Monetary benefits

Case 1: Two-dimensional facts

1. facts of the case

NP is the sole shareholder of A AG, both domiciled in the Canton of Lucerne. In his 2022 tax return, NP declares income from employment with A AG in the amount of CHF 150,000. The Cantonal Tax Administration of the Canton of Lucerne adds the following items when determining the taxable net profit in the 2022 assessment at the company level:

• School costs son CHF 40'000
• Unrecognized private share of vehicle CHF 13,000
• Sponsorship expenses FC Lucerne CHF 20,000

Based on a corresponding notification of the aforementioned profit tax offsets from the Lucerne Cantonal Tax Administration, the responsible municipal tax office offsets the aforementioned items as non-cash benefits at shareholder level when determining taxable income.

Questions

• Are there any monetary benefits with respect to the above items?
• Who bears the burden of proof with regard to the profit tax offsets of the cantonal tax administration at the company level?
• Is an income tax set-off by the municipal tax office based on the notification by the cantonal tax administration permissible? Who bears the burden of proof with regard to the offsets of the municipal tax office at shareholder level?

Factual supplement/variant1: NP takes over a vehicle purchased by A AG in 2022 for CHF 90,000 at a takeover price of CHF 10,000. What are the consequences in terms of reclaiming withholding tax?

Factual supplement/variant 1a: How should the factual supplement/variant 1 be assessed if the transfer takes place at a value of CHF 10,000 in 2022, but the business vehicle was already acquired by A AG in 2017 and has a market value of approx. CHF 20,000 at the time of the transfer to NP?

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Case 2: Loan

1. facts of the case

Müller AG produces precision instruments for the aviation industry. It sells these to aircraft manufacturers worldwide. For the installation of a new production line (investment of around CHF 8 million), Müller AG requires considerable financial resources. As it is no longer satisfied with its house bank, it turns to another credit institution. In May 2022, the latter submits the following indicative offer: credit of CHF 5 million (self-financing of CHF 3 million) for 5 years, annual amortization of CHF 500,000 and an indicative interest rate (spot rate) of 5% (minor adjustments of approx. 0.25% possible). However, the credit institution is only willing to grant this loan if it can also take over the factoring for the accounts receivable. This is currently operated by the house bank. The factoring agreement was extended for three years at the end of 2021.

Mr. Müller is the sole shareholder of Müller AG. He decides to provide his company with the money it needs himself and grants it a loan of 4.5 million in the summer of 2022 at an interest rate of 5% for a period of 5 years without an amortization obligation or collateral. The company can finance the remaining investments itself thanks to its solid equity base and sufficient liquid funds.

Question

As part of the 2022 assessment, the responsible tax commissioner asks Müller AG to prove the appropriateness of the interest rate paid to the shareholder. How is the interest on the loan to be assessed for tax purposes?

Variant 1

Müller AG is not a manufacturing company, but a real estate company (purchase of land and real estate, construction of real estate, renting). The assets consist almost exclusively of real estate. The loan offer of the credit institution refers to the granting of a second mortgage under the condition that the first mortgage can be taken over. The first mortgage is currently granted by the house bank and has a remaining term until the end of 2026. The other parameters remain unchanged.

Question

Does this change anything in the tax assessment of the basic facts?

variant 2

Facts according to the initial situation. However, the credit institution has submitted the following binding credit offer to Müller AG: Loan of CHF 5 million for 5 years, annual amortization of CHF 500,000 and an interest rate (spot rate at the time of the offer) of 4.8% (minor adjustments of up to 0.25% possible in the course of negotiations). Three weeks after the preparation of the offer, Müller AG receives a loan from its shareholder Mr. Müller in the amount of CHF 5 million for 5 years with contractually agreed annual amortizations of CHF 500,000 at an interest rate of 4.5%.

Question

Does this change anything in the tax assessment?

Variant 3

Facts according to the initial situation. However, Müller AG has suffered considerable losses in recent years due to the Corona pandemic. A defect in a production machine led to considerable delays in production in 2022, as a result of which Müller AG had to pay high contractual penalties to its contractual partners. As a result of the losses, Müller AG now has only a thin capital base. If Mr. Müller were to provide the required capital for the construction of the new production line, there would be hidden equity in the amount of CHF 2.5 million. In order to enable Müller AG to obtain more favorable credit conditions and to be able to finance the entire investment costs externally, Mr. Müller has decided to pledge his securities portfolio with a current market value of CHF 5 million as collateral to the bank. The bank then made the following binding credit offer to Müller AG: Loan of CHF 8 million for 5 years, pledge of Mr. Müller's securities portfolio, annual amortization of CHF 500,000 and a fixed interest rate of 3.5%. Müller AG accepted the offer and concluded a corresponding credit agreement.

Question

Does this change anything in the tax assessment?

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Case 3: Tax consequences of hidden profit distributions

1. facts of the case

Müller AG (see case 2) received an unsecured loan without amortization obligation of CHF 5 million from its sole shareholder, Mr. Müller, on January 1, 2018 at an interest rate of 5% (annual maturity as of December 31). The interest on the loan was expensed annually at the end of December and transferred to the shareholder in a timely manner (no entry via current account). In the annual financial statements, the total interest expense including interest to third parties (mortgages) was reported and no information on loans from related parties was provided in the tax returns.

In the course of an audit of the years 2018-2022 in March 2023, the responsible tax commissioner of the cantonal tax administration determined that the shareholder loan bore interest at 5% per annum. There is no hidden equity.

Question

How should the interest on the loan be assessed from a tax perspective and what are the tax consequences?

Supplement to the facts 1

In his 2018-2022 tax returns, Mr. Müller has declared the loan to Müller AG and the annual interest of CHF 250,000 as investment income. Mr. Müller has already been definitively assessed for the years 2018-2021.

Question

Can Mr. Müller take action against the assessments that have already become final?

Supplement to the facts 2

Mr. Müller has transferred the withholding tax totaling CHF 315,000 (CHF 63,000 per year for the years 2018-2022) to Müller AG and Müller AG has paid the withholding tax to the FTA.

Question

Can Mr. Müller reclaim the withholding tax?

Supplementary facts 3

At the time of the tax audit, the 2022 annual financial statements have been prepared, but the 2022 tax return has not yet been submitted. The tax audit is limited to the years 2018-2021. Mr. Müller would like to adjust the interest rate on the loan retroactively as of 1.1.2022 to the interest rate according to the circular and debit the difference to the paid out interest of CHF 250,000 to his current account.

Subvariant1
The 2022 financial statements have already been approved by the General Assembly.

Subvariant2
The 2022 tax return has already been prepared and submitted, but has not yet been audited by the responsible tax commissioner.

Question

Can Mr. Müller come back to the agreed interest rate and adjust the annual statement?

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Case 4: Tax attribution / services between sister companies

1. facts of the case

NP 1 is the sole shareholder of Planung AG. NP 1 is domiciled in Switzerland, and Planung AG is also domiciled in this country. In addition, NP 1 together with NP 2 has a 50% shareholding in Bau AG. Both NP2 and Bau AG are domiciled or have their registered office in Switzerland. In 2018, Planung AG provides project planning services to Bau AG and invoices an amount of CHF 1,200,000 in total. The project planning services relate to a development fee for a construction project, which was subsequently resold by Bau AG to third parties. The development fee also includes a success fee.

The tax administration considers the fee to be excessive and accepts only an amount of CHF 900,000 as a business-related expense in the 2018 profit tax assessment of Bau AG. According to the tax administration, the difference of CHF 300,000 is a benefit in kind. The taxpayers decide to take legal action. The objection decision from 2021 as well as the cantonal administrative court decision from March 31, 2023 fully supported the original assessment of the tax authority from 2018. Due to the fact that the taxpayers were too poorly documented with regard to transfer prices, it was decided not to take the case to the Federal Supreme Court and to accept the cantonal administrative court decision and accordingly let it become legally binding.

Questions

• What are the tax consequences in the area of income and profit tax?
• What are the tax consequences of withholding tax? Who is the recipient of the service?
• How is the withholding tax obligation to be fulfilled? Can the reporting procedure - taking into account the temporal element in relation to the lapse of the refund claim - be applied in casu?
• What other tax risks arise from the transaction?

Variant 1: NP 2 is resident in Germany. What changes with regard to the withholding tax consequences?

Variant 2: How is the situation according to variant 1 to be assessed if the billing is not for project planning services but for services for the purpose of renovation?

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