Update on withholding tax

1. case study: levying withholding tax on benefits in kind (partial loan/mezzanine financing)

Facts

X AG is based in the canton of Z and its purpose is to trade in automobiles and to acquire, hold and sell investments. Originally, X AG was founded as a limited liability company (GmbH) and was converted into a stock corporation in 2010. The participation capital of the former X GmbH was dissolved and the previous holders of the participation certificates granted X AG loans in the amount of the participation capital, which carried interest of 7 % p.a.

In 2015, the Swiss Federal Tax Administration (FTA) conducted an audit of X AG for withholding tax purposes. The audit covered the financial years 2010 to 2014 and the FTA established that a total of four persons had granted X AG participating loans totalling CHF 1,820,000.

The FTA subsequently argued that for the purposes of levying withholding tax, the loans granted by the Partiarians should be treated in the same way as ordinary loans as regards the question of the appropriate interest rate. In this context, the FTA further stated that X AG had not provided sufficient evidence to date that this interest would stand up to a third-party comparison. Consequently, that part of the interest which was above the maximum interest rate set out in the relevant FTA Circular was to be qualified as a payment in kind and therefore subject to withholding tax at a rate of 35 %.

In contrast, X AG denies the existence of a payment in kind. In particular, it believes that for the purposes of levying withholding tax, a distinction should be made between loans with profit participation and ordinary loans. Thus, the interest rates according to the relevant FTA circulars may not be applied unchanged to profit-participation loans. In addition, the interest rate of 7% would correspond to the interest rate on the former participation capital. Due to the fact that the profit-participation loan combines elements of debt and equity capital, no comparison with third-party prices can be demanded; rather, a case-by-case analysis is appropriate. In addition, the fact that the interest paid would serve to preserve the vested rights of the former holders of the participation certificates had to be taken into account in the present case.

Questions

1. Are the interest payments made by X AG in this case subject to withholding tax? If so: To what extent is the withholding tax to be levied?
2. Does the qualification of the interest payments under withholding tax law change if the loans in question are mezzanine financing rather than participating loans?

2. case study: limitation period

Facts

In February 2020, the FTA conducts an audit of the years 2015 to 2018 at Muster Produktions AG. Muster Produktions AG produces Product A and sells it to its foreign sister company, Muster Vertriebs Ltd. Both companies are wholly owned by Muster Holding Ltd, UK. In the course of this audit, it emerged that since 2011, when Muster Vertriebs Ltd. was founded and Muster Produktions AG changed from direct operation to the current system, Muster Produktions AG has waived an above-average part of its margin in favour of Muster Vertriebs Ltd. The withholding tax inspector therefore also requires the necessary audit documents for these years.

Questions

1. Are there any monetary benefits relevant for withholding tax?
2. Until when can the FTA record these services?
3. Does it matter that the audit has only been announced for the years 2015 to 2018?

3. case study: profit shifting

Facts

Mr. Muster, domiciled in Switzerland, holds all the shares in Swiss Muster AG. This company trades in Product A. For the purpose of tax optimisation, Mr. Muster has established an FL foundation, which is revocable. He is its sole beneficiary. The FL foundation's only asset is the 100 per cent participation in Muster Ltd, Panama. Muster Ltd. buys Product A from third parties and sells it to Muster AG. The Muster Ltd. has its registered office at a law firm, a Panamanian lawyer is a member of the board of directors and otherwise Muster Ltd. has no infrastructure. The FL Foundation has never declared Mr. Muster in his tax return.

The structure and flows of services are therefore as follows:

Questions

1. Are there any monetary benefits relevant for withholding tax?
2. Until when can the FTA record these services?
3. What possibilities does the FTA have?

4. case study: refund in case of undeclared dividends in error

Facts

Muster AG has been paying a dividend every year for years. For the 2014 financial year, a dividend of CHF 800,000 with a split maturity date of 1 October 2015 / CHF 400,000 and a maturity date of 1 March 2016 / CHF 400,000 was approved. In addition, Muster AG has decided to pay a dividend of CHF 400,000 for the 2015 financial year, payable on 1 October 2016. Muster AG has declared, passed on and delivered the withholding tax on all dividends.

The sole shareholder of Muster AG, a natural person resident in Switzerland, completes his tax returns himself. Up to now, he has always listed the shares in Muster AG and the dividends received in the list of securities and has claimed back the withholding tax deducted and also received the refund. Due to the split maturity of the dividend for the 2014 financial year, the sole shareholder will forget to declare the CHF 400,000 / 1 March 2016 in his 2016 tax return and will make a subsequent declaration based on a request from the cantonal tax authorities. Tax Administration.

The undeclared dividend of CHF 400,000 / due on 1 March 2016 will be offset against taxable income in the assessment ruling for the 2016 tax period, which will be issued in mid-2018, and the refund of the withholding tax deducted thereon will be denied due to a breach of the declaration clause of Art. 23 VStG or the lack of a proper declaration. The sole shareholder's appeal against this negative refund decision is currently still pending.

The facts of the case are as follows:

Questions

1. What are the refund requirements?
2. Is a proper declaration available?
3. Is Article 23(2) of the VStG applicable in this case in terms of both time and content?

5th case study: Reimbursement for benefits in kind

Facts

Muster AG is wholly owned by Mr. Muster, a natural person resident in Switzerland. In 2018 it is subject to an audit by the FTA, which will last until the end of 2019. The following benefits in money's worth result according to the final account of the FTA of February 2020:

• "Securities." Model AG has a securities portfolio. The sole shareholder makes a "private withdrawal" in 2013 by transferring the securities with a value of CHF 70,000.00 from the securities portfolio of Muster AG to a securities portfolio of the sole shareholder and writing them off at Muster AG. The withholding tax thus amounts to CHF 24,500 in case of a subsequent transfer.
• "Gold bullion": Muster AG holds gold in the amount of CHF 300,000 in a bank safe in its name. The sole shareholder makes a "private withdrawal" in 2014 by physically removing the gold, depositing it in his private safe and writing it off in Muster AG's accounts. The withholding tax thus amounts to CHF 105,000 in the case of a subsequent rollover.
• "Own shares": Model AG holds own shares which have not yet been amortised for tax purposes. In January 2017, the sole shareholder will purchase seven of these shares from Muster AG at the price just paid by the cantonal government. The sole shareholder buys seven of these shares from Muster AG in January 2017 at the tax value of CHF 120,000 per share at the end of 2016, which has just been provided by the cantonal tax authorities, with a net asset value of CHF 350,000 per share as at 31 December 2016. The withholding tax thus amounts to CHF 563,500 in the event of a subsequent rollover.

Questions

1. What are the refund requirements?
2. Is a proper declaration available?
3. Is Article 23(2) of the VStG applicable in this case in terms of both time and content?