Decisions of the Swiss Federal Supreme Court (CW 1 - 2023)

Overview of tax law decisions of the Swiss Federal Supreme Court published between January 2 - 8, 2023:

Judgment of 21 December 2022 (2C_170/2022): Value added tax (2012-2016); Inadmissibility of the appeal; In the present legal dispute, the question is whether the Federal Administrative Court was right to confirm the order of the FTA and to declare the appeal filed on the part of the complainant inadmissible due to delay. The complainant alleges, on the one hand, a formal denial of justice and a violation of her right to be heard (Art. 29 para. 1 and 2 Federal Constitution) and, on the other hand, a violation of the prohibition of arbitrariness (Art. 9 Federal Constitution). In its decision, the Federal Administrative Court held against her the fiction of service, although the disputed order had only been served by A-Post Plus and not by registered mail and the trustee had confirmed that he had never received the disputed order. The Federal Supreme Court states that, with regard to VAT, there are no legal provisions that would oblige to send dispositions in a certain way. In the case of an A Mail Plus item, according to Federal Supreme Court case law, the item is deemed to have been delivered when it is posted in the recipient's mailbox or post office box, and this point in time is the starting point for calculating the appeal period. According to the case law of the Federal Supreme Court, the occurrence of an error with respect to service by mail is not completely excluded. However, an erroneous service may only be assumed if it appears plausible based on the circumstances. The Federal Supreme Court concludes that there is no concrete evidence of an error. The Federal Administrative Court's reasoning that the order of May 7, 2020, which according to the "Track & Trace" statement of Swiss Post was delivered "via P.O. Box" on Friday, May 8, 2020, was correctly delivered to the complainant's trustee, is based on a correct application of Art. 82 para. 2 VAT Act and the Federal Supreme Court case law on the delivery of postal items sent as A Mail Plus. The taxpayer's appeal is dismissed.
Judgment of December 16, 2022 (2C_907/2022): Direct federal tax and cantonal and communal taxes 2006-2008 (Geneva); The taxpayer A. SA, domiciled in Geneva, indirectly held D., domiciled in the BVI, at 79.53%, which was active in the fund sector. According to the findings of the lower court, D. is an empty shell, as it does not have any operational infrastructure, personnel or premises in the BVI. However, in the disputed years it generated a profit in the millions, as the employee and sole shareholder of the taxpayer, B., carried out his activities for D.. The legal form chosen by the taxpayer appears to be unusual, inappropriate and in any case unsuitable for the economic objective pursued. It would have been much more logical if the funds had been managed directly by the taxpayer and its employee, without going through an external structure without any real substance. As a result, against this background, tax avoidance is affirmed and the ruling of the lower court, which recorded 79.53% of D.'s profit with the taxpayer, albeit erroneously with a transfer price correction, is at least confirmed in the result. In view of the affirmed tax avoidance, the Federal Supreme Court left open the question of a possible enforcement. Dismissal of the taxpayer's appeal.
Judgment of December 15, 2022 (2C_217/2022) - intended for publication: Value added tax; tax periods 2006 to 2009; In dispute in the present case is the input tax deduction of the respondent in the years 2007 to 2009 regarding the mixed use of the aircraft. These facts are to be assessed according to the old law. The Federal Supreme Court has had to determine on several occasions how a company holding an aircraft is to be treated for VAT purposes if it transports the shareholder or related persons with the aircraft or makes the aircraft available to its shareholder or a related person. In a first phase, the Federal Supreme Court held that under the old VAT law, services are entitled to input tax deduction if they flow into taxable business transactions. In a second phase, the Federal Supreme Court recognized an exchange of services in the case of transport services to the beneficial owner or a related person, even if the service was used for private purposes. It examined such arrangements under the heading of tax avoidance. This view led to criticism in the literature. It was pointed out that the company holding the aircraft is obliged by law to register in the VAT register as soon as it fulfills the conditions of subjective tax liability. Furthermore, it was stated that the question of subjective tax liability, which the Federal Supreme Court had left open in earlier case law, should be examined from a tax system perspective before tax avoidance. Against this background and in view of the exceptional nature of the tax avoidance institute, it must therefore first be examined whether companies such as the respondent are subject to the subjective tax liability at all and can claim the input tax deduction before the arrangement is examined for tax avoidance. The activities of aircraft ownership companies cannot be described as commercial insofar as the company is used to satisfy the private needs of the beneficial owner or persons close to him. Consequently, no input tax deduction is possible. In its current practice, the FTA considers a private use of the aircraft of up to 20% as harmless (MWST-Branchen-Info 11 Luftverkehr). However, as soon as this value is exceeded, the entire use of the aircraft for private purposes by the beneficial owner and related persons falls outside the scope of application of VAT and does not entitle to an input tax deduction. In the present case, it is undisputed that the aircraft was chartered to a significant extent to independent, precisely designated third parties. Thus, a commercial activity was undoubtedly carried out with respect to third parties. However, the extent of the other use (i.e. whether private or business purpose) is unclear. Thus, the Federal Supreme Court cannot assess whether the aircraft was used for more than 20% for private purposes. Dismissal of the appeal of the FTA and referral back to the Federal Administrative Court for supplementation of the facts and reassessment in the sense of the considerations and determination of the statute of limitations for the 2006 tax period ex officio.
Judgment of December 21, 2022 (2C_1026/2021): Cantonal and communal taxes 2018 (Fribourg); Profit tax; Sponsorship expenses; Hidden profit distribution; A. SA (taxpayer) with its registered office in the Canton of Valais has as its purpose various activities in the real estate sector as well as the development and support of sports activities. B. SA is the sole shareholder of the taxpayer A. SA as well as D. SA. D. SA controls the football club FC V. C. is the sole shareholder of B. SA and managing director of these three companies. In its 2018 tax return, the taxpayer reported a taxable profit of CHF 4,884,395 after deduction of an amount of CHF 3,725,000. The tax return contained an intercantonal segregation, according to which the Canton of Fribourg was allocated a share of CHF 1,327,362 of these expenses. Upon inquiry by the Fribourg tax administration, the taxpayer explained that these were sponsoring expenses in favor of D. SA (these had accrued to D. SA in the form of a debt waiver), which had been discussed in advance in a ruling with the Valais tax administration. The Fribourg tax administration refused to assume the expenses on a pro rata basis and allocated them in full to the canton of domicile in Valais (with pro rata assumption of the resulting Valais loss). In the appeal proceedings, the Cantonal Court of Fribourg carried out a reformatio in peius by qualifying the expenses as a hidden distribution of profits. The Federal Supreme Court first rejected the taxpayer's complaint that the Canton of Fribourg was bound by the assessment of the canton of domicile in Valais. Art. 39 para. 2 StHG is limited to the fact that the canton of domicile brings its assessment to the attention of the other canton. Its own assessment therefore does not have the effect of forcing the other canton to follow its position. Each canton thus remains entitled to make its own assessment of the facts and subsequently make its own assessment and distribution. Sponsorship expenses may be business-related expenses. However, sponsoring contributions are not deductible if they have no connection with the business activity of the company, but merely serve the private interests of the entrepreneur or, in the case of a legal entity, of the person involved or of a person close to this person. In the present case, there were sufficient indications that speak against a business-related justification of the expenses. A protection of legitimate expectations based on the Valais ruling was then denied. Dismissal of the taxpayer's appeal.
Judgment of December 14, 2022 (2C_464/2022): The set-off due to a hidden profit distribution has to correspond to the value of the benefit granted by the company, which - in case of a real estate sale at a preferential price as in the case at hand - basically corresponds to the difference between the effective sales price and the market value of the sold property. Hypothetical brokerage costs do not have to be taken into account, as they do not reduce the market value of the property sold at a preferential price and thus the value of the benefit granted to the related party. Approval of the complaint of the tax administration.
Judgment of December 15, 2022 (2C_705/2022): Direct Federal Tax and State and Municipal Taxes 2007-2011 (St. Gallen); in addition to various formal complaints, the taxpayer essentially claims in substantive terms that the lower court wrongly qualified his activity for B. Bank as dependent gainful employment. However, under the premise, which is binding for the Federal Supreme Court, that the complainant was integrated into the work organization of B. Bank, this qualification is not objectionable. Dismissal of the taxpayer's appeal.
Judgment of 21 December 2022 (2C_1008/2022): The taxpayer claimed that it was not notified of the FTA's objection decision until March 6, 2021, against which it filed an appeal with the Federal Administrative Court on April 20, 2021, in compliance with the deadline. The Federal Administrative Court did not hear the appeal due to the missed appeal deadline. The taxpayer filed an appeal against this with the Federal Supreme Court, mainly claiming that her right to be heard had been violated as a result of the FTA's failure to provide her with a hearing in the Federal Administrative Court proceedings. The Federal Supreme Court upheld the appeal (see our article of February 20, 2022). The Federal Administrative Court then granted the taxpayer - with two extensions of the deadline - the opportunity to comment on the FTA's consultation. Instead, the taxpayer requested that the instruction judge be recused due to bias. Both the Federal Administrative Court and subsequently the Federal Supreme Court (see our article of November 1, 2022) rejected the request for recusal. Following the outcome of the proceedings regarding the recusal request, the Federal Administrative Court granted a grace period for the last time to comment on the submission of the FTA. On the last day of the grace period, the taxpayer responded with another request for extension of the deadline, mainly arguing that the interim ruling of October 21, 2022, had been served to her only on October 31, 2022, and that she would thus have had only three days to submit a statement. The Federal Administrative Court rejected the request for an extension of the deadline and further ruled that the appeal against the objection decision of the FTA was not admissible for lack of compliance with the deadline. This was because the tracking & tracing of the Post CH AG showed a delivery on March 5, 2021 (and not on March 6, 2021 as claimed), which meant that the appeal was no longer filed on April 20, 2021 within the deadline. The Federal Supreme Court also considered the appeal against the objection decision of the FTA as not having been filed within the time limit. The taxpayer's claim that the post office had delivered the objection decision to the neighbor and that the neighbor had only handed over the letter to her on March 6, 2021, was not convincing - despite the neighbor's written confirmation. This in view of the special duty of care of the legal representative: He should have checked the numerical code on the envelope and objected to an improper delivery in advance. Dismissal of the taxpayer's complaint.

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