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Switzerland: Interpretations of beneficial ownership

On May 5 2015 the Swiss Federal Supreme Court (SFSC) decided on a leading case relating to the reclaim of Swiss withholding tax (WHT) on Swiss dividend distributions

On May 5 2015 the Swiss Federal Supreme Court (SFSC) decided on a leading case relating to the reclaim of Swiss withholding tax (WHT) on Swiss dividend distributions. The judgment, which was in favour of the Swiss Federal Tax Administration (SFTA), will have significant influence on similar cases that are still pending.

In the case in question, a Danish bank issued a total return swap (Swap) to counterparties with underlying shares in a publicly listed Swiss companies (Swiss Shares). At the maturity of the Swap, the bank was obliged to pay an amount corresponding to dividends generated by the Swiss Shares to its counterparts. In turn, the bank received as remuneration a fixed interest based on the Libor plus a margin. To hedge its risk, the bank bought the Swiss Shares.

When the dividends on the Swiss Shares were paid, the Danish bank requested a refund of the entire 35% WHT in accordance with the Denmark-Switzerland treaty (DTT). The FTA rejected the refund claim arguing that the bank was not the beneficial owner of the Swiss-source dividends and that the structure was abusive.

In 2012, the case gave the Federal Administrative Tribunal (FAT) the opportunity to conduct a detailed analysis of the beneficial ownership concept. In 2012, the FAT confirmed the position traditionally taken by Swiss case law that beneficial ownership is an implicit requirement applying to all tax treaties. The fact that the DTT did not expressly contain that requirement was, therefore, not of relevance.

As to its content, the FAT held that beneficial ownership focuses on the power to decide on the use of the income received. Such power should be understood based on a substance-over-form approach. Accordingly, beneficial ownership may be denied if the recipient is under a legal or factual obligation to pass on the income to a third party. The reciprocal interdependence between the income and the obligation to pass it on is, therefore, critical in this respect.

Although the written judgment in the case is not yet available, one can expect that the findings of the Federal Supreme Court (FSC) will focus primarily on the beneficial ownership aspects of the case. During the public available hearings held on May 5 2015 in Lausanne, the FSC reversed the analysis of the FAT on various points. It appears that the FSC gave a rather wide interpretation to the concept of beneficial ownership and interdependence. In essence, it considered the case at hand to be akin to a classic stepping-stone or direct-conduit structure involving a mere conduit company with very limited powers passing on treaty-favoured income to non-residents. Based on such grounds, the refund of the WHT will be denied.

It will be interesting to analyse the written judgment of the Court in the light of the interpretation of beneficial ownership given by the 2014 OECD Commentary to the Model Tax Convention on which Swiss tax treaties are generally based. One of the concerns that led to the adoption of this commentary was indeed that an overly broad definition of beneficial ownership may have unintended effects in bona fide financial transactions. It will therefore be important to monitor the evolution of tax treaty policy in this area, in particular the work done by the OECD with respect to treaty abuse.

Robert Danon and Daniel Bader
Bär & Karrer

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