Tax planning between legality and crime: tax evasion, abuse of rights, treaty abuse and tax crime - national and international
Workshop on the occasion of the ISIS seminar on 9/10 September 2019 entitled "Tax planning in the area of conflict between cost optimisation, tax compliance and Good citizenship - opportunities and risks".
Case study 1: Taxable residence
Pensioner X is a Swiss citizen. He has retired after having completed his employment abroad. In this state he is exempt from tax liability. In Switzerland, he is the owner of an inherited single-family house, which he uses during his European travels and leaves otherwise empty.
Every year at the beginning of May he travels to Switzerland where he registers his car and visits relatives and friends in Switzerland and the rest of Europe. In October he returns to his place of residence abroad.
In Switzerland, he submits a tax return in which he states that he has only limited tax liability in Switzerland. He declares the imputed rental value and the property tax value of his single-family home.
When checking his last tax return, the tax administration asked how long he had been in Switzerland during the tax period in question.
- What are the tax risks for X. when he answers that he has been in Europe for a good five months?
- Does it matter whether he lives in a state with which Switzerland has concluded a DTA?
- Are there risks of criminal tax law?
Case study 2: Mailbox domicile
Founded in 2008, A.AG has its statutory domicile in the Canton of Appenzell Ausserrhoden. Its purpose is the import and distribution of goods. A.AG is the sister company of D.AG with headquarters in the canton of Zurich, which pursues the same corporate purpose.
The business activity of A.AG is limited to purchasing goods on behalf of D.AG and delivering them to its customers. These transactions are handled by D.AG personnel, who charge A.AG for personnel and administrative expenses plus a profit margin. At its statutory domicile in the Canton of Appenzell Ausserrhoden, A.AG has neither a permanently leased infrastructure nor its own staff.
In 2016, the tax administration of the Canton of Zurich claims tax sovereignty over A.AG. since its foundation. In the Canton of Appenzell Ausserrhoden, it has been legally assessed for the tax periods 2008 - 2013.
- What tax risks exist for A.AG?
- Has she committed tax offences?
Case study 3: Private expenditure
B. is managing director and sole shareholder of C. GmbH. This company paid B. a trip to Disneyland, the leasing instalments for the vehicle which it also used privately, and a B & O system, and charged these services to operating expenses, without any private expenses being deferred.
- What are the tax consequences of this operation?
- Has B. committed tax offences?
C. GmbH pays its remuneration to A., the brother of B., who is the de facto managing director of C. GmbH.
- What tax consequences does this have for A?
- Has he committed tax offences?
Case study 4: Redirected commissions
On X. AG, A (56 %), B (36 %) and several small shareholders are involved. The X. AG brokers capital investments and insurance. Among other things, she has worked with the Y. AG concluded a service agreement. It transfers a part of the commissions to X. AG and the remainder to the Z. Anstalt with its registered office in the Principality of Liechtenstein, in which A. is the beneficial owner.
- What are the tax risks for A and X. INC.?
- Have they committed tax offences?
Case study 5: Refund of withholding tax
A, resident in Vienna (AUT), is the indirect founder and sole beneficiary of the Liechtenstein Foundation I. On the basis of a so-called "letter of wishes", he has full power of disposal over the assets of the foundation. 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, in turn, 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 a genuine economic or active business activity.
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.
- Under the law of which state is the question of whether a dividend is present and to whom it has accrued?
- 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?
- Can the refund of withholding tax be refused on the grounds of abuse of the treaty?
Case study 6: Tax avoidance with the aim of avoiding transposition taxation
A is the sole shareholder of E. AG, domiciled in Schwyz. His father C was the sole shareholder of F. AG, also domiciled in Schwyz, whose share capital consists of 5,000 fully paid-up shares of CHF 500 each. As early as May 2010, C intended to sell 25% of the share capital of F. AG to E. AG in the amount of CHF 1.55 million in view of the pending company succession. In addition, a further 25% of the share capital was to be transferred to A as an advance inheritance. A would then have sold this second block of shares to E. AG at a nominal value of CHF 625,000. Both sales were to have been financed by non-interest-bearing loans. In the final shareholding structure, E. AG, which was held by A, and C would then each have been entitled to a share capital of 50% in F. AG. With regard to the tax qualification of this constellation, it was stated in the ruling request of May 2010 and also confirmed by the tax administration of the Canton of Schwyz that the sale of shares to E. AG does not trigger an indirect partial liquidation, provided that no substance withdrawals are made during the blocking period of five years, and that the sale of the second block of shares held by A to E. AG does not qualify as a transposition, since the shares are transferred at par value. Notwithstanding this ruling request, C sold 2,500 and thus half of the share capital of F. AG to E. AG on 1 January 2011 at a price of CHF 3.1 million. The purchase price was left as a non-interest-bearing loan by C to E. AG. Under the gift agreement of 20 December 2011, C assigned the partial amount of CHF 1.55 million from his loan balance vis-à-vis E. AG to A as of 31 December 2011.
- Is the transposition factual situation fulfilled?
- Is there tax evasion?
The vendor loan is in line with the arm's length principle, i.e. an annual interest rate and amortisation period in line with the market was determined. Furthermore, C did not submit a ruling request to the Schwyz tax authorities with regard to company succession.
How would the case be assessed now?