Procedural issues in the case of services between related parties

Case 1: "Two-dimensional" facts

1. facts of the case

Hans Müller is married to Claudia Schlau Müller and lives with her in Weinfelden/TG. Claudia Schlau Müller and her cousin, Jolanda Bauer-Meier, each hold 50% of the shares in Schlau-Meier AG and Bauern-Schlau AG, both of which are based in Frauenfeld/TG. Jolanda Bauer-Meier is married in second marriage to Hugo Dreher and lives with him in Weinfelden. Hans Müller- Schlau and Hugo Dreher act as managing directors and sole members of the board of directors of both companies.

Bauern-Schlau AG has been in financial difficulties for some time. In order to bridge the worst of the difficulties, Schlau-Meier AG grants Bauern-Schlau AG an unsecured loan of CHF 5 million at the beginning of 2023. Nevertheless, Bauern-Schlau AG has to file for bankruptcy a short time later in the summer of 2023. Hans Müller-Schlau, who had already given Bauern-Schlau AG a loan of CHF 20 million a long time ago, receives a bankruptcy dividend of CHF 4 million, Schlau-Meier AG one of CHF 1 million. The Dreher/Bauer-Meier couple is not a creditor of Bauern-Schlau AG and therefore does not receive a bankruptcy dividend.

In the context of the profit tax assessment of Schlau-Meier AG for the year 2023, tax commissioner jP Werner Beinhart of the Tax Administration of the Canton of Thurgau (KSTV TG) concludes at the end of 2024 that the entire granting of the loan constituted a hidden profit distribution. It is therefore offsetting the amount of CHF 5 million with Schlau-Meier AG. In addition, the KSTV TG submits a corresponding report to the FTA.

Anton Fuchs is a tax commissioner nP at the KSTV TG and is responsible for the assessment of the two married couples. He wonders how he should now assess the two married couples.

Question

• What is the significance of the profit tax assessment of Schlau-Meier AG and the withholding tax assessment of the FTA for the assessment of the shareholders?

Variant 1

Bauern-Schlau AG survives its financial difficulties - also thanks to the loan from Schlau-Meier AG. Before the end of 2023, it is able to repay the loan to Schlau-Meier AG. In 2024, however, the shareholders decide to liquidate Bauern-Schlau AG. During the liquidation period, Bauern-Schlau AG still holds a large agricultural property (with Güggeli fattening infrastructure) near Bregenz/Austria, which it has leased. From the sale of this land Bauern-Schlau AG generates proceeds of EUR 5 million (= CHF 5 million), which is above the book value (CHF 4 million) but below the acquisition costs (= CHF 6 million). In its liquidation balance sheet Bauern-Schlau AG does not show a profit.

The responsible tax commissioner jP of the KSTV TG, Werner Beinhart, has never been particularly interested in the property in Austria because the income and expenses (incl. depreciation and value adjustments) in connection with this property have always been segregated to Austria. Accordingly, he assesses Bauern-Schlau AG on the basis of the liquidation balance sheet. The FTA also has no objections to the liquidation balance sheet and approves the deletion of Bauern-Schlau AG from the commercial register.

Anton Fuchs is of the opinion that the book profit from the sale of the property should be taxed as a benefit in kind for the shareholders.

Question

• Can Anton Fuchs deviate from the assessment of the tax commissioner jP in the assessment of the shareholders?

variant 2

Schlau-Meier AG has recorded an extraordinary expense of CHF 67,000 in 2023. Tax office clarifications at the company have shown that this was a cash withdrawal. The withdrawn amount should have been handed over by Claudia Schlau Müller and Jolanda Bauer-Meier as a fee to a supposed client who held out the prospect of brokering lucrative business for the company. After the money had been handed over, however, the alleged intermediary disappeared without a trace along with the cash. Tax Commissioner Werner Beinhart does not allow the extraordinary expense to be deducted because the company's account is not supported by any meaningful evidence. This assessment becomes legally binding. The amount is qualified as a payment in kind to the two shareholders. The two shareholders oppose offsetting on the grounds that there is no evidence as to the fate of the disputed amount of money. The consequences of the lack of evidence are to be borne by the assessment authority.

Question

• What is the situation under the law of evidence with regard to female shareholders?

Case 2: AG with loss - loss offset

1. facts of the case

Butterfly Management AG, which is active in the consulting sector, shows a loss of CHF 55,000 for the financial year 2020 according to its annual financial statements. Tax commissioner Werner Beinhart charges monetary benefits of CHF 15,000 to the sole shareholder Kevin Ekel. These are made up as follows:

• Privately motivated travel and consumption expenses CHF 8,000
• Unrecognized expense expenditure CHF 7,000

Butterfly Management AG wishes to lodge an objection against the 2020 assessment. However, the tax lawyer consulted by it for this purpose points out that no appeal is possible due to the zero assessment resulting despite offsetting. However, the monetary benefits could be contested at the level of the sole shareholder.

Questions

• Is there really no possibility of rescission for Butterfly Management AG?
• Can Kevin Ekel challenge the offset in the assessment proceedings affecting him?

Variant 1

Kevin Ekel challenges the offsetting. With regard to the unsubstantiated expenses of CHF 7,000, he can provide evidence showing that expenses of CHF 6,000 were incurred for business reasons.

Question

• Is the offset to be reduced for Kevin Ekel?

variant 2

Butterfly Management AG returns to profit in 2021 and reports a net profit of CHF 80,000. In the loss offset it now claims a loss of CHF 46,000 (CHF 55,0000-CHF 9,000).

Questions

• How should the losses be offset if the AG only refers to the 2020 income tax treatment of Kevin Ekel? How, if it provides the relevant evidence from 2020 in the 2021 assessment procedure?
• How would it be decided if Kevin Ekel had accepted the offset in 2020?

Case 3: Intercantonal relationship

1. facts of the case

Eleonora Biber lives in the city of Lucerne. In 2011, she founded Hochglanz AG, which is based in Zug. In 2013, she transferred all shares in Hochglanz AG to her brother, Fritz Drucker, who also lives in Lucerne, and who also became the sole member of the board of directors of Drucker AG at that time. Meanwhile, Eleonora Biber remained employed at Hochglanz AG as an employee (with sole signature) and continued to make all important business decisions on her own; Fritz Drucker, who was heavily absorbed by his job and his family, always signed off on them without questioning Eleonora's instructions.

In 2023, Eleonora Biber has various "expenses" paid for by Hochglanz AG, namely the lease payments for her Mercedes (CHF 15,000), a trip with her partner to New Zealand with a first-class flight (CHF 50,000), a new home cinema system (CHF 10,000) and a weekend with her partner at the Dorchester Hotel in London (CHF 2,000).

In the assessment of Hochglanz AG, the tax administration of the Canton of Zug (KSTV ZG) comes to the conclusion that the leasing rates for the Mercedes were indeed business-related. In contrast, the KSTV ZG considers the other "expenses" (CHF 62,000) as monetary benefits of Hochglanz AG and offsets them. The CSTO ZG reports this pecuniary benefit to the FTA. The FTA also considers the leasing payments to be non-business-related and accordingly levies withholding tax on the entire amount of CHF 77,000.

Kurt Vögeli is a tax commissioner nP at the Tax Office of the Canton of Lucerne (DSt LU). He wonders whether the "expenses" should not rather be taxed directly to Eleonora Biber as income from employment.

Question

• What is the significance of the assessments of the KSTV ZG and the ESTV regarding Hochglanz AG for the assessment of Eleonora Biber? Does it matter that different cantons are responsible for the company and the recipient of the monetary benefit?

Variant 1

Hochglanz AG is not domiciled in Zug, but in Stuttgart/D. The responsible German tax office adds an amount of EUR 70,000 to Hochglanz AG in its tax assessment.

Questions

• What is the significance of the tax assessment notice from the tax office for Eleonora Biber's assessment?

variant 2

Hochglanz AG (with registered office in Zug) operates a paper mill in Sarnen/OW. In July 2023, Hochglanz AG sells this paper mill at a price of CHF 2 million (= acquisition cost and book value) to Fritz Drucker, who now operates the mill as a sole proprietor. Fritz Drucker capitalizes the paper mill in his accounting at acquisition cost, i.e. at CHF 2 million.

KSTV ZG is of the opinion that CHF 2 million is an appropriate price. Consequently, it does not make any offsetting when it assesses Hochglanz AG on February 15, 2025 for the year 2023. The Tax Administration of the Canton of Obwalden (KSTV OW) is of the opinion that the market value of the paper mill is at least CHF 3 million. In its own assessment of April 30, 2025, for the year 2023, it deviates from that of the canton of domicile, offsets a hidden profit distribution in the amount of CHF 1 million and submits a corresponding report to the FTA.

Questions

• May the KSTV OW deviate from the assessment of the KSTV ZG?
• What is the significance of the notification of the KSTV OW to the FTA?
• Based on the assessment of KSTV OW, KSTV ZG is now also of the opinion that the price of CHF 2 million was too low. Can the KSTV ZG return to its own assessment and adjust its assessments (direct federal tax and cantonal and communal taxes)?
• Does the DSt LU have to/is it allowed to offset a monetary benefit at Fritz Drucker (and recognize a taxed hidden reserve for this)? May it carry out such a set-off solely on the basis of the assessment of the OW CSTO?

Variant 3

Hochglanz AG has two subsidiaries, Esperanza SA with registered office in Bellinzona/TI and Tiefschwarz GmbH with registered office in Chur/GR. Tiefschwarz GmbH sells a patent to Hochglanz AG in June 2023 at a price of CHF 2 million. The Graubünden Tax Administration (KSTV GR) does not question this price and assesses Tiefschwarz GmbH on July 3, 2024 according to the self-declaration. This assessment becomes legally binding.

In contrast, the Ticino Tax Administration (KSTV TI) is of the opinion that Esperanza SA paid too high a price. In line with the market, only CHF 1.5 million would have been appropriate. In its tax assessment of August 16, 2024, it added a hidden profit distribution of CHF 0.5 million.

Questions

• Hochglanz AG is of the opinion that its group is now taxed twice on CHF 0.5 million. Can it defend itself against this double taxation?
• Hochglanz AG does not notice the double taxation until January 2025. Can it still do something about the double taxation at that time?

Case 4: After-tax procedure

1. facts of the case

Lorenz Macher is the sole shareholder of Thurgovian Services AG. Regarding the tax period 2021, Lorenz Macher will be assessed in 2022 according to the self-declaration. This assessment becomes legally binding without being contested.

In the assessment procedure of Thurgovian Services AG regarding the tax period 2021, significant hidden profit distributions are identified, which result in corresponding tax corrections. The assessment concerning the AG was not carried out until the beginning of 2023.

Based on the official tax notification, Lorenz Macher is subject to an after-tax procedure, as he did not declare the hidden profit distributions in his 2021 tax return. The latter defends himself against this with the argument that there is no new fact, since a later after-tax procedure is excluded by bringing forward the shareholder assessment.

Question

• Can after-tax proceedings be carried out on Lorenz Macher despite the fact that his assessment has been brought forward?

Variant 1

The 2021 assessment concerning Thurgovian Services AG will be made in November 2022 with the offsetting of significant hidden profit distributions to Lorenz Macher. The corresponding tax office notification to the shareholder's file is not properly filed due to a deficient electronic transmission process, which is why it is not (yet) in the tax files at the time the shareholder assessment is made. The assessment without offsetting the hidden profit distributions becomes legally binding. Only then will the tax official notification be made. Tax Commissioner Werner Beinhart wonders whether he can carry out an after-tax procedure.

Questions

• Can an after-tax procedure be carried out?
• How would it be decided if the electronic transmission process had worked flawlessly?

variant 2

Tax commissioner Werner Beinhart announces a domicile audit at Thurgovian Services AG for the tax period 2021. Lorenz Macher, who is aware that his AG has paid him benefits in kind, discloses these immediately before the domicile audit as a self-disclosure.

Questions

• Is there a voluntary disclosure?
• Is the factual situation to be assessed differently if the non-cash benefits are unrecorded and privately received sales of which Werner Beinhart has no knowledge?

Variant 3

Lorenz Macher collects certain services invoiced by Thurgovian Services AG privately. This account is not listed in his personal tax return. The long-time accountant of Thurgovian Services AG, Hermann Nötzli, is privy to these machinations. At the 2022 staff meeting, Nötzli demands a hefty pay increase, which Lorenz Macher refuses. As Nötzli becomes more and more of a burden to him, Macher terminates the employment relationship. Since he believes Nötzli is capable of a revenge denunciation, he wants to beat him to it and discloses the corresponding tax evasion concerning Thurgovian Services AG and for him to the cantonal tax authorities. However, Macher is negatively surprised to learn that Nötzli was one step ahead of him and made a denunciation with documentation of individual receipts and account statements.

Question

• Is a voluntary disclosure still possible in this constellation?

Variant 4

Thurgovian Services AG sells its property located on Lake Constance, which has a book value of CHF 2 million and a market value of CHF 4.5 million, in 2019 for CHF 2.5 million to the life partner of Lorenz Macher, Maria Bologna. The responsible tax commissioner Beni Blümchen does not recognize the related party relationship. He also considers the market value appraisal submitted by the company regarding the sold property to be plausible. The 2019 tax assessment becomes legally binding without any tax correction. The same applies to the 2019 tax assessments of Macher and Bologna (both with unlimited tax liability in the Canton of Thurgau). In 2023, Maria Bologna sells the property for CHF 4.6 million. Tax commissioner Werner Beinhart reviews the transfer that took place in 2019 and comes to the conclusion that at that time there was an underpriced transfer or a hidden profit distribution. He initiates after-tax proceedings.

Questions

• Can an after-tax procedure be carried out?
• How should the situation be assessed from the point of view of gift tax?
• Could Macher and Bologna have a tax offset if their 2019 assessments were still pending at the time the underpriced transfer was determined?

Case 5: Withholding tax refund

1. facts of the case

Sebastian Braun lives in Zurich and holds 50% of the shares in Casa Altura SA, based in Lugano. He is also the sole shareholder and managing director of Braun Invest GmbH, based in Berlin. In June 2023, Casa Altura AG will sell Braun Invest GmbH a 20 % stake in Teutonia SA, headquartered in Lugano, for a price of CHF 2 million.

In March 2027, the FTA carries out an inspection at Casa Altura AG. It concludes that the investment in Teutonia SA was worth at least CHF 3 million at the time of the sale to Braun Invest GmbH. It collects the withholding tax from Casa Altura SA. To avoid the extrapolation to the hundred and because Casa Altura SA assures him that he will receive a refund of the withholding tax, Sebastian Braun allows Casa Altura SA to debit the amount to his shareholder account.

Question

• How must Sebastian Braun proceed in order to apply for reimbursement (assumption: he is entitled to reimbursement under substantive law)? What has to be considered in terms of time?

Variant 1

Sebastian Braun does not live in Zurich, but in Berlin.

Questions

• What changes to the reimbursement process?
• Would anything change in terms of time if Sebastian Braun lived in Paris instead of Berlin?

variant 2

Sebastian Braun applies for a refund in April 2027. The FTA refuses the refund by decision of September 15, 2027. It is of the opinion that according to the direct beneficiary theory, not Sebastian Braun but at most Braun Invest GmbH is entitled to a refund of the withholding tax. Sebastian Braun does not agree with this because he is of the opinion that the triangular theory should also apply to the withholding tax. He is therefore challenging the FTA's ruling before the Federal Administrative Court.

Question

• Does Braun Invest GmbH still have prospects of a (partial) refund of the withholding tax if Sebastian Braun fails in the legal process?

Case 6: Corrections in the international relationship

1. facts of the case

Excellence Suisse AG is based in the canton of Thurgau and produces photovoltaic systems and wind turbines. It is a 100% subsidiary of Excellence Holding AG in Lausanne. In 2018, the holding company acquired all participation rights in Excellence Allemagne AG, which is based in Germany.

Excellence Suisse AG is the owner of the trademark "Excellence Suisse", which is also registered in various trademark registers. Since becoming part of the Excellence Group, Excellence Allemagne AG has paid license fees to Excellence Suisse AG for the corresponding rights of use. During a tax audit of Excellence Allemagne AG, the German tax authorities objected to the existence and scope of the license payments and denied their tax deductibility. The German tax assessment notices are not yet legally binding.

The 2018 to 2020 tax assessments of Excellence Suisse AG have been legally assessed. The Group Tax Manager is considering initiating a mutual agreement procedure.

Questions

• To which authority should the mutual agreement procedure be submitted?
• How are the deadline and formal requirements structured?
• Does the taxpayer or applicant have a duty to cooperate in a mutual agreement procedure?
• Assuming that a mutual agreement between the two countries is reached, how will it be implemented in Switzerland?

Variant 1

The brand is hardly managed anymore and is hardly marketable. The royalty payments of Excellence Allemagne AG are likely to be relatively generous, even from a Swiss perspective.

Question

• How does the situation stand against this background?

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