Overview of the tax law decisions of the Zurich Administrative Court published in November 2021.
- VGr ZH, 15 September 2021, SB.2021.00038: Taxability of a scholarship from the Swiss National Science Foundation (appeal pending before the Federal Supreme Court): The Administrative Court qualified the scholarship from the Swiss National Science Foundation (SNSF) as taxable income within the meaning of Art. 16 para. 1 DBG and § 16 para. 1 StG-ZH. The qualification as a gift was denied due to the lack of intention to make a gift (E. 6.3). Likewise, the existence of a tax-exempt support payment was denied due to the lack of need on the part of the recipient (E. 6.4). Contrary to the opinion of the lower court, the administrative court did not apply Art. 37 DBG or § 36 StG-ZH, as the scholarship is not a lump-sum settlement for recurring benefits. It qualified the SNF payments as so-called non-regular income, which is subject to the full annual tax pursuant to Art. 40 para. 3 DBG or § 49 para. 3 StG-ZH, but which is not converted into annual income for the purpose of determining the rate (E. 8). Appeals of the Cantonal Tax Office (SB.2021.00038/39) upheld and appeals of the obligated parties (SB.2021.00083/84) dismissed.
- VGr ZH, 25 August 2021, SB.2021.00015: Municipal tax sovereignty (this decision is final): The 39-year-old, single complainant has been a tenant of a loft flat near his place of work for 12 years. He claimed tax sovereignty at the location of his parents' house. Due to his age, his professional position and his living situation, it is to be assumed that the complainant has his residence for tax purposes at his loft flat and not at his parents' house (E. 3.3). The complainant was unable to provide evidence to the contrary (E. 3.4). Dismissal of the complaint of the obligor.
- VGr ZH, 19 August 2021, SB.2021.00029: Calculation of the imputed rental value and the property tax value of a property (appeal pending before the Federal Supreme Court): The liable party refers to previous assessments in which the property values it contested were adopted by the tax office. However, when assessing the valuation of a different tax period, the tax authority may evaluate both the factual and the legal starting position differently (E. 3.2). Contrary to the view of the debtor, the cantonal tax office did not carry out an extraordinary revaluation of his property within the meaning of para. 89 of the 2009 Directive (E. 4.4). The obligor complains of unequal treatment, as his underground parking space was valued at CHF 31,684 and that of another person at only CHF 27,000. For the first time before the administrative court, he argues that the garage spaces are of equal size. Due to the prohibition of novelties, the administrative court is not able to review unequal treatment (E. 4.5.2). With regard to a barn belonging to the residential building, the cantonal tax office applied a reduced factor (1% instead of 3.5%) for the imputed rental value calculation. An even lower rate of 0.7%, as advocated by the obligor, finds no support in the directive (E. 4.7). Dismissal of the appeals of the obligor insofar as they are upheld.
- VGr ZH, 10 August 2021, SB.2021.00027: Deduction of flight and room costs as professional expenses (this decision is legally binding): The liable employee is CEO and member of the board of directors of a company domiciled in Dubai. He also has an employment relationship with a Swiss company limited by shares as managing director and sole member of the board of directors. The Swiss limited company is a wholly-owned subsidiary of the company in Dubai. In connection with his activities, the obligor claims flight costs to Dubai and the costs for a room in Dubai. In the tax period to be assessed here, the liable person was not paid a salary by the company in Dubai due to poor business performance. The deduction of profit costs presupposes a related taxable income. Accordingly, professional expenses are only deductible if they are offset by a corresponding dependent income in the same tax period. In the present case, the deduction of profit costs fails due to the lack of income of the obligor from the company in Dubai (E. 4.6). However, the obligor generated taxable income from his work for the Swiss subsidiary. However, the obligor did not substantiate the activities carried out for the Swiss company in Dubai in more detail. In addition, transferring these professional expenses to the duty bearer would contradict Art. 327a para. 3 CO and the employment contract, according to which business expenses can be charged (E. 4.7). Dismissal of the complaints of the duty bearer insofar as they are upheld.
- VGr ZH, 21 July 2021, SB.2021.00048: Deferral of real estate gains tax due to replacement acquisition (this decision is legally binding): It is disputed whether the acquisition of the replacement property more than four years after the sale of the residential property still took place within a reasonable period of time. The reasons put forward by the complainant do not prove that it was not possible for her to transfer ownership within the period of no objection (E. 2.6). Dismissal of the complaint of the obligor.
- VGr ZH, 7 July 2021, SB.2021.00045: Commercial property trading (appeal pending before the Federal Supreme Court): The property sold by the taxpayers after a holding period of around 5 years qualifies as business assets. In the context of the overall assessment, there are numerous indications that from the very beginning the aim was to sell the property in a timely manner for a profit, which is why the taxpayers are to be classified as commercial property traders (E. 4.1 et seq.). The Administrative Court considered the debt financing ratio of approximately 75% to be high, taking into account the location of the property. Experience showed that the apartment building, which was located in a rather peripheral region, was exposed to a higher risk of vacancy than a property in a conurbation. Thus, even with a debt ratio of around 75%, there was a high investment risk, which argued for a commercial approach. In this context, however, the Administrative Court held that taking out a mortgage on another property that is not tied to the property is to be allocated to the taxpayer's equity capital. By taking out the mortgage, a previously illiquid asset had merely been converted into a liquid position (E. 4.2.1). Dismissal of the appeal of the taxpayer.
- VGr ZH, 15 September 2021, SB.2021.00061: Transposition in the context of a management buyout (appeal pending before the Federal Supreme Court): The obligor sold 8.4% of the share capital in X AG from his private shareholding to his holding company, in which he held a 60% majority stake, in exchange for a loan claim. The Administrative Court held that it was undisputed that the objective conditions for transposition were met. It rejected the economic approach applied by the Tax Appeals Court. The motives of the obligated party for the contribution of the shares to the holding company were also irrelevant, nor was it decisive whether distributions had actually been made. Since the transposition does not provide for a specific holding period, it was also irrelevant that the holding company had only held the shares for a short period of time. Appeal of the cantonal tax office upheld.
- VGr ZH, 28 September 2021, SB.2021.00082: Lebenspartnerabzug bei der Erbschaftssteuer (appeal pending before the Federal Supreme Court): At the time of the inheritance, the obligor and the testator were registered in different communes of residence and were liable for tax. According to his own statements, the obligor always had separate living quarters. The Administrative Court considered that the tax allowance of the civil partner for inheritance tax generally presupposed five years of cohabitation in the same household with undivided shared living quarters at the same tax domicile, whereas an alternating shared living quarters in two completely furnished flats excluded an entitlement to deduction subject to special circumstances. The obligor had never formed a corresponding household community with the deceased for a longer period of time in the sense described, but had always had separate living quarters. Dismissal of the complaint of the obligor.
- VGr ZH, 20 October 2021, SR.2021.0001: Tax freeze (not yet final): The Administrative Court denied a violation of the right to be heard because the freezing order was only served after the arrest. It also denied that the grounds for the freezing order were inadequate. It affirmed the disputed fact of endangerment based on the large difference between the taxable assets declared by the obligated persons and their tax liabilities, as well as the fact that the obligated person had systematically concealed his income situation from the assessment authorities for several years through the monetary benefits received. Dismissal of the complaint of the obligated persons insofar as it is upheld.
- VGr ZH, 29 September 2021, SB.2020.00011/12 and SB.2020.00014/15: Hidden profit distribution through underpriced sale of intangible assets (this decision is final): [The shares of the obligated party were acquired by a foreign group in June 2011. On the same day, the obligated party concluded two contracts with a newly founded Swiss sister company in which it undertook to provide general services and research and development. In September 2011, the taxpayer sold all intellectual property rights and non-viral contracts to a foreign sister company with tax domicile on Island V. The prices were in accordance with an (undated) transfer price study submitted to the tax office in March 2013. Finally, in November 2011, the obligor retroactively transferred the remaining business assets and employees to the Swiss sister company, for which the obligor paid compensation. The cantonal tax office considered the price for the IPR and customer relationships not to be in line with third party comparisons and concluded that there was a hidden profit distribution. The offsetting of profits was carried out as an estimate according to dutiful discretion].
The administrative court dismissed the application filed by the obligated party for the appointment of an expert to determine the disputed transfer prices with reference to the prohibition of novelties. From a material point of view, it considered that the large discrepancy between the values according to the transfer price study submitted by the obligor and the share purchase price and the result of the purchase price allocation (PPA) was suitable to cast doubt on the accuracy of the transfer price study. It confirmed the discretionary assessment in this regard. With regard to the additional hidden profit distribution with regard to the transfer of functions and the downgrading, the Administrative Court referred the matter back to the Tax Appeals Court to review the admissibility of the discretionary assessment. Partial approval of the appeals of the cantonal tax office and rejection/rejection of the appeals of the obligated parties.
