Overview of the tax law decisions of the Zurich Administrative Court published in February 2021.
- VGr ZH, 20 January 2021, SB.2020.00115: Admissibility of an annual individual appraisal for multi-family houses (this decision is not yet final): The complainant's co-ownership share in a multi-family house was increased to 70% of the market value in the 2017 tax period (via the formula value). The determination of the property tax value of multi-family houses is governed by § 39 StG-ZH as well as by the Directive of the Government Council to the Tax Authorities on the Valuation of Properties and the Determination of Imputed Rental Values as of Tax Period 2009 of 12 August 2009 (Directive 2009) (E. 2.4). According to the 2009 Directive, an individual estimate of the market value must always be made if the formula value has been recalculated. Since the formula value for multi-family dwellings is re-determined annually, an individual estimate of the market value must also be made annually in order to review the formula value (E. 3.2.3). The fact that the provision according to which a formula value that is below 70% of the market value must be increased to 70% of the market value is only contained in the 2009 Directive and not in the Tax Act itself does not constitute a violation of the principle of legality under tax law (Art. 127 para. 1 Federal Constitution) (E. 3.3). Moreover, in the proceedings before the Tax Appeal Court, the subject matter of the dispute was limited with the consent of the parties. This limitation of the subject matter of the dispute also applies before the Administrative Court (E. 2.1). Dismissal.
- VGr ZH, 15 January 2021, SB.2020.00112: Privileged dividend taxation in case of intercantonal tax segregation (this decision is not yet final): The complainants have limited tax liability in the Canton of Zurich due to real estate ownership. A dividend received in 2017 from qualified participations was taxed in full in the canton of residence according to the partial income procedure. The complainants considered the fact that the Canton of Zurich did not grant relief to be a violation of the prohibition of discrimination derived from Article 127 of the Federal Constitution.As long as the income from qualifying shareholdings could be fully relieved under the relief mechanism applicable in the main tax domicile - which is the case here - there is no entitlement to additional relief in a secondary tax domicile (E. 3.3.2). This follows from the Federal Supreme Court case law on intercantonal tax apportionment, according to which income from movable assets is allocated to the main tax domicile for taxation. In this situation, a frowned-upon worse position is not discernible (E. 3.3.3). Dismissal.
- VGr ZH, 17 December 2020, SB.2020.00095: Calculation of the lump-sum deduction for maintenance and operating costs of a property held as private assets (this decision is not yet final): The complainant claimed the lump-sum deduction for maintenance and operating costs of his rented property held as private assets. Contrary to the opinion of the cantonal tax office and the lower court, the lump-sum deduction is to be calculated on the target annual rent and not on the basis of the gross rental income less the costs for heating, hot water and staircase cleaning as well as cable connection fees (E. 2). The lump-sum deduction is also available to owners of a privately owned property if the tenant pays the maintenance and operating costs himself (E. 3.). Partially approved and rejected.
- VGr ZH, 16 December 2020, SB.2019.00029: Offsetting of fees and royalties paid to a sister company as hidden profit distribution / waiver of profit distribution to the canton of domicile (an appeal against this decision is pending before the Federal Supreme Court): The complainant, domiciled outside the canton of Zurich, aims to provide tax advisory services. It entered into a "management contract" with its sister company domiciled in the same canton. In the absence of evidence that the fees paid to the sister company were justified in business terms, they were estimated on a discretionary basis. The discretionary assessment of the fees was confirmed because the complainant, despite a reminder, failed to submit in full to the cantonal tax office the requested information and documents that would have been necessary to assess the business justification of the payments (E. 5.4 f.). The documents and offers of proof submitted for the first time before the Administrative Court cannot be taken into account due to the prohibition of novelty (E. 6.3 & 6.4). The accounting of the fees as service compensation to the sister company under commercial law must be accepted by the obligated party on the basis of the principle of relevance. A subsequent reclassification of the payments to the sister company as a salary payment to natural persons is not possible (E. 6.7).The complainant also paid royalties to its sister company for the use of a trademark. These were offset, as the complainant itself was the owner of the trademark. The segregation of part of the net profit to the canton of domicile was refused, as the complainant did not carry out any serious, quantitatively or qualitatively significant business activity there (E. 8). Dismissed insofar as it had to be accepted.
- VGr ZH, 2 December 2020, SB.2020.00089: Underpriced sale of a business unit to a sister company (this decision is final): The complainant sold a business unit to a newly established sister company. One year after the sale, the shareholders solicited offers for the shares in the sister company which exceeded the sales price of the sold business unit by a factor of three to five. After taking note of these offers, the cantonal tax office revoked the 2016 assessment ruling regarding direct federal tax within the objection period. The municipal tax office filed an objection against the 2016 assessment ruling on the grounds that the sale price of the business unit was too low. With regard to direct federal tax, the tax authority may revert to an (as yet) unchallenged ruling during the current appeal period without having to fulfil the requirements of reconsideration or procedural revision required after the entry into formal legal force (E. 2.1.4). The tax authority has shown an obvious disproportion between performance and consideration, especially since already after approximately one year after the conclusion of the contract, various offers in three to four times the amount were available (E. 3). The lower instance determined the sales price in conformity with the third party comparison on the basis of a corrected version, the DCF valuation submitted by the complainant. This procedure was confirmed by the Administrative Court, since the corrected deficiencies of the DCF valuation had already been discernible at the time of the valuation (E. 3.2.2). Dismissal.
- VGr ZH, 11 November 2020, SB.2020.00085: remission of state and municipal taxes 2012 to 2014 (this decision is final): the joint and several liability of spouses remains in force in the event of divorce for tax debts incurred during cohabitation. The complainant can therefore not derive anything in her favour from the fact that she was divorced in 2016 (E. 2). Based on the record, it must be assumed that the complainant's assets exceed her debts. The obligor does not substantiate her claim that she cannot liquidate the requested funds. Moreover, the partial remission requested is precluded by the failure to set up tax provisions (E. 3). Dismissal.
- VGr ZH, 11 November 2020, SB.2020.00084: Tax jurisdiction for the 2015 tax period (an appeal against this decision is pending before the Federal Supreme Court): Based on the fact that the complainant lived in the family home in the Canton of Zurich for several years and that the family home was available to him at all times beyond the 2015 tax period, there is a natural presumption in favour of the previous main tax domicile in Zurich. The complainant's allegation that he and his wife separated in 2015 is not established (E. 4). He fails to establish his change of domicile (E. 5). Dismissal.
- VGr ZH, 21 October 2020, SB.2020.00065: Qualification as a commercial real estate trader within the meaning of § 221 para. 2 StG (an appeal against this decision is pending before the Federal Supreme Court): The Administrative Court has already decided on several occasions that the qualification as a commercial real estate trader within the meaning of § 221 para. 2 StG must be based on the Federal Supreme Court practice on Art. 127 para. 3 of the Federal Constitution of 18 April 1999 (BV), which in turn refers back to the case law on direct federal tax (E. 3). In summary, it is to be noted that the two sales of the obligated parties show that the realization of profit through the sale of further developed properties constitutes the corporate purpose of the obligated parties. The somewhat longer holding period of the second property, the accounting of the properties as fixed assets as well as the few transactions are due to the size of the two projects and the time-intensive development activities and do not prevent the qualification as a commercial property trader within the meaning of § 221 para. 2 StG in the present case. The decision of the Tax Appeals Court, according to which the obligor qualifies as a commercial real estate trader within the meaning of § 221 para. 2 StG, is to be confirmed (E. 4.4). In order to substantiate the facts already alleged before the Tax Appeal Court, the respondent submitted new evidence. This proves to be admissible (E. 2). Dismissal.
- VGr ZH, 21 October 2020, SB.2020.00048: No nullity of the assessment or assessment according to dutiful discretion (an appeal against this decision is pending before the Federal Supreme Court): An assessment or assessment according to dutiful discretion can (only) be null and void if the assessment authority deliberately and arbitrarily assesses the taxable income or the taxable profit or the discretionary surcharge to the detriment of the taxpayer (E. 2.3). In particular, new facts asserted subsequently, i.e. only after the expiry of the objection periods, cannot (retroactively) result in the absolute invalidity of the assessment decision or the assessment ruling. This would seriously jeopardise legal certainty and frustrate the purpose of the tax procedure, which also opposes the requested declaration of nullity (E. 2.5). Dismissal.
- VGr ZH, 30 September 2020, SB.2020.00045: Discretionary assessment of real property gains tax (an appeal against this decision is pending before the Federal Supreme Court): The taxable company (respondent) acquired real property and had it built over by another company. Since both companies together form an economic unit, profit shifts cannot be ruled out (E. 5). The tax office requested from the respondent, inter alia, the building statement and the articles of association. Due to the refusal of the respondent to submit in particular the construction account, the tax authority found itself in an investigative emergency. Since a comparison with third parties was at least considerably more difficult due to the lack of the requested documents, the tax authority rightly made a discretionary assessment (E. 6). The amount of the assessment was confirmed (E. 7). Approval.
- VGr ZH, 16 September 2020, SB.2020.00050: Qualification of participations in real estate companies of a commercial real estate trader as business assets (this decision is final): In general, the classification of commercial real estate traders as private assets is subject to high standards. This applies both to direct ownership of real estate and to indirect ownership via a participation in a real estate company. If a taxpayer engages in commercial real estate trading, there is a presumption that the taxpayer's real estate or participation in a real estate company - with the exception of owner-occupied real estate - constitutes business assets. The taxpayers do not succeed in rebutting this presumption (E. 3.7). Dismissal.
- VGr ZH, 10 September 2020, SB.2020.00018: Tax levying competence of a privileged liquidation gain for direct federal tax in the intercantonal relationship (this decision is final): The competence to levy direct federal tax on a liquidation gain subject to privileged taxation pursuant to Art. 37b DBG belongs to the canton in which the taxpayer was domiciled at the end of the tax period (Art. 105 para. 1 DBG). The exemption provision for pension benefits pursuant to Art. 105 para. 4 DBG does not apply (E. 4). Approval.
- VGr ZH, 26 August 2020, SB.2020.00044: No commercial property trading (this decision is final): The complainant, 79 years old on the date of the decision, sold two multi-family houses at a profit in 2014. In 2001-2013, he had also bought and sold several properties. The cantonal tax office qualified the real estate gains realized in 2014 as taxable income from commercial real estate trading. The Administrative Court concluded that an overall assessment of all the indications did not justify the assumption of commercial real estate trading. In particular, his special expertise had to be put into perspective due to his retirement in 2001 (E. 2.3). A closer look at the earlier property sales (2001-2013) reveals that either no profit resulted from the sales, the property sold was part of the private assets of the obligor or it was a property located abroad (no taxation of the sale). Three of the previously acquired properties were owner-occupied holiday homes; two other properties were used as long-term investments; one property was acquired as part of a forced sale in which the obligor bid because the owner owed him CHF 1 million. Thus, the high number of real estate transactions alone does not allow the conclusion that the obligor was acting as a professional real estate trader (E. 2.4). The longer holding period in each case also speaks against an actual real estate trading activity (E. 2.5). Approval.
- VGr ZH, 30 July 2020, SB.2020.00027: Standstill of time limits in tax appeal proceedings (this decision is final): the Ordinance of the Swiss Federal Council of 20 March 2020 on the standstill of time limits in civil and administrative proceedings for the maintenance of justice in connection with the coronavirus (COVID-19) is not applicable to the time limits for appeals under Section 153(1) of the Tax Act and Article 140(1) in conjunction with Article 145(2) of the Federal Tax Act. The appeals were therefore clearly filed late (E. 3). Dismissal.
- VGr ZH, 22 July 2020, SB.2020.00032: Underpriced sale of properties encumbered with building rights between two sister companies (an appeal against this decision is pending before the Federal Supreme Court): (Hidden) profit distributions to the shareholders on the one hand and (hidden) capital contributions by the shareholders to the receiving company on the other hand constitute a pecuniary benefit between sister companies (E. 3.2.3). In the case of non-cash benefits, the time of accrual to the shareholders cannot usually be determined according to the criteria of the establishment of a fixed legal entitlement. The point in time at which the party involved expresses the clear intention to withdraw the funds from the company is therefore taken into account (E. 3.2.4). Rejection.
- VGr ZH, 10 June 2020, SB.2019.00084: Hidden profit distribution to the children of the indirect sole owner (this decision is final): The primary issue in dispute was whether the wages paid to the children of the sole owner of the complainant's holding company were justified on business grounds. This was denied. The AG did not provide any written evidence of the alleged extensive administrative activities of the children, who had been employed on a 100% basis. The work activity described by the AG should have left written traces (e.g. e-mails or correspondence by letter). This was all the more true as the complainant claimed that all data and files relating to the entire administrative activity and administration were stored and could be retrieved in the EDP system of the duty holder at the head office, but did not submit any of these documents. In the absence of supporting documents, the proof of the existence of a consideration for the wages paid to children fails (E. 4). A fee claim by the sister company, which was also in dispute, was recognised as being justified on business grounds (E. 5). The requested capital segregation was also recognised by the cantonal tax office (E. 6.1). With regard to the separation of the net profit, the decision of the Tax Appeal Court was confirmed (E. 6.2). Partially approved.
- VGr ZH, 31 May 2017, SB.2017.00011: Main tax domicile after transfer of registered office (the appeal against this decision was dismissed by the Federal Supreme Court): The complainant has business premises in the Canton of Zurich and in another Canton, whereby it transferred its registered office from the Canton of Zurich to the other Canton at the end of 2008. The Administrative Court considered the main evidence for the convergence of the threads of the management or for the main tax domicile in the Canton of Zurich to have been provided. This was supported by the spacious premises in Zurich, the fact that most of the employees live in the Zurich area, that only invitations were sent from the location in the other canton and that the premises there were shared with another independent company. The fact that meetings (possibly also of a strategic nature) were held in the business premises outside the canton does not change anything (E. 5.2). The complainant is not able to shake the main evidence provided in the context of the counter-evidence (E. 5.3 - 5.8). Dismissal.
- VGr ZH, 12 December 2012, SB.2012.00093: BVG purchase through employer's benefits (this decision is final): the obligated company assumed 90% of the purchase amount of its employee and sole shareholder, although it suffered a loss as a result. In the absence of a basis in the regulations - the purchase of benefits by the employer is only provided for in a resolution of the general meeting - the purchase amount cannot be deducted as a business-related expense (E. 3.2). Moreover, the principle of equal treatment is violated because the financing of the purchase benefit at 90 % and thus of the pension gap leads to significant differences in the amount of financing depending on the age of the employee and the status of the saved retirement capital. In addition, it cannot be assumed that the obligated party would have made similar purchase contributions in the case of an independent employee and would thus have accepted a loss (E. 3.3). Dismissal.
All decisions of the Administrative Court of Zurich are available here.