Germany).
Case 3: Reimbursement: Corporate Foundation FL with Swiss operational group
A., residing in S. (FL), had the X. Foundation, with its registered office in S. (FL), irrevocably established with a foundation capital of CHF 30,000 with the adoption of the statutes on 1 February 1994. It was entered in the FL company index the following day. A few days later, A. dedicated the X. Foundation all shares of Z. HoldCo., Switzerland, to the X Foundation. A. lived in S. (FL) until his death
The purpose of the foundation is in particular
- Acquisition of Z. HoldCo., Switzerland, and the group of companies held by it
- Influence on the management of the projects managed by the Z. HoldCo's management of the group of companies held by Z. HoldCo
- promote the continued existence and expansion of this group of companies and
- to provide financial support and encouragement to the founder of the company as a whole and to members of his family by distributing dividends and granting other financial benefits
- acquisition, construction, management, leasing and sale of domestic real estate
- the foundation is authorised to conduct a business run on commercial lines.
Z. HoldCo was established by A. with its articles of association dated 12 April 1984 with a share capital of CHF 1,000,000 (unchanged) and registered office in P. (Switzerland) and was entered in the Commercial Register the following day. The. Z. HoldCo holds several operating Swiss subsidiaries. All are active in the field of energy technology.
In the meantime, the X. Foundation has also acquired several properties and is investing in them.
Discretionary beneficiaries pursuant to Art. 552 para. 7 of the PGR are the four sons of the founder (B., C., D. and E.), who have always resided and continue to reside in FL. Upon their death, their descendants take over the respective position.
To the Board of Trustees of X. Foundation:
- it consists of three members. One of them must meet the requirements of Art. 180a PGR;
- if one or more beneficiaries hold a management position in the company as a whole, two of them belong to the board of trustees, provided that they agree to this;
- The most senior executive member of the Group is entitled to sit on the Board of Trustees (regardless of his or her status as a beneficiary).
Three of the four sons are operatively active for the group. Son B. is CEO of the group and Chairman of the Board of Directors of Z. HoldCo and two subsidiaries.
Son C. is the COO of the group of companies, manages the operative business of the group of companies, is Vice President of Z. HoldCo, Managing Director of another subsidiary and Chairman of the Board of Directors of two other Group companies.
Son D. is in charge of the Group's accounting. His wife is also a member of the management. Their son recently joined the company.
B. and C. together with F., a lawyer resident in FL, form the Board of Trustees.
The four discretionary beneficiaries together form the Council of Beneficiaries. It has certain exclusive powers, such as approving the annual accounts of the foundation, deciding on distributions, submitting applications to the board of trustees regarding changes to the foundation's benefits. In addition, it has certain rights of participation: the Board of Trustees must submit certain transactions to the Board of Beneficiaries prior to passing a resolution, such as the sale, pledging and/or encumbrance of directly held participations in the company as a whole and of majority participations in significant, indirectly held Group companies. If the Board of Beneficiaries does not agree, the transaction may not be dealt with further by the Board of Trustees.
The X. Foundation has unlimited tax liability in the Principality of Liechtenstein. Its taxable net income is subject to income tax at a rate of 12.5% (Art. 61 SteG).
Can the X. Stiftung be used for distributions of Z. HoldCo the zero rate in accordance with Art. 10 para. 3 letter a DBA CH-FL?